TCS Daily

Inter Modal Monopoly

By Robert Lee - February 17, 2003 12:00 AM

On Feb. 7, just before the Federal Communication Commission is due to report out the triennial review, word leaked that SBC is in talks to buy out satellite operator DirectTV from General Motors Hughes for a handy $10 billion.

What is wrong with this picture?

Well, FCC Chairman Michael Powell is very serious about technological convergence among many modes of telecommunications. One mode is the telephone, a wireline mode that we all know and, naturally, love. Cable provides another wireline mode. The cell-phone provides a wireless mode. Satellite provides another such mode. Powell even talks breathlessly about power grid transmission as being a mode.

Powell believes very much in competition between these modes, less so to the necessity of competition within them

Indeed, some inter-modal competition theorists believe it would be perfectly OK for each mode to be controlled by a monopoly, on the basis that each of the modal monopolies would have to do battle with each other as telecommunications service offerings converge. Consumers, these theorists believe, would still have choice, between the modal monopolists, thus keeping them from being a victim of any particular monopoly. The only monopoly consumers have to fear is inter-modal monopoly, not modal monopolies themselves.

Although not intuitive, the idea is not without intellectual appeal. But a hell of a lot hangs in the balance. Consider the oil market. By this line of thinking, we are not really the victims of oil pricing pressures because there is more than one sheeted Arab sheik in the cartel. Oops.

Punishing Bad Behavior

Along with his beliefs about inter-modal competition, Powell also believes government ought not to regulate future behavior so much as punish bad behavior.

Powell's retrospective philosophy (don't try to shape the future in an effort to prevent injustice, but punish it after it happens) stems from his training as an antitrust lawyer. Unfortunately antitrust lawyers are people who come riding to the rescue after there is no one left to rescue.

The problem in business and in all other organic and inorganic events is that after the fact is -- after the fact. And it is the bad fact, the bad event that wise people ought to try to avoid. There is a lot of truth in the old adage that "an ounce of prevention ..." or "a stitch in time ..."

I spend a great deal of my time making sure my third oldest child doesn't on purpose or by accident harm my youngest. I could simply wait for number three to maim or kill number four and then punish number three, but after a nanosecond of what cannot even be considered reflection (it would have to be considered species knowledge ... that circuitry based knowledge with which normal people are born) I decided to be a bit more proactive.

As a parent, I can't afford to act like a vice principal I had in high school.

At lunch in my junior year, a hulking thug appeared behind me, complained that the poppy seeds from a roll I was eating were messing up the table, mentioned something unfriendly about my mother, and then informed me he was going to kick my ____ after school. To support his claim, he then lifted me from my seat and threw me across the table.

The vice principal was standing not 30 feet away. I went and told him what he had seen and what my fellow student had told me. The principal, Mr. Alexander, proceeded to tell me there was nothing he could do because there had been no fight. Even as I explained there was going to be one, he stuck to his position. He apparently was the vice principal in charge of previous fights but not future fights.

I, to my great surprise, won the fight, and was suspended for three days for taking part in it. The instigator got five days. That's how the vice principal retrospectively did his job of maintaining order.

One of the hallmarks of humanity and intelligence is being able to figure out what is going to happen and adjusting before it happens. The law calls the victim of a crime a witness, except in one case - when he is deceased.

Telecom and commerce are not some after school fight between kids. And the good guys in the telecom fight, the competitors to the local Bell monopolists who brought us telecom innovation and lower prices, are not going to win this fight without protection. And if they lose they will die. And the nation won't witness competition for years. It will take years for investors to forget that government induced them to invest only to pull the rug from under them. Investors take no comfort from mea culpas. They will simply put no new money into inter modal telecommunications competition once intramodal telephone competition is squashed.

Why would they, considering the inter-modal competitive landscape?

What Inter-Modal Competition?

SBC controls 90 percent of all the consumer telephone lines in its territory.

But, according to the theory, SBC is subject to competition from the cable industry. What amount of cable telephony is there in SBC's territory? Is it closer to zero or 1 percent?

Theory also will tell you that SBC is in competition from Wi-Fi. And what percentage of telephony in SBC's territory does Wi-Fi constitute? Zero percent.

Further, theory says SBC is subject to competition from the emerging technology of power grid telecommunications. Guess how much telephone traffic goes over power lines? Zero percent. As a matter of fact the bulk of electrical engineers have taken the position that it is highly unlikely that power grid transmission will gain much traction in this universe so long as the universe continues to obey the laws of physics it appears to obey.

Yes, but we have cellular and satellite, you say. There is competition from cellular. Almost everyone has a cell phone. We shall examine this more closely.

Competing with Yourself

Cingular is the second largest cellular carrier in the nation. It serves 22 million customers. There are only around 220 million people in the country between 5 and 65. Cingular already has 10 percent of them. Cingular has revenues of $15 billion. Guess who owns Cingular? SBC and Bell South. Guess who is the majority owner? SBC.

Verizon Wireless has 35 million customers. Thus, it is larger than the second largest, Cingular. By my math (I am not an anti trust lawyer) that makes it the largest wireless company in America. It has revenues of $17 billion. Guess who owns Verizon Wireless? Verizon, naturally.

So the largest and the second largest cellular operators are the largest and second largest Baby Bells.

And what about satellite?

There are about 18 million satellite subscribers in the country. Half belong to DirecTV, the other half to EchoStar.

With its acquisition of DirecTV SBC would own half the satellite business in the United States.

What Do We Know?

The Bells either control or are seeking to control the lion's share of all modes other than cable, Wi-Fi and power grid. Wi-Fi is in its infancy so, who knows? The power grid is a fantasy. And cable is not for sale.

But the Bells say they have no incentive to build fiber out to the home if they do not have control of their own network. Let's forget whose network it is for a minute and just focus on this statement.

In the early 1990s in exchange for being allowed to merge (Bell Atlantic plus GTE) the new Verizon promised to run fiber to every home in its territory and did not, even though they got rate increases to do it. As you read this, lawsuits are being filed against the Bells to recoup these payments.

Stanford University Professor John Cioffi, a world-renowned telecommunications researcher says, "It costs between $10 thousand and $1 million per kilometer to run fiber. If you read that it costs only $1 thousand to run fiber to the home don't believe it. If that were the case it would have been done already."

He goes on: "With the new DSL equipment that is just coming to market it soon will be possible to run at 52 megabits per second over copper lengths of three thousand to four thousand feet. If you run fiber to the curb and copper from the curb to the home, it will probably be possible in the not too distant future to run 300 to 400 hundred megabits per second up your driveway."

To put this in perspective consider that on typical fiber networks the average user is only getting 10 megabits per second anyway because that is all that is necessary. The high fiber speeds you read about are not delivered to individual users; they are delivered to networks of hundreds of users. We do not have hundreds of users in our homes.

Until porn goes holographic there will be no applications that could conceivably require the kind of bandwidth that fiber to the home would require. The second place contender for bandwidth is stealing music. A couple of megabits are plenty for even the most ardent thief.

Further, in the late 1980s Bellcore (the old Bell Labs, which was given to the Bells as a part of the 1984 breakup of Ma Bell, which the Bells dumped the minute they were allowed -- it had only invented the transistor, UNIX and DSL) estimated that if every single employee of the incumbent local exchange companies were to start to lay fiber it would take 15 years to get to half the homes.

What SBC's Actions Say

But don't believe me. Believe SBC. SBC is talking. SBC is trying to tell you something. On the eve of this historic decision it has not been caught making deals with fiber suppliers. It has been caught working on spending $10 billion to buy control of the satellite mode.

If you are a good listener you will have to admit that the Bells never said they would build out fiber to the home. That cry was supplied by legions of legislators looking for a cause to espouse. These are legislators who two years ago thought broadband was the Dixie Chicks.

Remember what the Bells are saying. The Bells are only saying they have no incentive to build out fiber while they are forced to share their networks. They are studiously not saying they will build out fiber to the home if you give them back "their" networks. That is terribly important to understand. The Bells know you are hearing something they are not saying.

Down the road they will give you the 14 reasons it makes no sense to build out fiber, but for now they simply want you to know they have no incentive.

Robert Lee is a private investor whose columns run weekly on

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