The worry is obvious: just as an expanding high-tech sector contributed to strong growth in the 1990s, so might a deepening slump intechnology drag down the entire economy. High among the sources of concern is therecent meltdown in the telecom industry. Even after the dot-com collapse, abroadband upgrade of the Internet seemed sure to be the next big thing, andinvestors continued plowing capital into the companies supplying and building thenew infrastructure for high-speed digital communications. But now telecom too hasseen staggering losses, bankruptcies, and layoffs.
The specter that haunts telecom goes by the ominous name of "darkfiber." 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 faultlies as usual with the government. But, curiously, the policies they primarilyhold responsible were designed to stimulate competition, and what they want the public to accept is greater monopoly power. The danger, if Congress and theFederal Communications Commission (FCC) accept their view, is that the short-termdifficulties in deploying broadband could become the basis for long-term limits onthe diversity of communications.
No one has been a greater apostle of broadband than the right-wing guru GeorgeGilder, author of the book Telecosm: How Infinite Bandwidth Will RevolutionizeOur World (Free Press, 2000) and publisher of the Gilder TechnologyReport, 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 ingovernment are trying to deprive Americans of broadband. In fact, Gilder's chiefexamples of misguided regulations involve good-faith and whollydeliberate--though not yet highly successful--attempts by the FCC to open localtelephone monopolies to competition and to prevent cable systems from gaining astranglehold over the Internet of the future.
And this, according to Gilder, is precisely the problem. In his view, thetelephone and cable companies need the incentive of monopoly returns to developbroadband. By trying to make these companies share their pipes, the governmenthas discouraged them from investing.
As an explanation for the telecom bust, this simply won't do. Thepolicies affecting the telephone carriers were already established while telecominvestment 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 broadbandsimply isn't strong enough. A growing market exists for high-speedaccess--broadband Internet connections rose 158 percent last year--but unlessthere are exciting new applications to persuade consumers to pay the price, themarket may not be big enough to deliver investors the promised results. Intechnology, 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: theeconomics of video-on-demand, glitches in broadband wireless for cheaper homeaccess, and greater security risks than those that Internet users already face.
Unwilling to accept a slower growth path, however, Gilder wants us to acceptmonopoly as the necessary price for boundless bandwidth. Not to worry, he says:"In dynamic technology markets such as Internet broadband, monopolies areinevitable, virtuous, and fleeting."
True, communications monopolies don't last forever. For example, the telegraphmonopoly that Western Union gained in 1866 ultimately became obsolete, and AT&T'stelephone monopoly was broken in the 1980s after merely the better part of acentury. In its heyday, through an alliance with the Associated Press, WesternUnion helped to squelch newspaper competition, and if it had been up to AT&T, wewould never have had the Internet. From an investor standpoint, the ability of amonopoly 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 bestampeded into the acceptance of monopolies on the false promise that they willpreserve prosperity. Too much is at stake--not just for the economy, but for ourdemocracy as well. Let the Pied Piper of fibertopia tumble into the telechasm hehelped to create.
