Checks, lies and videotape

Jan 1st, 1996

STEPHEN N. BROWN

The balanced-budget fight in Washington has led to an unusual proposition: Scientific and technological progress in the United States depends on a balanced federal budget. Once in a while, a politician`s claim is so outlandish that even the most power-hungry man cannot face himself in the mirror. On a campaign swing through California, Sen. Bob Dole (R-KS) raised more than $1 million in only two days and concluded his trip by meeting privately with a small group of high-technology executives, including the chairman and chief executive of Pacific Telesis, the president and chief executive of National Semiconductor, the president of Netscape Communications, the chairman of Intel, the chairman and chief executive of Hewlett-Packard Co., the chief financial officer of Oracle Systems, the president of Cortelco Corp. and the chairman and chief executive of Varian Associates.

Why would a small group of well-heeled telecommunications and computer executives meet privately with the Republican party`s leading presidential candidate? They were participants in the cash-buys-influence process, and Dole apparently felt a bit uneasy about his activity. When reporters asked the senator about his meeting, he replied with a classic "I-did-not-do-it-you-have-the-wrong-guy" denial: "We didn`t ask for anything except information." Sure, forget about the $1 million.

The reporters achieved what few, if any, people have accomplished: Somehow they caused Dole to deny the obvious--a sure sign of an involuntary twinge of conscience. Maybe the executives contributed to it by keeping silent at his press conference. Asked what the executives` top concern was, Dole did not bring up telecommunications reform; instead, he replied: "The most important thing was...I think...a consensus that we need to balance the budget, even if it means giving up things we`d like to have. All of us--my state, this state, any other state. It`s not just about getting it down to zero. It`s not a game. It`s the future...our high-technology future. It`s all tied up in whether we can exercise fiscal responsibility."

Dole`s assessment is not credible. The aforementioned companies are very healthy businesses, and their prosperity and a balanced federal budget are linked in the same way as the stock market`s health is linked to a full moon. Competitive forces determine a company`s fate. The U.S. has had approximately five balanced budgets in more than 60 years. Meanwhile, science, technology and the standard of living have improved tremendously. Dole`s linkage of scientific and technological progress to a balanced budget is purely ideological and will never serve the best interests of the telecommunications and computer industries. But the executives` silence shows the danger lurking in the cash-for-influence trade: It is not enough to give a candidate money to protect your interests. You have to support the candidate`s platform and all its superstitions. If not, your money is wasted. The business community often mistakenly thinks that a deal is a deal--not so in politics. Cash-for-influence requires continuously supporting and giving to the power broker. Then you may get something in return.

Thus Dole was not content to take $1 million and head home. He hauled the executives up to his balanced-budget gibbet. The problem they face, however, is that today`s onlookers could be tomorrow`s victims. The telecommunications and computer industries should refrain from aligning themselves with any particular ideology because in the end, ideology constrains the inquiry needed for further advancement. Despite this pitfall, the industries are aligning themselves with the new powers.

Campaign donations

Telecommunications political action committees have changed the pattern of their campaign donations. From January to June 1993, telecommunications political action committees representing cable companies, local and long-distance telephone companies, and broadcasters gave $1.3 million to congressional candidates. Fifty-three percent of the money went to Democrats and 47% went to Republicans. In the first six months of 1995, these committees gave $1.6 million in campaign contributions--27% to Democrats and 73% to Republicans. An exception to this is Chicago, where Ameritech`s recent investments show the continuing influence of the Democrats.

Ameritech is one of the seven regional Bell holding companies, each of which will benefit from telecommunications-reform legislation. The bill passed both the House and Senate last summer and was sent to a House/Senate conference committee in late October, but President Clinton threatened to veto the bill if it were not changed. Since then, the bill`s supporters, including Ameritech, have sought the congressional votes needed to overcome Clinton`s veto, if he were to carry out his threat.

Therefore, Ameritech announced its plans to invest more than $50 million to build a modern two-way video network in Chicago`s densely populated South Side. The company also suggested that the network would require 200 new jobs for installation, repair and maintenance of the system. The investment will be welcomed by Chicago`s South Side, a community suffering from high unemployment rates because many of the old-line manufacturing industries have scaled-back operations or left Chicago.

The investment is risky because the proposed network is a stand-alone project that will not supplement, connect to or transform Ameritech`s local telephone network. The investment violates the number one telecommunications investment principle--connectivity--where a communications system`s value increases with the network`s number of users and kinds of uses. Connectivity explains why cable and telephone companies are trying to integrate telephone and television service into a single system. If the companies succeed, their networks` value will increase greatly. Ameritech`s South Side Chicago project will have no benefit for the telephone network or consumers. The stand-alone network does not derive from a rational assessment of how to enhance the existing network`s capabilities. Its justification derives from Ameritech`s need for congressional votes.

Rep. Bobby L. Rush (D-IL), one of two congressional Democrats representing Chicago`s South Side, praised Ameritech while reminding the company of his influence and power: "This is the beginning stage of a long process that I am convinced will ultimately bring vigorous competition...to residents of the South Side. ...As a member of the Subcommittee of Telecommunications and Finance, my aggressive and emphatic insistence on competition in the cable industry has brought us to this point--a beginning." This is the cash-for-influence process at work again: Congressman Rush added the keep-on-giving condition: "We`ve come a long way, but we still have a long way to go."

Another South Side congressman, Rep. William O. Lipinski (D-IL), was more direct. He said, "I am very grateful that Ameritech has responded to my concern about the lack of competition in the cable-TV industry. Ameritech`s announcement sends a clear signal that full competition will soon be a reality for my constituents. Ameritech`s willingness to compete and positive changes in the communications bill before Congress move me closer to supporting the proposed rewrite of the nation`s telecommunications laws." Ameritech`s plans may violate the connectivity principle governing modern telecommunications investment, but they conform to the connectivity principle of American politics. Ameritech`s annual revenues are approximately $13 billion, therefore a $50 million investment for swing votes in Congress may be worth the billions of dollars that can be had if the legislation becomes law.

Unparalleled reliability

Besides, from both technical and marketing perspectives, the stand-alone network may succeed on its own. On the technical side, the project is being hailed as a marvel. Ameritech said the network will deliver "videoprogramming over a fiber-optic video network with unparalleled reliability." That is the good news, but there is no sound reason to segregate forever the fiber network from the telephone network. Perhaps the company will be more flexible as it considers Sen. Dole`s "high-tech future." The company may be in luck on the marketing side. According to a joint survey by Unisys Corp. and Telephony and Global Telephony magazines, almost 80% of cable customers would switch to a another provider if they were given a choice. Also, residential consumers give long-distance carriers a 90% service-approval rating, compared with 87% for local-exchange carriers, 60% for cellular companies and 50% for cable companies. The survey was presented at the United States Telephone Association annual meeting in November.

The survey`s sponsors said their results indicate that long-distance carriers are the likely winners in any competition that offers consumers one-stop shopping for all their telecommunications needs. That is unlikely because the long-distance companies do not have easy access to local customers. Access can be achieved by connecting through the local-exchange or cable company or by wireless connections such as cellular. Cable and long-distance companies are natural partners. To the extent that they cooperate and jointly offer services to the public, stand-alone projects such as Ameritech`s may fail. On the other hand, to the extent that Ameritech`s stand-alone project succeeds, it will weaken the cable side of the partnership and hamper the long-distance companies` ability to enter local markets. Chicago is in the forefront of this battle, too.

Continental Cablevision in Chicago has teamed up with AT&T to test cable subscribers` willingness to switch to AT&T`s long-distance service if the subscriber is rewarded with discounts on premium cable services such as Home Box Office and Cinemax. The joint marketing effort will determine if AT&T`s 90% consumer-approval rating will raise the cable company`s 50% consumer-approval rating or vice versa. Sprint and Tele-Communications Inc. are trying the same thing: If cable subscribers switch to Sprint, their monthly cable bill is reduced by $4.95. Ninety percent of subscribers refuse to change their long-distance service, proving that the program has had little success. According to a TCI spokesperson, both TCI and Sprint are learning how difficult it is to acquire another company`s customers when that company`s service is perceived as adequate. Thus the 87% consumer-approval rating for local telephone companies bodes well for them. Their only real worry is the ebb and flow of competitive forces, not a balanced federal budget.

Stephen N. Brown specializes in market research and public policy toward new technology in the telecommunications industry. For more information call (615) 399-1239.

More in Market Research