Hell's Bells: A Radio History of the Telephone; No. 7

I think the landscape is going to change so rapidly that in just a few years, the year 2000 that people have been talking about is that we have some great futuristic zones. The whole landscape will change and it would make sense at some point for the cable companies and the telephone companies to collaborate again. And I think if you're going to practice free private enterprise and really do a brilliant marketplace competition, you got to have some. There's going to be a lot of people playing. I think we recognize it. I think we accept that. And we see that as a. And we want to make networks where a lot of people like. Ten years ago, AT&T let go of its telecommunications monopoly

under intense legal pressure from MCI and the federal government, those same pressures continue breaking down a system that was once the world's largest corporation into smaller and smaller pieces. Even the local monopolies are starting to come apart. But beneath the rapid currents of change, one thing remains constant private ownership of the telecommunications infrastructure. I think primarily because of what happened with the Telegraph. Communications professor Herb Dordick of Temple University. The Telegraph had failed to become a public service. Congress just didn't want it. Congress avoided any interest, any desire, but there were made up of monopolies themselves. It was the nature of the history of our time at that point. And that's why we saw essentially a national monopoly, which is it was no different than the patents in Europe, except that it was owned privately rather than owned by the government. And the other reason was you look at the history of the country in 1876, that was a

booming year for American capitalism. You know, Harriman was building railroads and the oil people were out there. This was the big era of the monopolies, the growth of monopolies. It was big industrial was after the civil war, enormous growth of industry. And most of it was private. It's the nature of the U.S. They felt that there were some people who said that the railroads ought not to be private. They even suggested that bakeries should be regulated. Since they serve, they provide a necessary good. There were members of the Supreme Court at that time who argued that insurance should be regulated tightly. It should be not only regulated, but handled by the government because insurance provides a necessary service that could easily be made priced out of reach of many people. Unlike most every other country in the world, the U.S. bought into the notion of private ownership of the entire system. Under one condition, telephone companies would serve everyone without discrimination

and the government would oversee prices, making sure that costs were spread out fairly over the whole system. Business and long distance customers would pay a little more for the use of the system, while rural and local customers would pay a little less than it actually cost to hook them up. Don Viall was on the California Public Utilities Commission during divestiture, a time when most people were just getting used to the idea that they would have to choose their own long distance carrier. But the real issue that was really going on here nationally is that you had an integrated system and as an integrated system, a monopoly, there was a social policy behind there to have universal telephone service. And the way you achieve universal telephone service is to cross subsidize that. As revenues were increasing in long lines, the area that was being deregulated or where competition was being introduced, that the revenues you could get out of that would be used to support a low cost access system to the telephone in your home.

And we built up to our 90 95 percent service universal service on the basis of this social policy where we internalized, internalized, we had the capacity in a in a monopoly system, in a regulated monopoly system to internalize the social costs of having a universal telephone system. We did it internally because we had the capability of running a monopoly in that fashion. Well, at the moment you introduce competitive forces, then obviously you're breaking up and reducing the capacity to internalize the social costs of anything that you're trying to do. So the first thing that we were all concerned about was what did this mean for local access rates? Yet the conventional wisdom at the time was that this this breakup of Ma Bell would result in the access telephone rate, the basic telephone rate that you paid for in California, going up to 25, 30 dollars.

Regulation is what held it back because we were so sensitive to the shift of fixed cost of operating the system from the long lines and to the local operating company. And as competition moved into the operating company, as it is doing today, it's pushing rates up and access. All of this flies under the color of as you introduce market forces, you have to do more cost based pricing. More cost based pricing for services means that you price usage for cost at cost, and you don't get the subsidies or the support to internalize. Lower costs someplace else. It's not paying off, the vision of universal service is still with us, but the monopoly gold mine, with its fixed high rate of return, is fading fast. And competition for equipment, long distance and even local service is forcing everyone to rethink and restate their long range vision.

Given all of this went to the divested Bell operating companies want to do Professor Dautrich. They want to make money, lots of money. They would like to offer information services, which to them means nothing more than video services. They want to get in the cable TV business. The cable TV business has made it easy for them by being such nasty characters. But so far, there is an opportunity for competition at the local level, that is local service level. There is an opportunity, the FCC has said that the switch should be available to anyone who wishes to use the switch so that if I could start a telephone company that would wire parallel wire your community, but offer some very interesting special services, which would be very expensive to wire. But I perhaps your you live in an expensive area where I can charge you a lot of money and cream skim. If I have the right to offer that service and go to the telephone company and ask

them to give me access to their switch so that I could reach other parties and therefore your service would be more valuable. But right now, the telephone company says we don't quite know how to do that, and nor does the state know how to do that. So we have to wait for the state to give us the authority and the state. And this is where you have the difference with state and federal regulation. The state is going to move very slowly on that because what they're afraid of is that if more and more people get off the public switch network. Then this public switch network will have to deliver the same services to fewer people. And if fewer people are buying the same services with the same system, the same infrastructure, you got to charge each person more. And that's a real problem, and I think that we've got to face that if we want to increase competition in the delivery of information, the delivery of infrastructure and things of that sort. The phone companies aren't the only ones facing competition in this race to build the information highway. The three major industries with roots to the home, let's

call it the information driveway, are the telcos, the cable TV operators and the newspaper publishers. The newspapers have fought bitterly in Congress to keep the Baby Bells out of information services, arguing that throughout history the Bell Empire has tried to dominate every field it has entered, among them, radio, broadcasting and motion picture sound. Now the argument goes, the telcos shouldn't control the news that we all depend on. I think the real issue from the newspapers is something different. They don't state it so openly. Professor Michael Nall of the Annenberg School for Communications at the University of Southern California. There's a certain service that newspapers provide that is probably perhaps best provided by newer technology, and that's classified ads. You want to find an automobile use car of a certain type you'd like to be to purchase it in a certain color and a certain price range. And you'd like to have it reasonably nearby within 10 miles of your house to go take a look at that. That's just a perfect example of a nice database search.

And then that database search we identify for you the various hits, the various matches. Then you can seek those matches out with a telephone call. Also, if somebody sold an item, it would be knocked out of that database. So you wouldn't waste time calling people who already sold the item you were looking for or job or something of that variety. So they are an electronic database service, something where your fingers indeed did the walking or would make a lot of sense. And I think that might be the ultimate threat that that really the newspapers are concerned about is not the packaging of information. It's not news information. I think it's their classified pages, which I think are probably a great cash cow for the newspapers that they're concerned about, that newer technology might threaten. But what on earth is preventing the newspaper industry from doing this themselves then? If there's really something there and somebody really thinks that that technology to allow that to happen is at hand, why isn't the newspaper industry doing something about it? Instead, they're sitting there with the supposed threat

and their reaction to that threat rather than investigating technology themselves, rather than seeking out the best sources of wisdom and advice and found that business there. Knee jerk reaction is keep them out of it, get legislation against them. It's almost a paranoia. I don't have much patience with that. I don't think that's appropriate action on what should be a mature industry, which incidentally, itself in many cities in this nation monopolizes the packaging and providing of news, which is only one newspaper in town. All I say about 20 years ago in that time frame when

cable television was still in its infancy, some academics observed that this medium, the coaxial cable, had the potential to carry not only television signals, but also telephone signals. The idea of a nation wired with this new broadband medium over which all types of signals could be provided data signals, voice telephone signals, broadband TV signals for different purposes of interpersonal and entertainment communication. Some people thought it was a great new vision. Didn't happen. There are a lot of policy reasons, business reasons and technological reasons why not didn't happen. Wrong vision. The cable and telephone industries remain quite distinct. Incidentally, one does not know much about the other. What does the telephone industry know anything about entertainment? I must admit some of the recent ideas are quite entertaining. What does the cable industry, which is in the one way broadcast entertainment industry, know about the two way into personal electronic communications of telephony?

They don't know much about each other. Today, the rallying cry again is a single medium to the home. Optical fiber frequently mentioned again the thought, combining together a bunch of different signals, entertainment and interpersonal to send over this one single medium. So we now have the thought again, the telephone industry in this case, getting into the entertainment business of television and the cable industry has recently countered by showing technologically that they could do two ways switched telephone conversations over their fiber medium. So it's this battle over the fiber medium. Who's going to control it? What signals is it going to carry? If we look back in history? The answer is they are again to this one. In the past, it ended up being two copper based media, the copper of the twisted pairs of the phone company and the copper of the coaxial cable, the cable industry, the two separate

parts delivering different signals to the home. My guess is there will be two fiber to the home, one fiber carrying the two way switched traffic of telephony, the other fiber carrying the one way broadband entertainment signals of television. So meanwhile, it's fun to watch the battle between the two. It's sort of like Godzilla versus King Kong. Who cares? You know, they're both, in a way, Dodo's of the past. And, you know, why have such a big fight? There's enough of a pie for both in terms of revenues. The cable television industry is right around a little more and something the order of roughly 15 billion a year. I think I disagree with the overall revenue, but the telephone industry is ten times that. So it's hard to imagine that the cable industry of that small size is going to gobble up the other one. So you can understand, if you were that smaller industry, you'd be very, very worried about this 150 billion dollar thing that is looking at you, which could indeed gobble

you up perhaps just a little bit of paranoia there in a part of cable industry in terms of their fears at the telephone industry's going to do something to them. What will ultimately happen? Probably what I just said. History says that the windups remaining separate. But meanwhile, a lot of fun to watch these these two ancient giants and swing it out at each other. And I don't think they're going to hurt each other. I don't think King Kong, Godzilla, I don't think either one of them would win. They'd probably both walk away. But the problem is you don't want to be on the ground, kind of smores their feet might come stomping down on some poor innocents and hurt somebody. Anyway, interesting thought, though. In the spring of 93 when one of the seven regional bell holding companies, U.S. West, announced that it would buy 25 percent of Time Warner's massive cable holdings, the Cold War between the two industries suddenly began to thaw. I think the landscape is going to change so rapidly than in just a few years, the year 2000 that people have been talking about as if it were some great futuristic sound. The whole landscape will have changed.

Dennis Mengers, a former state assemblyman, is a lobbyist for the California Cable Television Association, the industry trade group. Any conclusions with regard to what's actually going to happen or purely speculative at this point? But I'd say there's some excitement. The lines are beginning to blur, and those who have long felt strong divisions between telco and cable I think are beginning to see the walls coming down. Natural business place marketplace synergies appear to be taking place as most of us thought they would, and how that will manifest itself in terms of new services to the customers and by whom and in what fashion and at what cost and with what level of choice, etc. as purely, as I say, speculative. At this point, fiber investment is a major investment for anyone to be making, and it would make sense at some point for the cable companies and the telephone companies to collaborate on providing video services. Kitty Bernick is director of external affairs for Pacific Telesis, the regional Bell

Holding Company, which owns Pacific Bell and Nevada Bell. I think cable clearly in the 80s overstepped their bounds by raising prices to the degree that they did. Congress stepped in this last session and slapped some great regulation on them. Well, first of all, I think it's unfortunate that the Congress saw fit to re. Regulate the cable industry nationwide at this time and that the FCC has taken such a stringent approach to implementing the Congress's intent right at a time when these marketplace activities are occurring, it it seems to me it would have been far better advised to sit back and let these industries develop some of these as a as I say, synergise together and then take another look at the field. Now, in retrospect, they'll have to take a look at how well balanced they think they've left the field and maybe make midcourse adjustments

now that they face that. I think they are perhaps more interested in. We hope that they're perhaps more interested in collaborative ventures with the telephone companies. But in order for that to happen, another law unrelated, the MFK has to be changed. That's the 1984 Cable Act. What that does is prohibit local operating companies from providing cable programing in the geographic areas where they provide telephone service. And so until that act is lifted, we Pacific, for example, would not be able to provide cable programing here in California. In the areas that we serve, I think the phone companies should not be in joint ventures to provide information services. I think it's a mistake for the telephone company, shareholders and management. I think it's a mistake for the people engaged in the joint venture with them. I think it's a mistake for the public interest and for American consumers. Former FCC Commissioner Nicholas Johnson.

And if they cannot see the wisdom to get out of these businesses themselves, I think we may need to consider legislation that will force them to get out of them. I mean, that's the kind of thing the antitrust laws were designed to do. I believe in free private enterprise as much as anybody else. But I think if you're going to practice free private enterprise and really do it and really have marketplace competition, you got to have some rules. And I'd like the thing to be as clean and mean as possible. And that means the phone companies and other telecommunications carriers and providers go head to head on the kinds of conduits they can provide in the switching capabilities they can give us and broadband capability and ISDN and and optic fiber and and satellites and and radio communications of all kinds. I had very exciting business and I think having competition in that is just terrific. But I just think that it's very the whole purpose of these joint ventures

is anticompetitive. I mean, the whole point of it is to try to give a competitive advantage to somebody who has a conduit and the content. And I think that's not in the best interests of of anybody, either the people in the conduit business or the people in the information providing business. I think the more open you have that marketplace, the better. I mean, you're just asking for regulation. We are not going to sit back and take these abuses. And so unless you divide up the the businesses that these folks are in and let them really have at it in clean divisions of business, you're going to have to have regulation once you start merging content with Conduit. In much the same way that the nationwide telephone monopoly was recast into smaller pieces with the breakup of AT&T monopoly service regions called Lattis, which are now controlled by the Baby Bells, are also being opened up to competition.

First, it was the high speed data carriers. These new teleport carriers called it competition. While the bells chose words like bypass and cream, skimming competition is now working its way into the small business and residential level so that one day soon will all be free to choose our own internal at a toll carrier for those regional calls that are too far to be local but too close to be long distance. And the process of breaking up the phone system into smaller and smaller pieces won't stop there. Competition will look more like door to door combat as all manner of service providers vie for your business. A brave new marketplace is taking shape telecom, computing, entertainment, publishing, consumer products and cable television industries that rarely spoke to each other are coming together into a kaleidoscope of alliances and partnerships.

But what if this new brand of competitive cooperation goes awry and these new three headed creatures, with their combined economic and political clout, become too powerful and break free from the restraints of market forces and government safeguards? Cable lobbyist Dennis Mengers here. All along people have been talking people who thought cable was a quasi monopoly and that telephone intrusion or incursion to the business would be good for competition. Now have to take a look at the possibility that some of these synergies will simply result in larger, possibly monopolistic telecommunications corporations of a size and magnitude beyond what we can currently conceive. I'm not saying that's bad or good or that it will inevitably happen. It just strikes me as one of the possibilities I hear in our company all the time, the fact that we want to be a part of a nationwide seamless network of networks.

Bob Clark is a vice president of sales and marketing for AT&T. Clearly, when the AT&T company, I think, stepped into divestiture in the in the 83, 84 timeframe, there was this I'll use the arrogance word, because I think, you know, speaking for myself and a lot of the folks that I worked with in AT&T, I think we believed at that particular time that we either had or we could develop the products and the services in the solution to anything anybody needed. Some of that came from heritage. Some of that just came from a belief that we had a lot of right answers. And so that served us well or did not serve us well for the first few years coming out of divestiture. And I think we then started to understand probably as we moved through the latter part of the 80s, that opening up architectures, opening up networks, opening ourselves up to ventures, just the type that we were talking about with Magic and with Ito, those were the kinds

of opportunities that we really had to make sure that we were a part of and help the industry be a part of to make this thing really go. So if you go back to a couple of the issues that you bring up, one is the issue of does this thing really fall back after a number of years and there's only a few large competitors who can play, who's got all the answers, or does it fall into the other dilemma of overlooking what might be what could be? Because either of arrogance or just not being insightful? What I've seen is you start to take on the belief that opening up networks so that everything can connect with everything. That's a little bit of the old tradition of the Bell system in a way, is that one of the prides of the Bell system was that everything worked together. It was founded on the belief that everything would work together, the old and in service, a kind of notion.

Well, if you extend that logic to everything, working together, when you've got a multiplicity of competitors and suppliers and genius working throughout the country and you're willing to accept that and let that be a part of it, of the total fabric, then I think maybe we can prevent possibly and change history possibly from a couple of the issues that you bring up. One, there's going to be a lot of people playing. I think we recognize that and I think we accept that. And we see that as a reality. And we want to make networks where a lot of people can play. And that may be the new pitfall that we write. The first history book on is how do you create an environment of huge networks, all interconnected with all kinds of people playing that becomes so complex and moving so rapidly that the group, the greatest burden that we create in the industry is the end of the inability of people or businesses to absorb

that much information or that much change, all in one one fell swoop. I think it's safe to say I'm not given to theatrical expressions except across the street, but in the capital. But I think all hell is breaking loose and and it's hard to tell whether that's entirely in the good sense or whether it's going to be a mixed bag. I know I approach these things as much sometimes the amateur sociologist as I do a political lobbyist because I'm like every other citizen. Concerned about how this changes the way we live and function as people, so I'm both excited and I'm also a little more unnerved at how rapidly these alternatives are developing. The Bell system was broken apart because it was too big. It became a special interest that had grown out of touch with the public interest. After a brief decade of court ordered separation's the old piece. Parts of former empires are quickly recombining. These multibillion dollar players come from traditions of domination and control.

Now they are driven by fear of eroding markets on one hand and the desire to capture an exploding market of global multimedia communications on the other. They've realized that without open standards, there will be no vast markets. This vision of the future and of them coming together to help create it is certainly heartwarming. But we have to wonder how long the openness will last. Are we simply building a new, vertically integrated empire out of the wreckage of the old? Or is this something altogether new for us where competitors can play openly and fairly improving society as they each behave in their enlightened self-interest? Anything can happen. So it's time to take careful notes as we write this next chapter in the history of the telephone. Hell's Bells, a radio history of the telephone, was written

and produced by Gregg McVicar of Pacific Multimedia with research by Tom Read and original theme music by Larry Council. The project director was Leo Lee. Funding was provided by the Telecommunications Education Trust, established by the California Public Utilities Commission to order audiocassettes or written transcripts of the series. Send us a fax at five one zero nine three eight 28 50. And thanks for listening. This is Western Public Radio.