Information Highway RobberyPaul Craig Roberts
The Federal Communications Commission's latest dictate, which collapsed the Bell Atlantic-TCI merger and hopes of an early Information Superhighway, could have come straight out of the pages of Ayn Rand's Atlas Shrugged. The government bureaucrat, Reed E. Hundt, a friend-of-Bill anointed as FCC chairman, and his bureaucratic economists think they know the appropriate price of cable services. Roll back your rates 7%, they ordered, with no regard to the impact on cash flow, finance, technological innovation, product development, jobs, national income, and the largest merger in history.
The hubris of the regulatory bureaucrats is staggering. If these people had the tiniest fraction of the knowledge to which they pretend, they would be making hundreds of millions of dollars putting together deals on Wall Street, instead of sabotaging important market developments.
The merger would have brought together TCI's high-capacity networks and programming experience with Bell Atlantic Corp.'s access to capital markets and the switching technology that permits two-way communications on interactive TV. Here were two companies prepared to bring into being, at considerable risk to themselves, the fabled superhighway--rolling wire and wireless service, video-on-demand, and interactive media into one product.
MORE GUESSWORK. As in any business venture, the deal depended on financing, and the financing for the $33 billion transaction was complex. Key variables were the market price of Bell's stock and the cash flow from TCI's cable service. All of TCI's cash flow comes from cable. The rate rollback reduced the cash flow and cut the ability of the planned merger to raise new capital by at least $900 million a year, according to The Wall Street Journal.
As every economist knows, there is no economic basis for Hundt's decision. Why a 7% rollback instead of 8%, or 5%, or 15%? Indeed, the 7% came on top of a recent 10% rollback. The additional 7% is an FCC admission that its previous 10% was an incorrect amount. There's no reason to believe they have it right this time, either. Thus, anyone in the cable business has reason to expect further FCC-ordered price rollbacks.
This is especially true if the real basis of the FCC's action is pandering to the staffs of two congressional committees, which in turn are catering to consumer-activist groups, themselves unknown to most cable subscribers in whose names they speak. A handful of arrogant people have taken it upon themselves to price cable services.
The FCC's pricing decision ignored the value to consumers of expanding cable markets and the services of the Information Superhighway. One wonders where the FCC and the consumer activists think the investment capital is going to come from to construct that highway when they cut private enterprise off from financing by regulating cash flow. Cable companies are not luxuriating in profits: They are leveraging their cash flow to get loans in order to expand their markets.
DEAD DEALS. Hundt's folly has implications far beyond the blocked merger. The value of all cable companies and the value of all potential mergers have been reduced. Billions of dollars in financing have been chased away from deals that were in the works. Falcon Cable Systems Co., for example, responded to the FCC's pricing of its product by shelving an initial public offering that it was counting on for improvements and debt repayments. TCI has announced a 50% reduction in its own capital spending, and Charles F. Dolan, founder of Cablevision Systems Corp., says the FCC's action will have a severe impact on future business developments. University of California economist Thomas Hazlett says the FCC has undertaken to provide consumers with "a lower quality cable package at a lower price." That always happens when regulators squeeze profits and innovation out of markets.
The curtailment of financing for the innovative industry is only the tip of the FCC's regulatory iceberg. The real import of the decision is the announcement of "cost-of-service" rate regulation. The FCC has no basis whatsoever upon which to determine the value of the intangible, nonhomogeneous assets of 11,000 cable systems. By substituting its ignorance for the market, the FCC is guaranteeing that resources will be diverted from product development and technological innovation to countless lawsuits. Already, the National Cable Television Assn.--stung by billions of dollars in lost revenues from the prior 10% price rollback--is taking the FCC to appeals court. Once the bureaucrats begin calculating the cost-of-service rates for each of the 11,000 cable companies, the capital that would have built the superhighway will flow into lawyers' pockets.
There could be a silver lining in the setback if it causes the Clinton Administration to rethink its reversal of the deregulatory trend dating back to President Carter. The case against regulation will become ever more apparent as satellite transmission brings increasing competition to the cable market. The lunacy we are witnessing at the FCC is good reason to get the agency out of cable regulation.