You Say You Want a Revolution: A Story of Information Age Politics, Reed E. Hundt (Yale University Press, 2000). Telecosm: How Infinite Bandwidth Will Revolutionize Our World, George Gilder (Free Press, 2000). This is a time of turmoil in communications and media, and for good reason: digital technology undermines the very premise on which these industries were built. In the analog past, content and services were tied to the mechanisms that delivered them. It was possible to speak of a medium like television or print or telephony without distinguishing between the mode of delivery and what was being delivered. This linkage put the owners of the delivery mechanisms in a privileged position to provide content and services. Newspaper publishers could write articles, television broadcasters could produce shows, and the owners of phone lines could offer telephone services. Because this position offered such overwhelming advantage, government carefully regulated these industries. With digital technology, we can now convert all of these different kinds of information into simple bits. And digital conduits, such as optical fiber, can deliver these bits indiscriminately, oblivious to whether they represent television shows, newspaper articles, or telephone calls. Everything can flow through the same pipe. At the epicenter of this earthquake is the Internet. Designed originally as a military communications system, its formative goal was to prevent bottlenecks and ensure wide access. In other words, its very structure is antithetical to any industry based on preferred access. The Internet works as an all-purpose delivery service, sending packets of bits toward their destination by any means available. It can use wires, fiber, satellites, microwave links, even technologies yet to be invented, in the stubborn pursuit of this goal. Today the Internet’s capacity is still fairly limited, so it’s better suited to carrying text and images than bit-intensive phone calls and video. But eventually it will carry even the highest-bandwidth channels of information. It will become the universal, low-cost system for delivering information to every business, home, and wireless device. Eventually, the Internet will become the universal low-cost system for delivering information to every business, home, and wireless device. As the Internet expands, companies organized according to the old rules face a major challenge. Their traditional advantages are eroding as consumers take advantage of the new ways they can receive content and services. Already, the dominant mode for classified advertising is switching from newspapers to the Web. Publishers like Encyclopædia Britannica are shifting their focus from traditional books to interactive Web sites that offer up-to-the-minute updates, search capabilities, and electronic commerce. Giants like Time Warner and Bell Atlantic face a triple challenge, since they must simultaneously deal with new technologies, new competitors, and a collection of leftover regulatory constraints. In the short term, however, these companies have a great deal of financial, market, and political power with which to defend their positions. Consumers are still learning about the new technologies, and some of the leftover regulations will help, rather than hinder, entrenched interests. Those who currently have the advantage of special access to customers can be expected to fight to hold on to that advantage for as long as possible. The next decade will be a battle, and since Congress is easier to fool than the marketplace, much of that battle will be fought over regulations. Breaking the Barriers Reed Hundt’s book, You Say You Want a Revolution, provides valuable background to the coming fight. It describes the first serious attempts to reconcile traditional telecom regulation with the possibilities of digital technology. Hundt was chairman of the Federal Communications Commission from 1993 to 1997, and he led the agency’s efforts to break down the barriers between the different delivery media. Hundt and his team understood that the digital revolution had changed the rules of the game, and their efforts to respond to these changes generated a lot of controversy. Breaking the usual pattern of the Washington memoir, Hundt writes as much about his mistakes as his successes, which makes the book both useful and fun to read. Much of the book focuses on the passage and implementation of the Telecommunications Act of 1996, which allowed local telephone, long-distance, and cable companies to begin competing with one another. As the monopoly barriers fell, new digital entrepreneurs stepped in as well. In principle, the FCC simply implements the laws passed by Congress. But Hundt’s book grants an insider’s view of the complex mix of politics, personal loyalty, special-interest pressure, and idealism that determines how the agency really sets the rules. In this case, Congress’s unwillingness to pin down specifics left the FCC in a position of unusual power. In Hundt’s words, “The more my team studied the law, the more we realized that our decisions could determine the winners and losers of the new economy.” The book describes how Hundt and his team found a workable compromise balancing the demands of the industry, the politics of Washington, and their own sense of mission. In the end, the compromise reflected Hundt’s own mixed feelings about deregulation. On the one hand, he argued for eliminating restrictions on competition, letting industry decide technology standards, and auctioning new chunks of the broadcast spectrum to the highest bidders. On the other hand, he felt that existing broadcasters, who had been given their spectrum for free, should be subject to old-style regulation—he wanted television broadcasters to carry a half hour a day of educational television and free political advertising. That same tension between the free market and the public interest carried over to the Internet. Historically, the FCC has stayed away from regulating information services, and that helped the Net to thrive. For instance, in 1984 the FCC chose to exempt data calls from the local access charges that apply to all voice calls over telephone wires. This little-noticed ruling made dial-in access economical and eventually enabled the explosion of the Internet. Hundt, who believed in putting a deregulatory wall around the Internet, continued this tradition by helping defeat the Baby Bells’ attempts to reapply these access charges. At the same time, however, he also successfully pushed for rules forcing the communications industry to help pay for connecting classrooms to the Net. In effect, Hundt played the role of Robin Hood, taxing the rich to help those he saw in need. Depending on your loyalties, Hundt may be a villain or a hero, but undeniably he has been an agent of change. A Vision of the Future George Gilder, by contrast, has no mixed feelings. He makes an appearance early in Hundt’s book arguing, as Hundt puts it, to “repeal all FCC rules and close the agency.” In his new book, Telecosm, Gilder dwells not on regulation but on the emerging technology and business of information delivery. With the capacity of fiber optics and wireless transmitters rapidly expanding, Gilder declares, “the computer age is over.” Communications technology will take over much of the information processing now done by computers, and the future will be defined by “the telecosmic vision of nearly infinite wave-born bandwidth.” Unfortunately, Telecosm is an odd combination of genuine insight and incorrect information. Gilder’s style is more poetic than scholarly, and his book should be read more for the gestalt than for the details. For example, here is Gilder’s introduction to the electromagnetic spectrum, which he dubs “Maxwell’s Rainbow” after the scientist James Clerk Maxwell. “Arriving at the profound and surprising insight that all physical phenomena, from images and energies to chemical and solid bodies, are built on oscillation, Maxwell embarked on a science of shaking… Another word for oscillation is temperature. Without the oscillations, the mostly empty matter of the universe would collapse in on itself. In theory, you can make the shaking stop, but only by making things cold indeed—273 degrees below zero Celsius, or zero Kelvin. So far unreachable even in laboratories, it is the temperature of the universe’s heat death. When things oscillate, they make waves, and in that magic moment, the possibility of the telecosm is born.” This explanation sounds plausible and even beautiful, yet in a single paragraph it confuses mechanical motion with electromagnetism, oscillation with quantum state, and heat death with absolute zero. Out of such lyrical confusion, Telecosm is born. Not only does Gilder predict that bandwidth will be plentiful and nearly free, but he also promotes the companies that deliver bandwidth as good investments. This may seem a bit paradoxical, as investors usually stay away from companies that provide an inexpensive commodity. If television programs can travel for practically nothing on anybody’s fiber lines, why would you want to invest in fiber optics? But the semiconductor industry has already shown us that high-tech commodity businesses can be hugely profitable. Computer-processing power has dropped enormously in cost, and despite Intel’s effort to build a brand, the basis of that company’s profitability is more low-cost manufacturing than special market power. “Intel Inside” doesn’t translate into much real benefit to the consumer, but low-cost computing does. Most buyers look at two simple numbers: price and speed. Yet Intel still flourishes. As Gilder points out, simply reducing the cost of producing these complex products can be an enormous technological accomplishment and one that pays off handsomely. Splitting the Business in Two Both Gilder and Hundt agree that as plentiful bandwidth emerges, the government should regulate less. Agencies like the FCC are going to have to pull back from attempts to supervise the roll-out of fast-moving, highly complicated technologies. It makes little sense for politicians to pick the next-generation television standards or for regulators to decide telephone rates. When technology was fairly stable, regulators could oversee business operations, calculate cost models, and ensure that companies didn’t make too much money off the public. Now, only the marketplace can do this effectively. Unfortunately, the big media and communications companies have become so adapted to regulatory constraints that they will have to be weaned from them gradually. The FCC will not and should not shut its doors, but eventually it will be more of a neutral coordinator than a benevolent leader. In the future, almost all the radio and television spectrum should be auctioned, not granted. A bit of the spectrum should be set aside for public broadcasting and administered in the old way, but by and large the giveaway of this public resource to for-profit enterprises should end. This is, of course, heresy to current broadcasters. They will fight it tooth and nail, but ultimately the industry as a whole will benefit from this change because the broadcast spectrum will be used more efficiently. Caught up in his reverie about the telecosm, Gilder doesn’t go into much detail about the actual future structure of this business, but the analogy with semiconductors can help us understand where things are headed. Early in the history of the computer industry, the same company would take responsibility for designing the processors, writing the software, and assembling the machine. But when the interfaces between these components became standardized, the industry disintegrated, as different companies began to control the different functions. As the telecom infrastructure develops similar standards, allowing easy transmission of bits from different media, these industries will likely split up and reorganize in a similar fashion. Instead of big phone companies trying to both deliver telephone service and manage the wires, or media conglomerates offering both content and channels, we’ll get a variety of efficient, independent specialists. Gilder’s technology companies will deliver the bits. They will build the digital infrastructure, wired and wireless, for the optimal transmission of information. This is a spreadsheet business. It’s all about cost savings, internal rate of return, and pure efficiency. Customers will choose suppliers according to a few simple parameters, such as speed and cost. Already, large-volume customers like WebTV use computer programs to reroute their traffic according to instantaneous changes in pricing. Bandwidth is becoming a commodity. The content and services part of the business is all about taste. Survivors will have strong brands and fashionable products. The content and services part of the business is all about taste, not numbers. Customers will have a much harder time choosing among the providers, so the survivors here will tend to have strong brands and fashionable products. Instead of painstakingly reducing costs, they will engage in all manner of creative experimentation aimed at finding out what audiences like. Great stories, eye-opening reporting, dazzling special effects, and famous people will be the draws. In a world where any information can come through any channel, customers will need help finding high-quality content of various types. Brands like CNN, ESPN, and Disney will become even more valuable as they point the consumer through all the clutter to news, sports, or family entertainment. The Last Mile Although this reorganization will ultimately benefit customers, it will almost certainly be resisted by many of the incumbents. The media giants base much of their current profits on linking content with conduit, or service with infrastructure. They are not likely to abandon that model without a fight. One of the key battles will be fought over the last mile of Internet access, the pipes that go into the home. As Hundt explains, if one pipe carries most of the good content and services, then whoever owns that pipe is likely to try to control the content as well. In such a one-pipe scenario, we would end up with natural monopolies, where innovation is slow and the government has to regulate heavily to make sure the public interest is served. A more attractive possibility is that a range of alternate providers would compete for the last mile. In phone service, for example, consumers would choose among cable, satellite, and traditional phone-line providers. In Hundt’s book, he describes how the FCC first considered this issue in 1993, when Bell Atlantic planned to merge with cable giant Tele-Communications, Incorporated. The organizers of the merger promised a massive investment in technology to connect every consumer to the information superhighway. But programming providers like Barry Diller, then at QVC, understood the dangerous monopoly that could be created. He asked Hundt to give him “a choice when I negotiate who will carry my content.” Ultimately, the merger failed, in part because of FCC concerns. Since then, the Baby Bells have backed off from mergers with cable companies, but the overall industry trend is still toward conglomeration. Even some Internet-based companies are joining the party. AT&T ended up buying TCI, effectively combining services with infrastructure, while the Excite portal combined with @Home cable, and Time Warner is now joining AOL. As the old model of a highly regulated industry is breaking down, the entrenched players are reorganizing around a new kind of vertical integration, but one with relatively few regulatory constraints. The current owners of the primary pipes into homes—the phone and cable companies—would like to control which content providers have access to their lines. While this arrangement is attractive to the traditional companies, it is ultimately unstable. Even if a few media giants manage to retain privileged positions, specialist rivals will surely find technological pathways around their tollbooths. Companies that produce content will simply not have the technological efficiency to be low-cost providers of commoditized bandwidth, and bandwidth experts will not have the skills or margins to produce content. The Internet will become the universal system for the delivery of information, and every communications and media company, as well as every government agency, will need to adapt to the new digital reality: all information can be made into bits, and bits are going to find their way to the consumers that want them.
