A BREAKDOWN IN COMMUNICATIONS?
FEBRUARY 2, 1996
The complex telecommunications reform bill just passed by Congress will impact the way telephone and cable companies do business. Following a backgrounder by Jeffrey Kaye, of KCET Los Angeles, Elizabeth Farnsworth discusses the issues with experts.
ELIZABETH FARNSWORTH: The bill passed by Congress yesterday would transform the laws that regulate each of these businesses. Specifically, long distance and local phone companies will be able to compete in each other's markets. And they can also begin to offer video services over phone lines, competing directly with cable providers. For their part, cable operators can now jump into the phone market and federal controls on cable TV rates will be lifted within three years or immediately, depending on the size of the market. But the bill reaches much further. For broadcasters, it would relax limits on the number of TV and radio stations a single company can own. At the same time, it requires TV sets to be equipped with a device known as the V-chip to block violent programming, and for on-line computer companies and users, the bill imposes criminal penalties for knowingly transmitting "indecent material" to minors.
To help us understand what all these changes mean for industry and consumers, we're joined in New York by Ken Auletta, media writer for the "New Yorker" Magazine, and Richard MacDonald, a media and telecommunications consultant. Welcome, gentlemen. Ken Auletta, let's talk about this for a minute from the point of view of the consumer. Most of us have telephone lines for local and long distance phoning coming into our homes. Some people have cable, cables coming into their homes for television. What will change? What will be different because of this bill?
KEN AULETTA, The New Yorker: Well, I mean, I think immediately what we're going to see is the spate of mergers and partnering on the part of all of these industries. But basically you have, you have the cable companies and the telephone companies, both local and long distance, and the wireless companies and the studies and the consumer electronics, and the computer industry and the publishing industry, all of them want to get in each other's pocket and get in each other's business, and they will attempt to do that. Whether that happens immediately or over a period of time which is what I suspect will happen, that will happen, so eventually the idea behind this bill is that the consumer sitting there will have a choice not just the cable service but the telephone company providing the cable or the wireless people providing the cable or the computer that providing you your video services. So, so you will have choices and as you have choices, as is true say of long distance today, your prices will come down. That's the presumption.
ELIZABETH FARNSWORTH: And Mr. MacDonald, do you think the presumption is correct? Because of competition among all these different providers, prices will go down?
RICHARD MacDONALD, Media and Telecommunications Consultant: Yeah, I think there's going to be a period of everybody sorting out there in-home equipment. I mean, it's kind of like it doesn't really match yet, but that's not going to take very long, and we're talking maybe a year or two to figure out standards and two to three years to get, you know, this kind of technology into production just so you've got the box in the house. And once that happens, especially in local telephone rates in big markets, big urban markets, you're likely to have an awful lot of competition emerge quickly and be very meaningful both to residents and to businesses.
ELIZABETH FARNSWORTH: Well, is the theory that in this home--let's take this typical consumer home, or perhaps not so typical because I think cable, most homes still do not have cable service, but let's take a home that does--is the presumption that there would be one line, either telephone or cable, that could do everything, and that this is desirable?
MR. MacDONALD: It's not clear whether there is going to be. It's probably better that it be that way, but what there is going to be a presumption about is that there will be at least a choice between service providers. We may not necessarily have to duplicate the wire in the home but there will be one service provider, or there will be two service providers competing with each other to offer the same types of services, and, in effect, what some of your people on the intro talked about, which is packaging services, could come in through one provider and presumably be done at a cheaper price than it can be done by two, or if both compete hard, you could have two service providers providing each one of those things but presumably over the same wire.
ELIZABETH FARNSWORTH: But Ken Auletta, at the same time there's talk of say NYNEX and Bell Atlantic merging, so at the same time as there's talk about lots of competition, there's also talk of mergers, and that--wouldn't that work against lowering prices?
MR. AULETTA: The presumption we're making is that you'll have more competition as people compete to provide some kind of service, some kind of route to your home, a highway to your home. But, in fact, there's another model that could happen, and we don't know if this won't happen, which is that these giant companies--let's say the regional Baby Bells--there are seven of them--may get together as, for instance, Bell Atlantic, as you mentioned, and NYNEX are talking about merging, and in fact, you can create spheres of influence. You may say, look, it is too expensive, guys, for me to get into your cable business, why don't we make a deal with Time-Warner or John Malone and TCI, we'll stay in the telephone business, we'll just go after AT&T and long distance, and--but we'll stay out of your cable business, and you stay out of our phone business. You could have something like that happen because in fact, if you look at the grid of the world, not just the United States, many of these companies are partnered in different countries with some of their adversaries in the United States.
ELIZABETH FARNSWORTH: Ken Auletta, still on this subject of the phone companies and the cable companies, a lot of the details of this still have to be worked out by the FCC, the Federal Communications Commission, right? Tell us about that. What has to happen now to make all this really, make it become reality?
MR. AULETTA: Well, one of the things that actually amuses me, you hear a lot of this talk about deregulation and let government get out of the way, and what do we need an FCC for, well, one of the reasons you need an FCC, as Rich says, if you're going to have people sharing a wire, which, in fact, is cheaper for the consumer, you don't want every company to go out and invest the same money that AT&T has already invested in building long distance wires, or have everyone do the same local, so if you want to have sharing of that wire, who's going to referee that the local phone company shares their wire with the long distance company, or with the cable company? The government has to do that. So the government is not going to go away, and this notion that it will is fallacious.
MR. MacDONALD: Yeah. In fact, one of the notions that--Ken's notion about spheres of influence actually has all sorts of dangers because presumably that's--there's always the risk you could get collusion or something like that. What you don't--what you want from this bill and what the great advantage, you know, and prize is here is that we'll end up with a really competitive and efficient telecommunications system. That's what we're--that's what the prize is. The costs of that are not all of it may get to, you know, the outer reaches of to markets where there are scare population, markets under 50,000, they're already--part of the bill already allows for consolidation between telephone and cable companies. So what you really are trying to do is capture efficiencies but the risks and one of the prices we're going to have to pay is yes, we're talking about very big companies possibly getting together and we're going to have to be a lot more careful about anti-trust implications of that, and No. 2, there's going to be--it's going to be cheaper presumably for both cable and phone and cellular and all the rest of it in the big concentration--concentrated markets.
ELIZABETH FARNSWORTH: And, Mr. McDonald, on this subject, the boosters of the bill, Vice President Gore, for example, talk about the benefits that will--that there will be more money for investment. I guess, presumably, there will be higher profits and more money for investment. I'm not sure I know the reasoning but is the investment money--is it likely to be put into fiber optic cables going into people's homes which will make interactive TV and all of these things that we see in the ad possible?
MR. MacDONALD: Well, I--
ELIZABETH FARNSWORTH: Is that a presumption, I should say?
MR. MacDONALD: Yeah. I think there are two things to look to, two major issues facing both investors and the managements of these companies, as they try to--as they look toward the future, as one entrepreneur told me a couple of weeks ago, he said, we were talking about stress--and he said that his son, who now runs the business, just thinks that all of these developments are nothing more than opportunity and, you know, what can we do next God bless America, and he's worried about competition all the time. I think that kind of attitude is something that both investors and management are going to have to sort out. How much is God bless America and how much is competition going to threaten the value of their investments as we go forward? I mean, after all, if you get--if you put money into the wrong investment, and we were talking about this, in the wrong box, if you put money into the wrong box, you make the wrong bet, and somebody comes in with a better box, cheaper, quicker, whatever, gets in the marketplace, this competition is real, and they can penalize the losers in a very dramatic way.
ELIZABETH FARNSWORTH: Ken Auletta, the cable companies can jump into the phone market, but they also have their rates deregulated either now or in three years. Why was this necessary? And, and what is the significance of it?
MR. AULETTA: Well, the presumption the government is making and Congress in passing this overwhelmingly is that there have been some injustices done to cable that they, they froze their rates two years ago, and that, in fact, cable needs to invest some money to, to build out those fiber optic wires and other things that you spoke of. In order to do that, they may have to raise some rates. In the short run, some people, some consumers will be paying more money. The bet is that in the long run, they will be paying less money as there's more competition. The essential thing that went on here, and it's an important point, government has changed the assumption under which its regulation operate. It used to be they assumed let us try and anticipate all the potential problems and pitfalls we will have and set up regulations to prevent them, and business found that this was an impediment to their moving forward. So now they're saying this is the fastest growing, most vibrant business in America. Our No. 1 export, communications is, change the assumption, and they have changed the assumption. The assumption now is, look, let's lower those barriers, let government get out of the way, let these industries compete and merge if they will, and if we have problems, let's not try and anticipate everyone and cross every "T," then we'll deal with it at the time, but let's get out of the way.
MR. MacDONALD: Yeah, that's a really great point, because I think what's changed, what's allowed them to do it this time around is the fact that 10 years ago they talked about deregulating cable rates and said we'll do it where there's effective competition. Well, they defined effective competition as three TV stations in the market.
MR. AULETTA: Right.
MR. MacDONALD: Now you've got satellite services that can deliver to your home anything cable can deliver, except for the local TV station, with a better image, and CD quality sound, so you can say and the consumer has to pay some money to buy the dish, you're talking about $500, but this is the dramatic change in the landscape of the business that if a cable company makes a mistake by pricing, putting its rates too high, the consumer has a real choice. He goes down to a local store, he buys a dish, it takes a while to put up, but it's done.
ELIZABETH FARNSWORTH: So this is--it's really a historic bill, this is a very big deal, isn't it?
MR. MacDONALD: Oh, yeah, this is very important. It is a very important moment in this industry.
MR. AULETTA: But we are jumping off a bridge, and we don't know whether water is down there.
ELIZABETH FARNSWORTH: Remember, remember, all the talk a year and a half or two years ago and last year about all of the very excited about interactive TV and there were experiments in various communities? What's really come of that? Not much, as I understand.
MR. AULETTA: Well, you see, but you're getting to one of the big issues here. These companies think they know what the right strategic move is for them to make revenues, but the great mystery out there that none of these companies know, in fact, none of us know, is what does the consumer want, and the presumption they were making a year and two ago was that video on demand was going to be the new hoola-hoop. Well, it hasn't been true. In fact, the new hoola-hoop is the Internet. That's the interactivity--
MR. MacDONALD: Yeah, that's true.
MR. AULETTA: --that's caught on.
MR. MacDONALD: The point is that basically the companies are trying to categorize the consumer and figure out what their, what their behavior is going to be, but people are using Internet as if it's interactive TV. I mean, the Interact is, in effect, interactive TV.
MR. AULETTA: Sure.
MR. MacDONALD: And people use it as if it's a combination of TV plus information service.
ELIZABETH FARNSWORTH: And Sen. Dole objected, as you know, to a portion of the bill in its earlier form that he said would have given away a segment of the airwaves to the broadcasters. What's happened to that in this bill and what's likely to happen in the future?
MR. AULETTA: It's been put abeyance, and they say they will deal with it in the subsequent legislation, and I--
ELIZABETH FARNSWORTH: Explain what it is here too just briefly.
MR. MacDONALD: The notion is basically that the public airwaves, the frequencies that are going to be allocated for so-called advanced television, either high definition or whatever, are a public good, and that the private broadcaster ought to pay for that. The broadcaster's point of view is that if you don't let us get into these new services, you'll basically disadvantage us so much against the rest of our very very powerful competition that we won't be able to survive. Now, in other licensing of frequencies like the PCS, the so called Personal Communications Services and other wireless type services, the government has raised billions of dollars by auctioning off those services, and what Dole pointed out was, look, this is something that belongs to the people, and people who are private folks who are going to make money off it, ought to pay for it, so he's going to--there's going to be legislation I think that's going to address that issue.
MR. AULETTA: And the lobbying effort against what is called the give-away to the broadcasters will be much more intense because a lot of people who might lobby against it wanted this legislation to pass.
MR. MacDONALD: Exactly.
MR. AULETTA: But now all the phone companies and all the cable companies are going to be loaded for bear.
MR. MacDONALD: That's exactly right. So anybody who's trying to come back to get a second thing done doesn't have all the advantage of--everybody's interested in trying to get this bill passed.
MR. AULETTA: The thing to watch here is the campaign contributions to all these candidates by all of these industries now.
ELIZABETH FARNSWORTH: Well, Ken Auletta, Richard MacDonald, thanks for being with us.