What Killed the Boom?

The worry is obvious: just as an expanding high-tech
sector contributed to strong growth in the 1990s, so might a deepening slump in
technology drag down the entire economy. High among the sources of concern is the
recent meltdown in the telecom industry. Even after the dot-com collapse, a
broadband upgrade of the Internet seemed sure to be the next big thing, and
investors continued plowing capital into the companies supplying and building the
new infrastructure for high-speed digital communications. But now telecom too has
seen staggering losses, bankruptcies, and layoffs.

The specter that haunts telecom goes by the ominous name of "dark
fiber." According to The New York Times, companies in the past two years have
spent $35 billion worldwide laying 100 million miles of optical fiber for
broadband networks, but only 5 percent has been "lit" (that is, made
operational). And while long-haul lines appear overbuilt, local access remains
unavailable for millions of potential customers. Moreover, there are nagging
doubts about the potential profitability of video-on-demand, the application that
many have counted on for the big payoff from broadband deployment.

What's to blame for the telecom bust? To some conservative writers, the fault
lies as usual with the government. But, curiously, the policies they primarily
hold responsible were designed to stimulate competition, and what they want the
public to accept is greater monopoly power. The danger, if Congress and the
Federal Communications Commission (FCC) accept their view, is that the short-term
difficulties in deploying broadband could become the basis for long-term limits on
the diversity of communications.

No one has been a greater apostle of broadband than the right-wing guru George
Gilder, author of the book Telecosm: How Infinite Bandwidth Will Revolutionize
Our World
(Free Press, 2000) and publisher of the Gilder Technology
Report,
which offers investment tips--albeit not terribly successful ones of
late. According to a widely accepted independent monitor, www.gtindex.com,
Gilder's list of recommended stocks fell 44 percent during 2000, plus an
additional 38 percent in 2001 (as of this writing).

But in a Wall Street Journal piece called "Tumbling into the
Telechasm"--an apt description for the experience of investors who followed his
advice--Gilder argues that the current "high-tech depression" stems from a series
of blunders in Washington, D.C., most notably deflationary monetary policy and
excess regulation. "The only reason for the so-called 'fiber optics glut,'" he
writes, "is the near deliberate starvation of connections to homes and small
businesses."

What "near deliberate" means is unclear, but it suggests that some people in
government are trying to deprive Americans of broadband. In fact, Gilder's chief
examples of misguided regulations involve good-faith and wholly
deliberate--though not yet highly successful--attempts by the FCC to open local
telephone monopolies to competition and to prevent cable systems from gaining a
stranglehold over the Internet of the future.

And this, according to Gilder, is precisely the problem. In his view, the
telephone and cable companies need the incentive of monopoly returns to develop
broadband. By trying to make these companies share their pipes, the government
has discouraged them from investing.

As an explanation for the telecom bust, this simply won't do. The
policies affecting the telephone carriers were already established while telecom
investment was booming; they are based on the Telecommunications Act of 1996,
which was aimed at opening local telephone loops. And the FCC's "open access"
requirements for cable have been extremely limited.

The more likely explanation is that, at present, demand for broadband
simply isn't strong enough. A growing market exists for high-speed
access--broadband Internet connections rose 158 percent last year--but unless
there are exciting new applications to persuade consumers to pay the price, the
market may not be big enough to deliver investors the promised results. In
technology, ripeness is all, and as a mass medium, broadband may not yet be ripe.
It will eventually prevail, but for the moment vexing problems remain: the
economics of video-on-demand, glitches in broadband wireless for cheaper home
access, and greater security risks than those that Internet users already face.

Unwilling to accept a slower growth path, however, Gilder wants us to accept
monopoly as the necessary price for boundless bandwidth. Not to worry, he says:
"In dynamic technology markets such as Internet broadband, monopolies are
inevitable, virtuous, and fleeting."

True, communications monopolies don't last forever. For example, the telegraph
monopoly that Western Union gained in 1866 ultimately became obsolete, and AT&T's
telephone monopoly was broken in the 1980s after merely the better part of a
century. In its heyday, through an alliance with the Associated Press, Western
Union helped to squelch newspaper competition, and if it had been up to AT&T, we
would never have had the Internet. From an investor standpoint, the ability of a
monopoly to suppress alternatives is a virtue.

Perhaps new monopolies will be equally "fleeting," but they are not inevitable.
We have a choice in the design of new communications media and should not be
stampeded into the acceptance of monopolies on the false promise that they will
preserve prosperity. Too much is at stake--not just for the economy, but for our
democracy as well. Let the Pied Piper of fibertopia tumble into the telechasm he
helped to create.

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