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Internet Illusions

Because of its ongoing war against the Clinton administration’s Justice Department, several Microsoft officials have become prominent Republican donors. The company itself contributed $100,000 in cash (plus software it valued at $900,000) to the committee running this year’s Republican convention. Robert Herbold, Microsoft’s chief operating officer, told Bloomberg News in August that George W. Bush would be “good for the US in favoring innovation and the free market system.”13

I had lunch with a small group of Microsoft employees at the time of the Republican convention. Half argued that anyone associated with the company had an inescapable duty to oppose the Democrats, since they’d threatened to dismantle the company. The other half argued that issues other than antitrust—environmental policy, abortion—might still justify supporting Democrats. Meanwhile, the Democratic candidate for the US Senate from Washington State, Maria Cantwell, is raising money from Microsoft executives and other members of Seattle’s software elite (and using some of her own wealth from her work at Real Networks, which itself was founded by Microsoft veterans) to finance her run against the Republican incumbent, Slade Gorton.

The antitrust case against Microsoft, which has confused the fund-raising picture in the Northwest, is in a way the key to the next big intersection of technology and politics. The Internet business is to a surprising degree concentrated in the zone between San Francisco and San Jose, and its leaders tend to regard Microsoft, 750 miles to the north, as not really part of the same game. Microsoft’s antitrust troubles are a source of general amusement in California, where many of the company’s competitors are based and where executives believe they are more polished in handling politics and public relations than Bill Gates and his colleagues.

But in the last two years, the Internet economy as a whole has become a tremendous engine of concentration and conglomeration. The industry’s self-image is still vaguely that of the outlaw and upstart. But several forces pushing toward a more concentrated economic structure have all affected Internet businesses at the same time.

The Internet obviously depends on systems of communication—telephone wires, cable connections, wireless transmission networks. Until four years ago, these had been treated as separate industries, regulated by different agencies of the federal government. After passage of the Telecommunications Act of 1996, they became one big blob of “bandwidth.” Bandwidth is the tech industry’s term for the speed at which information can be transmitted. Before the Telecommunications Act, different sources of bandwidth—telephones, cable and broadcast TV, cellular phones, and the Internet among them—were separated from one another as businesses, and often operated as regulated monopolies. One company—one of the “Baby Bells” produced by the breakup of AT&T in the early 1980s—provided local telephone service in each region, and these companies weren’t allowed to offer long-distance service. One cable TV company served viewers in each area. Its rates and offerings were subject to public regulation. In most areas, two cellular telephone companies were licensed to compete with each other, and each had to pay steep fees to the local phone system to have calls connected to land lines. A limited number of long-distance companies competed against each other. And a small number of broadcast TV stations were licensed in each city.

The pre-1996 system discouraged the growth of huge media conglomerates, because, say, a television network couldn’t buy a telephone company. But as Reed Hundt explains in his delightful book You Say You Want a Revolution, it also discouraged the investment in new bandwidth necessary to realize the potential of information technology. Adequate bandwidth for that purpose would mean high-speed Internet connections, via cable modems or advanced telephone lines, to homes and businesses (rather than slow connections via modems on normal phone lines). It would mean full connections for classrooms in schools across the country, and a far more robust system of cellular and wireless communication than is now in place.

Hundt, who was a high school friend of Al Gore’s and a classmate of Bill and Hillary Clinton’s at Yale Law School, was the chairman of the Federal Communications Commission during Clinton’s first term. His book, whose climax is the passage of the Telecommunications Act, is the drollest and most honest-sounding memoir of public service I have seen in many years.14 Such books are usually prolonged exercises in score-settling. Hundt gets in his digs, mainly at the business moguls he was supposed to regulate, but he is artful enough that the self-deprecating anecdotes and throwaway lines come across as genuinely funny rather than implicitly boastful:

In early January 1997, I sat with my team in one of our early morning conferences and read out loud an article reporting that I was a “spineless weasel” because of my refusal to block the giveaway of digital television spectrum to the broadcasters.

Blair [his chief aide] responded, “No one thinks ‘spineless’ is fair.”

Hundt’s book describes the grand bargain the Telecommunications Act was designed to carry out. It would remove most of the limits that kept one kind of bandwidth company from buying or merging with another—but, at least in theory, it would replace the old, regulated monopolies with genuinely competitive markets. By removing restrictions, it would give companies an incentive to invest in new cables, wires, and transmission systems. By introducing real competition, it would hold prices down. Or that at least was the concept.

Not surprisingly, the cable, telephone, and TV companies were far more enthusiastic about the first part of the bargain than the second. A wave of mergers began that continues to this moment. AT&T bought the leading cable TV company, TCI—plus a leading Internet company, Excite@Home. AT&T now uses TCI’s cable lines to bring Internet service to homes. The biggest on-line company, AOL, bought Netscape, the main competitor to Microsoft in the browser business (browsers being the software for viewing Internet sites). Then AOL bought Time Warner, which already included the cable network CNN. The idea behind these combinations and others is that companies are looking for as many routes as possible into the home or business where people will buy “information services”—a broad category that now includes local phone calls, long-distance calls, wireless calls, TV programming, on-line delivery of movies and other entertainment, plus Internet content itself. And the drive behind the mergers has been—consistent with most business logic, and exactly contrary to what Hundt and others had hoped for—to preempt competition before it can arise.

The AOL-Time Warner merger has been especially controversial, because of the many layers of the new information economy that would be combined in this new company. Time Warner includes a number of cable TV systems, and has alliances with AT&T, which controls others. The merged company would, therefore, run about half the cable TV systems in the country. These would increasingly be a vehicle for high-speed Internet access, since Internet data can travel over the same cables that carry TV signals. AOL, which behaves more and more like Microsoft the bigger it becomes, would then be in a position to deny access to Internet sites or services that compete with its own offerings. This is one of several reasons why antitrust regulators in the US and Europe, working in obvious if unacknowledged concert, have kept suggesting new conditions before they will approve the deal. (European regulators have effectively forced Time Warner, as a condition for approving the AOL deal, to call off a merger with the British music publisher EMI. US regulators have made clear that AOL would have to let competing Internet companies reach customers via its cables, and that the alliance with AT&T’s cable TV systems might have to be sacrificed.)15

The pressure toward merger, and the natural desire of companies to thwart competition and recreate monopoly, will for the foreseeable future be the real impact of the Internet on politics—and by extension on culture. A monopoly in the steel industry only raises prices. Monopoly in media and communications has more profound effects. The revised edition of Robert McChesney’s 1999 book Rich Media, Poor Democracy documents the way previous alliances in the media world are being extended to the Internet. McChesney, a professor at the University of Illinois, is the current leading practitioner of the A.J. Liebling-I.F. Stone school of analyzing press content by analyzing press ownership. His book chronicles the ways in which the growth of media chains has meant a contraction of range of opinions. This book is the latest documentation of a familiar but convincing argument: that as “news” becomes just another product sold by big media companies, it becomes more of a commodity, more entertainment-based, and dumbed-down. The Internet makes it possible for individuals to set up their own news sites, McChesney says, but that’s no substitute for “real” news organizations:

As a rule, journalism is not something that can be done piecemeal by amateurs working in their spare time. It is best done by people who make a living at it, and who have training, experience, and resources…. The corporate media giants have failed miserably to provide a viable journalism, and as they dominate the journalism online, there is no reason to expect anything different.

McChesney also echoes Hundt’s outrage over what they both consider the most expensive failure of public policy in the last decade. This is the success of the big broadcasting networks—ABC, CBS, and NBC—in getting, free, rights to digital spectrum that might properly have cost them $60 billion or more.16 Hundt pioneered the idea of auctioning spectrum—the right to broadcast in certain frequencies—to companies that want to offer new cell phone service, rather than granting the right to licensees without charge.

The big TV broadcasters have for decades enjoyed the free right to broadcast their signals. In the mid-1990s, they persuaded Congress to grant them additional free rights to large amounts of digital spectrum, on the argument that they would use it to bring extra-sharp high-definition TV to customers. They haven’t done so, and instead are preparing to use their access to the spectrum to sell high-value digital services. Cell phone companies had to bid billions of dollars for similar spectrum in which to develop their products. There was—and is—no argument besides sheer political muscle for the broadcasters getting this gigantic subsidy.

The Hundt and McChesney books also suggest the way antitrust law will have to evolve, to take account of the structure of new industries and the effect new monopolies might have. Hundt, who convincingly presents himself as a champion of new technologies and new business arrangements, says the competition will be more effective and profitable if companies have a clear idea of what public interests they are supposed to respect. “It would be legitimate to legislate political and cultural aims, as long as they were honestly stated so they could be discussed,” he told me. These aims might include public-affairs programming that media companies would have to carry, rather than concentrating almost exclusively on whatever gets the highest ratings. Also, he argues that antitrust regulation will have to be international, since communications companies operate in at least North America and Europe, and regulators are de facto coordinating efforts now.

Previous waves of industrial change—the mills of the early nineteenth century, the integrated factories of the early twentieth century, the mechanized farms of the post-World War II era—changed living patterns and income levels. But they also had an impact through the legal responses they provoked. This could be the biggest immediate effect of the Internet.

October 18, 2000

  1. 13

    Bloomberg News, August 1, 2000.

  2. 14

    The previous champion in wry first-person narrative about government experience is The Dance of Legislation by Eric Redman, first published in 1973. It is an account of the passage of the bill creating the National Health Service Corps, from the perspective of a twenty-two-year-old assistant to Senator Warren Magnuson. It has just been republished, with a new introduction by Richard Neustadt, by the University of Washington Press.

  3. 15

    Brandon Mitchener and John R. Wilke, “EU Regulators Give Approval For AOL-Time Warner Merger,” The Wall Street Journal, October 11, 2000.

  4. 16

    William Safire is also on the warpath about this corporate welfare. See his “Spectrum Squatters,” The New York Times, October 9, 2000.

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