The greatest story never told: how the 1996 Telecommunications Act helped to transform cable's future.(Telecommunications Act of

It'll be 10-to-1 in our favor. I would say that by 2000, we'll have 50 percent of the cable TV business--no doubt about it, which is why some cable companies are in a panic. Meanwhile, the cable companies won't have even 3 percent of telephony revenues in their best market. Not in their best market. It's just not going to happen. (1)

Those were the words of the chief operating officer of Bell Atlantic, Ray Smith, as reported in Wired Magazine, February 1995. And those words prove yet again the wisdom of the famous Yogi Berra quote: "The hardest thing to predict is the future."

Of course, predicting the future is exactly the task that the United States Congress took on when it fashioned, and ultimately passed with overwhelming bipartisan support, the Telecommunications Act of 1996 ("1996 Act"). Congress thought that the new Act would pave the way for facilities-based competition in local telephone service, and that by breaking down the legal barriers to entry by phone companies into the cable television marketplace, it would also stimulate more facilities-based competition in multichannel video services.

In retrospect, the provisions of the 1996 Act that have made the most difference in the communications marketplace were not those that were the most debated and discussed, but rather a single change that barely rates a footnote in most analyses of the 1996 Act: the decision by Congress to deregulate most rates charged by cable television providers effective in 1999.

Why did this small provision turn out to be so important, and what has it made possible? To give the most complete answer, let me provide some background on the state of the cable industry as the 1996 Act gained steam in Washington.

America did not have a national policy on cable franchising until Congress passed the 1984 Cable Act ("1984 Act"), which for the first time regularized franchising procedures, placed reasonable limits on the regulatory authority of local government, and curbed most of the abuses that had afflicted the wild and woolly franchising process until then. The 1984 Act inaugurated boom times for cable. (2) From 1980-89, cable's customer base soared from nearly 16 million to nearly 53 million. Cable construction boomed. New cable channels proliferated. After decades of struggling to establish ourselves, which included overcoming opposition from broadcasters, Hollywood studios, and telephone companies, and fighting our way through franchising, cable was finally entering a Golden Age. But this rapid growth was accompanied by some problems. Consumers experienced frequent service difficulties as systems were being rebuilt. Many companies did not take customer service as seriously as they should have--in a nation that loves television, nothing could be more annoying than losing service for long periods of time or waiting literally days for a service technician to arrive. And while consumers enjoyed all of the new programming, they just did not like what they perceived as their lack of choice among providers (this was back before direct broadcast satellite ("DBS") services became a serious competitor).

Regrettably, by 1992, Congress felt it necessary to step back in to reimpose some regulations on cable. At the same time, it took steps to encourage more competition from DBS companies, including the requirement that all programming in which cable operators had a financial interest be made available to DBS providers. While the cable industry warned that reregulation could have a devastating affect on cable's growth, congressional attitudes had hardened, and the 1992 Cable Act ("1992 Act") was passed over President George H. W. Bush's veto--the only veto override he suffered during his term. (3) Over the next several months, the Federal Communications Commission ("FCC") exercised its new authority over basic cable pricing by requiring seventeen percent across-the-board reductions, (4) which undercut investor confidence and choked off investment. In the words of two economists who examined the aftermath, "One revealing fall-out from rate regulation under the 1992 Cable Act was that the U.S. cable industry largely missed an entire capital upgrade cycle." (5) The launch of new cable networks and the introduction of new services essentially ground to a halt. The excitement of cable growth in the 1980s gave way to a serious case of Wall Street malaise for cable that persisted for years. (6)

The most unfortunate thing about the timing of the 1992 Act was that cable had just begun to understand the incredible possibilities of the coaxial networks it had strung across most of America. As we looked around our offices, we realized that all of our data networks consisted of these same coaxial cables. We were excited about the chance to digitize our networks to expand their effective capacity and to introduce new capabilities. The opportunity to use our networks to provide two-way services--like telephone--held out attractive revenue potential. And something called "the Interact" was just starting to get headlines.

As an industry, we were truly at a crossroads. It became increasingly apparent that DBS, whose services were 100% digital, were going to provide formidable competition. And the phone companies, epitomized by comments like Ray Smith's, (7) were making serious noises about jumping into the fray. At the same time, it became apparent to cable that if we could use our networks to provide telephone services, we would be in a position to provide facilities-based competition to the incumbent telephone monopolies. We decided that the time had come to embrace competition wholeheartedly and to make it work for us--the trade-off would be less regulation and more business opportunities.

Meanwhile, by 1994, it had become clear that competition in the telephone industry could no longer be managed effectively by a federal judge. The forces were mounting for major telecommunications legislation, and there was support in both parties for moving forward. As the legislative train began to roll, I was serving my first term as chairman of the National Cable Television Association ("NCTA"). In that role, I testified before the Senate Commerce Committee, where I explained the great potential that cable had to introduce real competition. "We face major barriers--technological, economic, legal and political--to competing in this market," I testified. (8) But, I added, "we are ready to go--provided that you will do what only you are in a position to do--create the legal and political environment essential to our success." (9) I asked the Congress to give the cable industry greater regulatory freedom and to make the promotion of "facilities-based competition" the paramount public policy goal.

The following year, as the legislative process entered the home stretch, I told the House Commerce Committee about the excitement in our industry. I had just flown in from Dallas where the NCTA was hosting its biggest convention to date. Our theme for the 1995 National Show was "The Future is on Cable", and I had come away from the convention feeling that the cable industry really was poised to deliver competitive telecommunications to American homes and businesses. At a hearing chaired by U.S. Rep. Jack Fields of Texas, I told the Committee,

Less than six months later, the House and Senate would reach agreement on landmark legislation. On my office wall hangs a letter that Chairman Fields sent to me on the day the 1996 Act was signed. The letter generously thanks me for my participation in the hearing process and for "inspiring the 'facilities-based competitor' language of the bill." Whether or not my testimony may have influenced getting that concept into the 1996 Act, it is unfortunate that the final version of the 1996 Act did not create the right set of incentives to promote facilities-based competition.

The big political battle around the 1996 Act had everything to do with the Regional Bell Operating Companies ("RBOCs"), seeking the right to enter the long-distance business from which they had been barred by the 1984 Consent Decree that broke up AT&T, and the interexchange carriers ("IXCs"), mainly AT&T and MCI, who were motivated primarily to continue protecting their turf against the RBOCs, but who were also realizing that Congress was fired of waiting for competition and wanted to see RBOCs and IXCs go head-to-head.

Competition between the RBOCs and the IXCs was skewed by bad policy decisions in ways that almost guaranteed competition would be unsustainable. Congress was persuaded to adopt a complicated scheme in the 1996 Act intended to ensure competitors' access to RBOCs' networks through resale and unbundled network elements. While this was intended to be transitionai to facilities-based competition, there were no timelines or other incentives to move competitors out of the resale business and into building their own facilities. As a result, most of the competition that the 1996 Act generated took place before the FCC and the courts, not in the marketplace.

But almost inadvertently, just by some modest price deregulation of cable, Congress set the stage for the real competition to come. Even though the lifting of price regulation of certain basic cable services contained in the 1996 Act would not even take effect until 1999, the mere expectancy of reduced regulation, and the growing excitement about the potential of cable technology were enough to put Wall Street in a positive frame of mind and to open up capital flows once again.

Since 1996, the cable industry has invested over $100 billion in digital broadband technology. (12) Within months of President Clinton's signature on the 1996 Act, it became clear that cable was in a position to be the first to bring broadband to the masses. Delivering these high-speed Internet services--rather than traditional telephone service--became the cable industry's primary focus for several years. Cable's great leap forward in infrastructure shook the RBOCs, who raced to introduce digital subscriber line ("DSL") technology that they had warehoused for years. More recently, it has prompted the RBOCs to announce major investments in fiber to the home ("FITH") and fiber to the node ("FTTN") network upgrades. (13)

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