Wired asks the chair of the FCC about cutting cable rates and competition, censoring Howard Stern, and John Malone's suggestion that he be taken out and shot.
__The chair of the Federal Communications Commission is more than just another box-suited bureaucrat. To those inside Washington, he's an A-list player, the guy in charge of the Pentagon of the digital age; to media mogulmaniacs and telecom titans, he's the politician who matters. Although Congress must pass legislation to set new outlines for competition on the information superhighway, the FCC is the one to implement and enforce those laws where the rubber meets the road - or rather, where the bits meet the bahn. To be FCC chairman is to be a lightning rod for controversy.
Even so, Bill Clinton's choice for the job, Reed Hundt, has proven especially electrifying. Early this year, in his first big move at the FCC, Hundt pushed through an order to cut cable television prices by 7 percent. Cable bosses went ballistic. Bell Atlantic and Tele-Communications Inc. blamed the rate rollback for the breakup of their multibillion-dollar marriage; Time Warner's boss, Gerry Levin, accused the FCC of "Soviet-style" regulation. Not since John F. Kennedy's man at the commission, Newton Minow, called television a "vast wasteland" has an FCC chairman managed to piss off more people in an industry he was responsible for regulating.
Cable barons have been so hostile to Hundt partly because they view the "7 percent solution" as a sign that he has a grudge against them; or, just as bad, that he is clueless about the economics of the industry. They widely believe that Hundt, sworn in November 29, 1993, was appointed less for his qualifications than for his political connections. All of which is more than a bit true. A 46-year-old antitrust lawyer, Hundt had no background in communications issues. He was a classmate of Clinton's at Yale Law School and, more crucially, has been a close chum of Al Gore's since prep school. Hundt made charges of cronyism all the more credible by bragging he was the only man alive to give money both to Gore's first congressional campaign in Tennessee and to Clinton's first run for governor in Arkansas.
But some of the attacks on Hundt have been unfair. In passing the Cable Act of 1992, Congress intended, rightly or wrongly, to see cable prices fall. The FCC's job was to make that happen. Consumer groups (and others whose interests extend beyond their own profit-and-loss statements) give him kudos. Although Hundt is no techno-savant, he is plainly intelligent, subtle, and savvy about economics - all qualities essential to dealing with the fiendishly complex public-policy issues that litter the emerging digital landscape. Wired's John Heilemann met with Hundt in his office in Washington early last summer to hash out some of these issues.__
Wired: The first time you and I spoke was after I had written an article reporting that you're the most reviled chairman the FCC has had in years. Then came an interview in Wired ("Infobahn Warrior," issue 2.07, page 86) in which John Malone, the boss of Tele-Communications Inc. and a leader in one of the main industries you regulate, suggested you should be taken out and shot. Why are you so unpopular?
Hundt:
[Grimaces.] I think you probably need to talk to a larger group of people if you want to assess my popularity with industry. But that's a good why-did-you-stop-beating-your-wife type of question. I've spent a lot of time with people in the cable industry; I've met with the key bankers to the industry; and my own impression is that the relationships are cordial and productive. There have been a lot of people in the industry who have been complimenting the FCC over our good faith and our sincerity in trying to achieve two objectives. The first is the law that when a cable provider is the only seller in town, it cannot charge an unreasonably high price for basic services. At the same time, another objective is to permit cable operators to add channels and services to increase capacity. These are two objectives that are reconcilable, but they require care and attention on the part of the industry and the FCC, and we've been working together very, very closely.
There's another comment Malone makes that I think is substantive and not merely personal. He says that in ordering the 7 percent solution, you were sort of a dupe to Rep. Ed Markey [D-Massachusetts] - a naive regulator trying to get in good with a key congressional figure. Is that a fair assessment?
Hundt: Number one, our decision was based on the Cable Act of 1992. We read the law. We looked at the economics. And then we did what we felt was the right thing. We were not the tool or pawn or dupe of anybody. The statistics overwhelmingly demonstrate that where there is competition for a cable programmer's offerings, the prices are lower. In only about 1 percent of all the markets in the country is there competition today. But it should come as no surprise to any consumer that where there is competition, prices are lower. Now, at the same time, basic and enhanced basic service are supposed to be evolving products. They're not supposed to be fixed in time forever. We want to make sure that we work with the cable industry to determine how they can evolve. The very instant there is "effective competition," there is no need for rate regulation.
But the cable industry has in some ways been as immune to competition as the telephone industry, hasn't it?
In many ways the cable industry's ability to compete with broadcasters has been furthered by the FCC. For decades we have been working to expand opportunities for the cable industry to offer competitive alternatives to broadcasting offerings. More than 10 years ago we made sure with the pole attachment law that the cable industry could connect their cables to households. In 1984, Congress not only substantially deregulated the cable industry, but also passed a law barring telephone companies from offering video programming that would compete with the cable industry. Now the time has come for the cable industry to be willing to face competition. It no longer needs protection against competitors. It is now a strong, viable, competitive force. In fact, it is so strong and so viable, it doesn't even face competition for basic and enhanced-basic in 99 percent of all the markets. So it's time for new entrants to come in and offer choice to consumers.
That process of increasing competition, that's the touchstone for you in terms of how you think the information superhighway should be built.
Our policy at the commission, and my personal policy, is that competition should drive all markets, especially the building-out of the info-highway. I don't believe government should build the information highway, and I don't believe a monopolist should be given the exclusive license to build the information highway. But there are three principles to this competition: choice, opportunity, and fairness. Choice means businesses that want to use the information highway should be able to choose their method of transportation.
So that's open access?
Yes. That's similar to the concept of open access. It also means the consumers who want to use the information highway to communicate or to buy products and services should have multiple offerers. Opportunity means all businesses and all service providers should be able to use the information highway to sell their wares. I consider that to be a little closer to the open access theme. That is also why you hear about questions of compatibility and interconnection. And then fairness is consistent with the way America thinks about competition in all industries. If you have an incumbent monopolist, you don't let that monopolist act unfairly to deny competitors entry. But another aspect of fairness is that if you have an incumbent monopolist, you don't want that monopolist to be able to charge consumers unreasonably high prices when they don't have any choice - when it's just take it or leave it from the same seller. It's that aspect of fairness that is behind the Cable Act of 1992.
Congress is currently haggling over a number of different bills to deregulate the communications industry, to let the TV and telephone industries invade each other's traditional markets. Are we heading in the right direction on Capitol Hill?
On the hill, Reps. Ed Markey, Jack Fields [R-Texas], Jack Brooks [D-Texas], and John Dingell [D-Michigan] and Sen. Fritz Hollings [D-South Carolina] and others are in concert on introducing competition in all communications markets. That's the FCC's policy. That's the White House's policy. And that's a very difficult policy to implement, because the incumbent firms don't easily allow new competitors in their markets. So, it's a fight to introduce competition, but that's a fight I eagerly take on.
Which barriers between industries should we remove, and when? In Britain, the government of former Prime Minister Margaret Thatcher deregulated most aspects of the telephone and cable industries in one fell swoop. As a result, investment in the British version of the info highway has taken place at an incredible pace. Is the Thatcherite vision of deregulation too radical for America?
No. These debates about sequencing are like a dance contest between two partners when neither one wants to let the other take the lead. They're all trying to figure out where the advantage lies. Incumbents are anxious about the prospect of competition and the new entrants are eager to enter. There is the potential for gridlock: when all incumbents finally agree, Gee, maybe it's too much trouble to take the risks of competition. It's very important to break down that gridlock. In this interview with Malone that you mentioned earlier, he talks about how he thinks cable is the most aggressive competitor in building the information highway. He seems to imply that we're more likely to get competition in communications markets if telephone companies don't merge with cable companies.... I thought that was an interesting interview, because it was only last fall that many people were saying telephone and cable mergers were essential to building the information highway.
It was Malone who launched the biggest such merger himself.
And many people think that if the government did anything to stop telephone companies from merging with cable companies, it would be inconsistent with wanting to build the information highway. Now I'm reading in this interview with Malone that maybe the most appropriate kind of actions would be anything that allows cable to go after telephone companies and vice versa, as opposed to merging. Well, what I'm saying here is that the business strategy of the season may change, but the policy of competition should never change.
TCI and Bell Atlantic both cited the cable rate rollback as a reason for not merging, because it would destabilize their cash flow. The multibillion-dollar telephone/ cable marriage between Southwestern Bell and Cox Cable also fell apart, and the people involved in that deal blamed the FCC. The comment you just made suggests that policy issues were not as important in those decisions as were more fundamental questions of business strategy.
There's no question that our decisions are important to the businesses.... Let me address specifically the failure of Bell Atlantic and TCI to merge. I read a detailed explanation of this in Wired, in which Malone cited the drop of Bell Atlantic's stock price and the difficulty of merging a dividend company with a growth company.
Do you think a policy of competition is one that's likely to end up providing universal service? And what exactly does "universal service" mean in the context of the information superhighway?
Let me give an example. In our personal communications services auction of broadband spectrum, which will begin toward the end of this year, we're going to be jump-starting competition from the get-go in the next generation of mobile telephony. It's the first time any country in the world has ever committed to a policy of competition in communications markets from day one. This is in contrast to the commission's creation of the duopoly in cellular telephony more than 10 years ago. We're not committing to a duopoly here. We're committing to a multiplayer market in which there will be vigorous, robust, and accelerated competition. It will lead to lower prices, higher quality of service, and greater penetration to a greater number of Americans than another policy would get you.
A chicken in every pot and a car in every garage.
No! Exactly not that. Just the greatest amount of penetration that private entrepreneurship is likely to get. It is difficult for one provider, or a comfortable duopoly, to engage in the kind of price wars that would increase penetration to the maximum number. They have many incentives to cooperate, and a monopolist has many reasons not to offer its product to all people at affordable levels, because there comes a point on the price curve where a monopolist makes more money by constraining output. This is pretty fundamental economics. We want to see competition drive prices down to get the greatest amount of penetration through the workings of the marketplace. What I can't tell you is what the percentage of the country will be that is reached by that competition. I can only tell you it will be a much greater percentage than would be reached if we didn't have a competitive policy.
So, we have to wait for the out-years to get the facts. That's point one about my policy on universal service. Here's point two: notwithstanding all of the above, I think it is absolutely essential that the information highway be connected to every classroom and every clinic and every library in the country as soon as practical.
Being on the information highway is the only way to participate fully in our economy. It is going to be essential for virtually all Americans. I want us to have a policy of connecting all classrooms for the beginning of any installation of broadband interactive services.
Well, these are the standard arguments people make for universal service. Namely, it's pretty much impossible to live a productive life in modern society without having a telephone.
There are other reasons. You have to be part of the communications network to participate fully in the economy. If I give you a chance to participate in the economy, I'm probably increasing the size of the economy. So you can make an economic argument in favor of that. But also, I want you to participate in the communications system in the country for purely social reasons. I'd like you to be able to cast your vote in an informed way. I'd like you to be able to express your opinions, under the First Amendment, and to share in the development of community. Third, I have health and safety reasons for wanting you to participate in the communications system. I'd like you to be able to call for help. I'd like you to be able to get a diagnosis from an expert doctor in a remote location.
Do you think that being connected to the information superhighway will be equally essential? That, at some point, upholding the political, economic, and social values you just mentioned will require the government to step in and ensure universal service from a "fat pipe," a broadband connection?
The information superhighway right now consists of our universal broadcast system, our almost-universal telephone system, our almost-universal cable system, our universal satellite system, and our virtually universal wireless system. Right now, all five of these parallel and almost-universal networks deliver voice, video, and data - to varying degrees. As they become digitized, they will deliver even more. And almost all of them will become interactive. I don't believe there's going to come a day when some other system will replace all five. I believe that all five will intersect, interconnect, overlap. And we will end up with a network of these networks. When I talk about connecting all the classrooms in the schools to the information highway, I would like phone lines in those classrooms as soon as possible - the day after tomorrow. But I also agree that as the fatter pipe or thicker connection that facilitates broadband interactivity is deployed everywhere in the US, it should be deployed in the classrooms as part of the first stage, not the last stage.
For kids in the classrooms, the real connection to broadband interactive services is, I believe, going to be related to the greatest revolution in the history of education since the development of the printing press.
At the same time you will be addressing head-on the question of remote locations, small town USA, and rural versus urban, and all the other tensions that are usually in people's minds when they focus on the problem of universal service. If you make the commitment to connect the advanced network to all classrooms, clinics, and libraries, you will ensure that all geographical parts of this country are connected.
Given that so much of the justification for regulation of communications has always been based on the idea of scarcity of spectrum, for example, what do you think the FCC's role should be in regulating content in a world of abundant bandwidth?
I don't want to be in the censorship business. The FCC - starting now and continuing in the future - should be an agency that is concerned with the economics of competition. But we don't have this abundant bandwidth yet. It is promised to us by the technological mavens, and to some degree by the financiers. But we aren't going to get it if we don't have competition.
So how does that sit with the FCC's actions relating to Howard Stern?
You mean what's his reaction to what I'm saying?
There are critics who would claim the Stern controversy shows the FCC is very much in the business of being involved in free-speech issues.
We have never censored anyone. We've never told anyone that it is illegal or unconstitutional for them to express their views. The only question in the broadcast context is whether, given the free use of the spectrum that has been granted to broadcasters, broadcasters should be required to channel certain kinds of programs in late-night hours when children aren't listening. That's the only issue. I don't see that as a censorship issue. That is an issue of living up to the social compact between the people and broadcasters. The deal is that they get the free spectrum and they need to do certain things for society in return.
Have you ever listened to Howard Stern?
No.
Why not?
I don't even know what channel he's on.
