by Kevin Walker
University of California, Berkeley
December 6, 1990
Introduction
Once again, technology has surpassed legislation. The U.S. has a policy governing telephone communications, and a policy governing cable television. But technology has progressed to the point where these two media are merging, along with most other media. Many communications policies are bound to be modified and combined in the next decade, and those affecting these two media are presently among the most pressing. Naturally, along with separate policies, these two media have their own separate industries, each unwilling to surrender to the other. There are no easy solutions to this problem, which may be of the most important and far-reaching issues of our time.
Background
Fiber-optic technology has wide implications. Wired to homes and businesses, it can provide digital-quality broadcasts and telecasts, two-way transmission of data and video, and a wealth of services not even dreamed of, all in addition to clear, efficient telephone service. Its main feature is the potential for virtually infinite bandwidth, which means that an unlimited amount of data could be transported along the fibers, which are hair-thin and transmit laser light impulses instead of sound or electronic waves. Telephone companies have already begun to replace existing copper wires with fiber optic cables, with the ultimate goal of a nationwide, even worldwide, fiber optic network. By owning and installing the cables, they would theoretically be able to supply some of the numerous services that pass through them, the foremost being television. But legislation bars them from providing other than phone services, or, acting as "common carriers".
Support For Allowing Telcos Into Cable TV
The wide bandwidth of fiber optic lines is the most compelling reason for replacing existing lines. The possibile services are almost endless, and they could include: video phones complete with attatched high-resolution facsimile ("fax") machines; high-definition television with digital sound; interactive shopping, research, polling, electronic mail and other on-line data services; a "smart" phone that could allow a person to call home and be able to check the temperature, see if anyone has been in the house, and turn on or off any light or appliance. A computer in the house could also dial the police or fire department if necessary, on its own; the ability to consult a doctor without leaving home -- with two-way video interaction, a patient could be examined over the phone; the ability to send home videos to neighbors' sets; the ability to dial up the daily newspaper or any film. There are many more as-yet unimagined services possible.
A fiber optic network would also provide the basis for other industries, and could help revive the flagging U.S. semiconductor industry, which could supply the technology for the new generation of receivers and other appendages.
It is generally accepted that the technology is inevitable. Other countries are already ahead of the U.S. in constructing fiber optic systems. Europe is investing heavily in the technology, and Japan's largest telephone company plans to spend over $200 million on it over the next dedade. Five years ago the U.S. led the Japanese in fiber optics-related patents by two-to-one; that situation is now reversed in favor of the Japanese.1
U.S. phone companies claim that they could wire all homes in the country in about 40 years. If restrictions were lifted, however, and telephone companies allowed to compete in cable television, this would provide incentive for them to work faster, and they acknowledge that under such circumstances, the transition could be completed quicker. Telephone companies insist that the cost of wiring homes is simply not cost-effective without the option of offering other services besides phone communication. Without the incentive, affluent regions could be rewired much sooner than poorer areas, creating a widening gap of information "haves" and "have-nots".
There is a related environmental benefit to changing to fiber optics, involving the transition itself. While most telephone lines are now above-ground, causing very real hazards to wildlife and people, not to mention the clutter and visual pollution they create, new fiber optic lines would be placed underground. The 40-year schedule to make the transition is based on the lifespan of overhead copper wires, which are currently being replaced at a rate of about 3% per year.2
Backing the telephone companies are several powerful groups. The National League of Cities and U.S. Conference of Mayors support fiber optics, and support the phone companies' entry into TV to speed the transition. The Wall Street Journal voiced its support for the phone companies in an editorial earlier this year, emphasizing that the telcos' entry into TV would be "an effective way to foster competition." Most importantly, President Bush has come down on the telcos' side.
Opposition to Telcos in Cable TV
The telephone companies are already huge conglomerates with enormous control over communications. Given their sheer size and the potential of the technology, were they to have complete control over fiber optic cables and the content carried on them, the companies could easily crush cable companies, television networks and even newspapers. Phone companies already have local and regional monopolies, and could use them to subsidize cable operations.
The threat to cable companies is the most apparent. Prof. Robert G. Harris, an economist at U.C. Berkeley, said, "If, over a single optical fiber, I can choose between 17 different cable companies, I don't have to deal with my local cable company any more. With an an optical fiber, I can watch any television broadcast, anywhere in the world, as long as they hook it up to their phone line."3 In addition to cable companies, there is a threat to cable's own competitors, the TV networks. With so many channels (and other services) to choose from, the new fiber optic cable system would undoubtedly further erode networks' fast-diminishing share of audience.
But would so many channels be necessary? "The whole fiber issue is a smoke screen," according to Robert Alter of the Cable Advertising Bureau. "Is there really a market for 500 channels in the household? There are cable systems with 110 channels which don't have enough programs to fill them."4 In addition, many of the proposed services are already availible on ordinary wires, and are little used. In the case of high-definition television, it may be much cheaper to provide it through rented digital disks instead of through cable. Even with its pretty picture, the demand for HDTV may not be as high as expected, especially if consumers are asked to spend upwards of $2,000 on a receiver. This especially applies in a time of economic fear such as the present.
Another big drawback is the cost of rewiring all homes. Estimates range from $200-250 billion (Northern Telecom estimate) to $450 billion (National Cable TV Assn. estimate). Phone companies could try to "cross-subsidize" the venture on the backs of their existing telephone customers, by raising phone bills. This would cost each customer between $4000 and $10,000.5
The most vocal opponents of the phone companies are, of course, cable operators and the networks. They have some strange bedfellows, however. For instance, despite the Wall Street Journal's support for the telcos, the American Newspaper Publishers Association believes the telcos should remain common carriers and not content providers.
Policy Action
It goes without saying that telecommunications policy needs updating. The last decision of this magnitude was back in the 1930's, when Franklin Roosevelt vowed to "put a phone in every home," and to do it inexpensively. That plan worked, and strict price regulation and long depreciation schedules kept the price low. But as Gary Ames, president of U.S. West Communications, said, "by the '70s and '80s, that pricing and regulatory scheme was discouraging investments in new technology."6 Restrictions have not barred telcos from developing the technology overseas: U.S. West is a partner in eight cable franchises in the U.K. alone, and has others in Hong Kong, France, Norway and Sweden.
The FCC has vacillated on the issue, due to the conflicting interests they are trying to appease, but mostly has moved in favor of the telcos. In July 1988, the commission proposed to allow telcos into cable TV. Its motivation was to stimulate competition and to keep up with technology. Naturally, cable operators raised an ire. James Mooney of the National Cable TV Assn. called the move "an invitation to predatory behavior not seen in this country since the days of the robber barons."7 Despite this outcry, two years later the commission granted GTE a "special waiver of restrictions" allowing it to test the cable TV waters in a Los Angeles suburb.
Ultimately, the decision lies not with the commission but with Congress. This past session, a bill went through the Senate that would allow telcos into cable, without having to apply for franchises. Telcos would, however, remain restricted from producing programming. The bill is supported by the President, and will be acted upon when Congress reconvenves. Perhaps not coincidentally, legislation was at the same time making its way through Congress to re-regulate cable companies' pricing schemes.
Suggested Policy Directions
The main questions before Congress do not concern whether fiber optics should be adopted -- its benefits far outweigh its drawbacks, and it is already here. The questions are: Should the transition be made sooner or later? Who should pay? And most importantly, who will control the lines and the information that flows through them?
In light of the action taken so far, it appears that the government prefers that fiber optic lines be laid sooner, not later, to keep up with international competition. The telcos will retain control over the lines but not the content. With their power and experience, this decision is only natural. Cable operators might be a casualty, but in light of recent price re-regulation, they may yet be protected from competition. But they must be allowed to use the new lines as a condition. Cable operators should prepare themselves by diversifying, forming strong groups or getting into programming arenas.
The main issue is the cost. The burden should not be placed on consumers, but on the telcos themselves: consumers will not want to pay. Congress should continue to keep telephone rates down. The telcos insist on selling content as a condition to speedily laying fiber optic lines, but this must not come to pass. They must continue to be utilities, not producers, to preserve competition in other industries. I believe that the unlimited bandwidth will not be a problem, and a wide array of services will be offered, including some not yet dreamed of. Some of the services that are little used today will find a niche. But overall, free and fair access to the lines must be maintained.
1. Kissinger, David. "Industry Wired Over Fiberoptics." Variety, Aug. 15, 1990, p. 81:4.
2. Ibid, 81:5.
3. Ibid, 81:2.
4. Ibid, 81:3.
5. Ibid, 81:2.
6. From a speech delivered Jan. 22, 1990, published in Vital Speeches of the Day, May 1, 1990, p. 447.
7. Quoted in "Cable TV by Phone Line?" U.S. News and World Report, Aug. 1, 1988, p. 9.