Unnatural Monopolies
swanson, bret & Vigilante, Richard
12 THE AMERICAN SPECTATOR N Summer Reading Issue 2001 Unnatural Monopolies A broadband boom or a busted presidency? BY BRET SWANSON & RICHARD VIGILANTE gled in front of the Bells-the chance...
...This is why over the past few years companies poured hundreds of billions into the completion of the global broadband network that will become the main artery of both commerce and culture for the coming century...
...As the Baby Bells count up the risks of betting on copper one more time, they face at least three competing technologies--coaxial cable (as in cable TV), wireless, and fiber optics--each of which carries higher data rates than copper DSL-and a fourth, satellite, which equals many DSL facilities and covers markets DSL may never reach...
...Ooops...
...SBC promptly canceled its Illinois build-out.With similar stories echoing all over the country, the Bells and their competitors alike had signed up THE AMERICAN SPECTATOR 0 Summer Reading Issue 2001 13 i 1AKTN APOOK tion plummet to $81 billion, at least in part because of such regulations...
...Using no wires, digging no ditches, Soma can roll out service for 30 to 40 percent of the cost of a DSL or cable deployment...
...Now that the Bush administration has blown the tax cut, leaving us with a set of changes that probably will cost most of $1.3 trillion while adding minimally to growth, Bush's last best chance for a successful presidency depends on re-igniting the New Economy...
...Open-access regulations are stalling the Internet and the economy...
...Bush's watch if he takes steps now to let it happen, jumpstarting the stalled technology sector and turning the 20-year boom into a 30-year boom...
...The current regulatory scheme tries to ensure competition on a "level playing field...
...monopolies...
...Soma's indoor antenna, replacing clumsy and unreliable rooftop "line of sight" units, can get you hooked into the Net in minutes at speeds as fast or faster than DSL or cable, plus supply up to four Internetbased voice phone lines, replacing your local and long distance phone service at a fraction of the price...
...In March, for instance, the Illinois Commerce Commission, exercising its discretion under the '96 act, ruled that SBCAmeritech must share all the new assets of its $6 billion Project Pronto...
...Crucial innovations, being decisively superior to the competition, always establish momentary...
...The White House, so far, has been missing in action...
...But in a dynamic, innovationdriven capitalist economy there are no level playing fields...
...The obvious answer is to let the cable and phone companies compete freely...
...Jato closed its doors...
...Not surprisingly, DSL upgrade projects all over the country have either slowed or collapsed...
...Companies like Rhythms, Northpoint, Covad and Jato were awash with billions of dollars in Silicon Valley venture capital and IPO dough...
...Computers brought the first great phase in that transformation, allowing us to substitute an ever-more intimate knowledge of the physical world for the brute movements of matter...
...Of Covad's 274,000 lines in service, 92,000 were not "recognizing revenue...
...The communications revolution, allowing us the power to transmit any amount of information, from anywhere to anywhere, instantly and at trivial costs, will complete what computers began...
...Billy Tauzin's bill, co-sponsored by the Commerce Committee's top Democrat, John Dingell of Michigan, would substantially relax the current regime.A great improvement, the bill enjoys substantial support in the House, though it has drawn mostly yawns in the Senate, where Trent Lott and the ever clueless John McCain are opposed...
...And under the Telecom Act they intended to use the Bells' local copper connections-appropriately upgraded-to do it...
...Covad has slashed 800 jobs and closed 260 central offices...
...Natural "duopoly" anyone...
...It is now all but obsolete...
...Rhythms has cut its staff by a quarter, so far...
...Federal policy originally aimed at eliminating a natural monopoly about to disappear now aims at preventing a monopoly that has never existed, natural or otherwise...
...Now joining the mix of technologies that could unseat copper is residential wireless, courtesy of a company called Soma, which can use the same spectrum used for PCS phones, UHF-TV, or socalled wireless cable TV, to carry both broadband Internet and voice service into the home...
...The standard retrofitting technique, called DSL (for Digital Subscriber Line), won't work if the subscriber is more than 12,000 feet from a phone company's switching office...
...12 THE AMERICAN SPECTATOR N Summer Reading Issue 2001 Unnatural Monopolies A broadband boom or a busted presidency...
...But capital expenditures will be high, and affordable, says Cooley, only if he can offer voice and cable TV service along with broadband Internet service...
...There are companies building fiber networks that reach all the way to the home, like Keith Cooley's Broadband Chicagoland, which is hoping to win the right to build a new network along Chicago's transit and sewer rights-of-way...
...Most hi-tech companies issue press releases featuring new product breakthroughs.The CLECs have headlines like "Rhythms continues successful regulatory litigation...
...The "natural monopolies" which alone justified the entire structure of telecommunications regulations, including those on cable TV no longer exist...
...the Internet, that the Bells now want to get into...
...These were mostly not high-tech startups, but lobbying and litigation shops aimed at forcing the Bells to supply facilities virtually for free...
...These momentary monopolies dissolve under the next technological advancethat is, unless government steps in to freeze the players in place...
...As many as 50 percent of DSL hook-ups fail on the first try, requiring expensive home visits (known as truck rolls) by technicians to solve the problem...
...The justification for these local monopolies is that, like phone service, cable is really a "natural" monopoly...
...Crucial innovations, being decisively superior to the competition, always establish momentary presidency into a four-year distraction...
...AT&T CEO Michael Armstrong acquired $140 billion in cable assets in recent years while watching his company's $184 billion market capitalizaFederal policy originally aimed at eliminating a natural monopoly about to disappear now aims at preventing a monopoly that has never existed...
...As the definition of what constitutes broadband is continually revised upward and the public's appetite for bits per second is defined by the best-served users (enjoying everything from movies on demand to "eye contact" video conferencing), the Bells' copper will eventually become altogether obsolete...
...Any serious effort by the administration would push the bill over the top...
...of billions required to upgrade to DSL would have been meager and uncertain, since any competing local company would have the right to lease the Bells' upgraded facilities at below-market regulated rates...
...Pronto would expand DSL service by pushing optical fiber deeper into neighborhoods, shortening the copper loop...
...Most of the newcomers proved unequal to the task...
...L 14 THE AMERICAN SPECTATOR S Summer Reading Issue 2001 In a dynamic, innovation-driven capitalist economy there are no level playing fields...
...Crucial innovations, being decisively superior to the competition, always establish momentary monopolies, allowing the entrepreneur and his investors to extract "inordinate" profits to compensate for extreme risks...
...And under the Telecom Act, the Bells' rewards for the tens or even hundreds just 3 million DSL customers through the first quarter of this year...
...Far from an illusion or a momentary bubble, the historic increases in productivity and growth we have seen over the past two decades are the direct and measurable result of the substitution of mind for matter in the creation of wealth, first identified and documented by Peter Drucker even before the boom began...
...When local competitors to the Baby Bells did show up, about two years ago, it was not local voice they were after, but the Internet, just as it is long distance data transmission, i.e...
...All in all, the Bells face a challenge even keeping their precious copper lines in service over the next decade...
...All of this in the face of massive consumer demand for broadband services...
...Nevertheless, the Bells could perform a monumental public service by using their currently dominant market position to bring broadband to the masses now...
...Sorry...
...local broadband Internet connections...
...Federal law allows local governments to make cable service a local monopoly...
...Satellite TV now competes with cable all over the country, albeit burdened by some silly regulations to keep the satellite companies from "unfairly" competing with local broadcasters...
...The entire regime should be repealed...
...The feds naturally have done precisely the opposite, shackling AOL Time Warner and AT&T, America's two cable behemoths, with the same sort of open-access nonsense that plagues DSL...
...But they will never make that investment, especially in an otherwise rapidly depreciating asset, if "open access" laws force them to share the fruits with all comers...
...Or he could do nothing and let the matter drift, and perhaps turn his presidency into a four-year distraction...
...In short, the legislation that now governs the most important new development in the world economy since the invention of the microchip was originally passed in order to promote competition in two dying industries that are unlikely to exist in recognizable form by decade's end...
...The problem is the very copper infrastructure, the asset the Telecom Act of 1996 considered so valuable that it bestows on its owners a "natural monopoly...
...The nation's second-largest ISP, EarthLink, now gets access to AOL's cables at nominal cost.Yet cable, like DSL, requires costly upgrades to handle broadband, again mounting into the hundreds of billions and, as with DSL, the open-access fetish has slowed the cable Internet rollout dramatically...
...L 14 THE AMERICAN SPECTATOR S Summer Reading Issue 2001 In a dynamic, innovation-driven capitalist economy there are no level playing fields...
...Upgrading copper phone lines for high-speed Internet use requires massive capital expenditures in fiber optics and other facilities...
...To make the game worth the candle, however, the administration should go even further...
...AT&T "owns" Chicago cable, leaving the fate of Cooley's project to the tender mercies of the Chicago Cable Commission...
...Far from being monopolistic bullies, they are stuck with the most problematic technology...
...BY BRET SWANSON & RICHARD VIGILANTE gled in front of the Bells-the chance to get into long distance voice service-began to wilt.The blooming of fiber optic technology has driven the price of traditional long distance voice connections so low that long distance voice service will soon be essentially free, ceasing to exist as a separate business, as voice calls become insignificant rivulets in rivers of Internet data.Voice revenues from the big three long distance services AT&T, MCI WorldCom, and Sprint are already collapsing...
...Despite winning most of their cases, the upstarts mostly lost their companies...
...The new start-ups, known as competitive local exchange carriers (CLECs), planned to compete with the Bells in providing Northpoint filed for Chapter 11 and is now being acquired by AT&T...
...It could be largely completed on Mr...
Vol. 34 • July 2001 • No. 6
