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Rebooting the RegulatoryOperating System–The Computer Industry Turns on thePowerJoan Van Tassel, Ph.D.

Dr. Joan Van Tassel is aconsultant with theMalibu-based consultingfirm, Working Knowledge.She is the author ofAdvanced TelevisionSystems: Brave New TV(Focal Press, 1996), andshe writes for TheHollywood Reporter,WiReD, and otherpublications on theemerging communicationsinfrastructure. She hasalso written for a varietyof nonprofit publicinformation campaigns,including the “FriendsDon’t Let Friends DriveDrunk” campaign. She isthe recipient of theprestigious Kenny RogersMedia Award, an Emmynomination, and manypublic service advertisingawards. Joan receivedher Ph.D. and M.A. fromthe Annenberg School ofCommunications at theUniversity of SouthernCalifornia.

[The telcos could accelerate higher-speedInternet access if they would] bring downthe price of ISDN. For us, that’s likeencouraging Intel to make fast chips. Wewant communications to be infinitebandwidth and free, just like we wantchips to have infinite speed and be free.

—Bill Gates, Microsoft1

The shot that signaled the arrival of theinformation technology (IT) industryinto the political arena was fired on

December 28, 1995, when most of theleaders of mega-business were celebratingthe holidays in Boston, Philadelphia, Vir-ginia, or Sun Valley. It reverberated inempty boardrooms around the United States,but its message was loud and clear: Thevery grounds of U.S. communication policyand practice were about to shift in ways thatwould ultimately touch everyone in America.

The agent of the shot was DhruvKhanna who, in the midst of all that festivity,had spent most of the week closeted in hisoffice around-the-clock preparing to mountan entirely unexpected offensive actionagainst U S WEST in the state of Washing-ton. On the rainy, windswept, cold, anddark morning of December 28, he was in hisDodge Colt, dodging the big rigs on Inter-state 5 as he made his way to Olympia,Washington’s capitol, to personally deliverthe opening salvo in the first great battle forthe digital destiny.

The opening quote by Bill Gates is adispatch from the front lines of the battlethat began that day, a continuing strugglebetween the emerging digitally-basedinformation industry and traditional analog-based entertainment, consumer electronics,and telecommunications industries. Itreflects only one dimension of the severalconflicts now raging between rapidly-expanding computer companies and theinfluential, entrenched communication-related business sectors.

We read reports from each skirmish inthe pages of our newspapers’ businesssection, but they provide only the daily bodycounts rather than covering the overall warin all of its scope. Essentially, this story isabout an extraordinary industry coming ofage, its entrance into the domain of publicpolicy and regulation, and its demands forchanges in the way business-as-usual isconducted.

Measured purely by economic growth,computer hardware, software, and serviceshave grown exponentially in the last decade.As long as computers were used primarily ascomputational devices, information compa-nies could focus on research and develop-ment, product design, manufacturing, andmarketing, reaping the profits from theexploding adoption of their technologies inboth the domestic and international markets.

However, now that computers haveentered the realm of communications, this

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nascent industry is thrust into a heavily-regulated, highly-profitable, innovation-resistant, slow-moving arena. This is anunwelcome and uncomfortable developmentfor an industry that has thrived in thecrucible of the market, and that has beenrelatively unconstrained by regulation oreven convention.

This observation is not meant to suggestthat the information world is withoutprinciples, ideals, or practical restraints.Indeed, commonly-held industry-wide corebeliefs and cultural practices are a primarycause of the recent initiatives advanced bythe information technology interests in thepolitical and regulatory arenas. So ferventlydo IT managements believe that theirpositions are inevitable, right, true, andrepresentative of “The American Way” thatthey are pushing against four distinctcommunication-related industries to makeroom for them at the public table with therighteousness of true believers.

This article begins with a description ofthese core beliefs and practices that are sohighly-regarded within the IT pantheon. Itwill then describe the factors that arepropelling IT companies to action and thefears this creates in other communicationssectors. From there, the article will detailthe inter-industry conflicts that have arisen

and the actions the information interests aretaking to pressure the government andexisting industries to meet the needs ofdigital technologies. Finally, after coveringthe scorecard of IT efforts, the article willexamine the potential for moving fromconflict to collaboration between thesegroups.

The Digital Destiny

[D]igital creation and display willpredominate over other forms of commu-nication—telephony, broadcasting—atthe workplace as well as in our personallives. Digital display will also subsumeall other forms of storing information—libraries (personal and public), profes-sional records, photo albums.

—Andrew Grove, Intel2

Cultural approaches to the workplacetypically consider the beliefs, norms, rules,and stories within single organizations.However, this perspective falls short when itcomes to IT companies, because there is anidentifiable industry-wide culture that issimilar across organizations. While theremay be differences between the corporatecultures of Intel and Apple, they are morelike one another than either is to any

So fervently do ITmanagementsbelieve that theirpositions areinevitable, right,true, and repre-sentative of “TheAmerican Way”that they arepushing againstfour distinctcommunication-related industriesto make room forthem at thepublic table withthe righteous-ness of truebelievers.

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telephone company or consumer electronicsmanufacturer.

One distinguishing feature of the ITindustry is its hyper-turbulent businessenvironment, which has resulted in aconstant round of buyouts, mergers, andfailures and, thus, an extremely mobileworkforce. Few employees last longenough to collect their gold watches whenthey retire.

One of the most fundamental beliefs ofpeople who work in IT is that the rise ofdigital technology is historically inevitable.In an interview, Paul Misener, Intel’s savvyWashington, D.C. representative, casuallyobserved that it was only a matter of timebefore the computer would be the commu-nications appliance in the home. “Why?Because it’s a general purpose machine thatreplaces the telephone, fax machine, televi-sion, CD player, DAT, and even takes overhome security and regulation of powerconsumption,” he answers immediately,quite evidently surprised to be asked thequestion at all.

Digital data is the stuff of legends, aninfinitely flexible, low-cost, long-lastingcommunications medium—the alchemist’sultimate dream of dross turned into goldcome true. In the article quoted at the be-ginning of this section, Andrew Grovedescribes the benefits of digital communica-tion. All information can be expressed,transported, and stored in digital form.Relatively inexpensive media, such as theCD-ROM or the DVD, store massive amountsof information that are virtually indestruc-

tible. Finally, digital data can be transportedalmost instantly around the world—thefastest, cheapest mechanism for carryinginformation ever devised, as shown inTable 1.3

According to InfoWorld, more than 186countries receive e-mail, even though 98%of the computers with access to the ’Net arein industrialized countries. “The Internetwill be much more important to the poorercountries of the world than it is to theirwealthier neighbors. It’s a type of reversecolonialism. For a relatively small cost,citizens of developing countries can exploitindustrialized wealthy nations for an endlesssupply of that precious commodity—information.”4

As computers became more capable ofreplacing and simplifying existing tasks, theyalso grew ever more awesomely sophisti-cated. The evolution of hardware has madeit possible for what most people thought ofas a computational device to become atechnology of communication, capable ofhandling voice, data, and high-quality audioand video. “Since the invention of theintegrated circuit in 1961, the number oftransistors contained in a single chip hasincreased one million-fold,” writes FedericoFaggin, noting that it is now possible tomake 10 million transistor microprocessorsand that, in 12 years, that capacity willincrease to one billion. Similarly, program-mable chips now incorporate 10,000 to100,000 logic gates, but in 12 years, that willgrow to between one million and 10 milliongates. 5

Table 1Relative Costs of Document Delivery

Delivering a 42-Page Documentfrom New York to New York Los Angeles Tokyo

E-mail 9.6 Kb/s/$0.28 9.6 Kb/s/$0.28 9.6 Kb/s/$0.28US Air Mail 2 days/$3.00 2 days/$3.00 3 days/$7.40Overnight Service 1 day/$15.50 1 day/$15.50 1 day/$26.25Fax 31 min./$0.44 31 min./$9.85 31 min./$28.83

Source: UUNet/MFS

Paul Misener,Intel’s savvyWashington, D.C.representative,casuallyobserved that itwas only amatter of timebefore thecomputer wouldbe thecommunicationsappliance in thehome.

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While the digitization of information iscertainly a wondrous thing, it is also truethat analog signals are sometimes more cost-effective to store and less costly and difficultto access. One example is videotape as anarchive for moving images. As one wag putit, “Never underestimate the bandwidth of astation wagon carrying a couple of crates ofvideotapes.”

Further, ever more sophisticated analogmicroprocessors are being designed andmarketed. Nevertheless, the impressiveadvances in the speed and capacity of digitaltechnologies have far outstripped almost allother areas of endeavor and have mademuch innovation possible in many otherfields such as health care. Despite theconceivable power of analogical computa-tion, based on biological principles, thedigital computer has proved so useful that itis difficult to imagine a near-term futurewhich does not increasingly depend on it.

The historical inevitability of the digitaldestiny is the center of gravity of the infor-mation industry’s belief system, but there areother important principles. They include:

• “A paranoid attitude toward governmentregulation” (as an executive from theentertainment industry put it).

• Commitment to open standards (notincluding Microsoft and a few othercompanies).

• Abiding faith in the virtues of competitionand the market mechanism.

• Enthusiastic adoption of innovation.• Acceptance of merit as the basis of

decision making.

Taken together, it is interesting to notethat they are classic American attitudes andideals in an industry that is anything buttraditional. While other industries pay lipservice to these ideals, the people who workin IT actually try to live by them. The resultis that, in addition to the very real businessconflicts engendered by digital products,there is also a cultural abyss that makes theplayers talk “by” each other, rather than “to”each other.

Robert Cringely summarizes the benefi-cial consequences of this value systemnicely: “Bad products die early in themarketplace or never appear. Good prod-ucts are recognized earlier. Change acceler-ates. And organizations are forced to bemore honest. Most especially, everyoneinvolved shares the same understanding ofwhy they are working: to create the prod-uct.”6

Table 2 compares the IT industry’s beliefsystem with the belief systems that the ITpeople attribute to other business sectorsthey must now deal with as computertechnology enters the realm of mass commu-nication. It does not address how theseothers really are; rather, it reflects the waymany IT people perceive and talk aboutthem.

A Gorilla in Their Midst

[The ’Net] is much more than a newcommunication medium, the study says,it is a model in miniature of the commu-nications industry of the 21st century....The ’Net is a disruptive technology whichwill completely reshape the market,forcing the convergence betweentelecoms, information technology,publishing, and broadcasting.... The’Net already provides personal computerusers with entry to a burgeoning marketfor every type of service, from on-linewine sales to samples of movies andmusic, pornography, and the Vaticanlibrary.

—Alan Cane, Analysys Publications7

The attitudes of the enormous industriesenmeshed with digital technology compa-nies are ambivalent. They are like the staidbusinessman who plays moth to the flame ofa beautiful and wild woman: They wouldlike to reap the rewards of intimate associa-tion, but they’re afraid they’ll get burned,spurned, and left flailing about in the dust oftheir demolished dreams. Companies thatmanufacture products or produce contentfor the telephone, broadcasting, film, audioequipment and music, video game, copying

The attitudes ofthe enormousindustries arelike the staidbusinessmanwho plays mothto the flame of abeautiful andwild woman.

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machine, and fax industries all depend ondigital technology for efficiency and cost-reduction. Yet, they face competition fromthat same technology.

While most sectors must be satisfiedwith a rate of growth that falls between 2%and 10%, generating like profits, the expan-sion of the information industries must beregarded with astonishment and envy. Forexample, in 1990, computer industry rev-enues were about $19 billion; in 1997, theywill reach nearly $46 billion. In 1993, globalsales of multimedia-capable PCs totaled 2.5

million units; in 1994, that figure qua-drupled to 10.3 million units.8 Researchfrom Frost & Sullivan predicted that multi-media hardware and software would growfrom 1993’s $4.9 billion to more than $22billion by the year 2000.9 Dataquest reportedthat 1996 was a poor year: The worldwidePC market grew only 25%, and the U.S.market was limited to 19%.

Whole industries created by digitalcomputer technology seem to turn to gold,even if, in hindsight, there are plenty ofbusiness failures as well. In less than five

Table 2Comparison of Industry-Wide Cultures and Attitudes

Local Broadcast Film Consumer ComputerTelephone Industry Industry Electronics IndustryIndustry

Regulation Heavy; use Heavy; use Light; use in- Moderate; Changing toinfluence for influence to fluence on mainly safety heavy reg.profit bar entry trade issues and electrical of telecom.

Standards Gov’t-set; Gov’t-set; mixed Industry-set; Mostly industry Mostly in-mandatory; mandatory/ voluntary; set; changing; dustry-set;permanent; voluntary; changing; open very fluid;restricted open open open

Inter- Proprietary, for Voluntary Voluntary Voluntary Voluntaryoperability LECs and LD cos.

Innovation Resistant Resistant Ambivalent Open Enthusi-iastic

Response to Slow Slow Moderate Rapid Warp-speedtech. change

Competition LECs - None Past: Strong Intense Intense IntenseIXCs - Intense Present: Intense

Mgmt Conservative; Exploitive; Clique of Conservative; Merit-based;Style hierarchical hierarchical insiders; hierarchical hetararchical

hierarchical

Profitability Subsidy and Market Market Market Marketguaranteed return; Lobby-

ing expertise

Lobbying Massive at fed- Moderate to Moderate; Moderate; Slight;Efforts eral and state heavy at fed- Trade issues Trade issues Trade

levels eral level at federal at federal issues atlevel level fed. level

Communi- Formal; Informal; Informal Formal; Informal;cation corporate bland corporate blunt

Source: J. Van Tassel

In 1990, com-puter industryrevenues wereabout $19billion; in 1997,they will reachnearly $46billion.

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years, Hambrecht & Quist estimated themarket value of publicly traded Internet-related companies at $6 billion and pre-dicted it would be a $13 billion industry bythe turn of the century.10 Companies thatdesign and manufacture switches for com-puter networks are growing at 400% peryear, bringing in $5 billion in 1995. Theleading company in that business, CiscoSystems, is valued at more than $20 billion—nearly as much as Bell Atlantic and largerthan Pacific Telesis.11

While some related industries benefitfrom their contact with digital technology,there are plenty of examples of businessesthat do not. Moreover, some parts within anindustry may gain from closeness, whileother parts suffer. Predicting future winnersand losers is historically difficult and inexact,so an aura of uncertainty surrounds analysisand prognostications. What is certain is thatno one wants to be in a business fighting itout on the competitive battlefield, armedonly with obsolete technologies and out-worn practices.

As noted in the previous section,computer networks are the least expensiveway to send information, causing someconcern within the U.S. Post Office. An-other victim of the versatile PC is the once-thriving videogame market and their dedi-cated players. In 1994, game sales topped30 million units; in 1995, sales reachedmore than 40 million games. However, in1994, games designed for the PC grew 21%and, in 1995, PCs acquired a 25% share ofmarket, while 16-bit video game softwaredeclined by 14% and sales of player hard-ware fell 36%.12

By April 1996, a Consumer ElectronicsManufacturers Association (CEMA) surveyreported that 88% of teenagers (the heaviestpurchasers of games) said they wouldchoose the PC if they had a choice. Amajority, 54%, said they already spend moretime with the PC than they do with games.13

Some analysts believe that PCs will continueto erode this market; however, manufactur-ers of videogame players are fighting fortheir market share by introducing higher-quality 32- and 64-bit players.

Broadcasters are also wary of thecomputer’s power to draw people’s leisuretime away from television, especially amongon-line users. Separate studies by Coopers& Lybrand, Jupiter Communications, Odys-sey, and Forrester Research show that on-line usage is a factor in the erosion of thetelevision viewing audience.14 The Forresterstudy indicated that, beyond the televisionindustry, magazine and newspaper publish-ers can expect to be affected as well.

Nor are there signs that computer use,including for communication, will decline.The demand for home communication hasincreased steadily since 1985, when U.S.households had only basic telephony. By1990, cable subscription brought the averageup to 1.2 services per household. In 1995,that average rose to 2.2, including secondlines, cellular, paging, and on-line accessservices. An estimate from the Washington,D.C.-based research company, MTA-EMCI,predicts the average will reach 3.2 servicesin 2000.15

Even though the growth rate of U.S.home computers may fall in the next fewyears, PC penetration will likely reach 50%around 2000. Even more indicative of thefuture is a survey by Custom Research, Inc.which found that 99% of people born after1971 (who will be 26 in 1997) used acomputer before they were 10 years old.More than 66% of them labeled themselvesas “intermediate,” “expert,” or “power” users.This generation contrasts sharply with thedata from people born before 1971. Only7% used a computer before age 10, and 19%consider their computer ability to be inter-mediate or above.16

Nearly all the people who are thedecision makers in the business world wereborn before 1971. Most executives havesecretaries who answer their e-mail, andsenior managers are reluctant to admit totheir junior employees that they don’t knowhow to use a computer. Most had hoped toretire before facing the full impact of digitaltechnology, and now fear they may notmake it in time.

The rapidity of digital diffusion gener-ates a climate of uncertainty and fear in

Separate studiesshow that on-lineusage is a factorin the erosion ofthe televisionviewing audi-ence. Magazineand newspaperpublishers canexpect to beaffected as well.

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other communication industries. Theresponse by many companies to thechanged business environment of instantubiquitous communication has been tocontinue following the procedures that havealways worked, whether or not they areeffective in this new world.

The eagerness of IT companies toestablish digital dominance, their no-nonsense and forthright language, and theirintense belief in their manifest destiny hascaught other communication sectors bysurprise. Many managers seem barely awareof the growing pains of convergence untilan IT representative ambushes them in aconsumer agency, standards committee,court, or public utility commission.

Perhaps fewer still recognize that thereis an enormous realignment taking placealong many fronts of the convergencelandscape, beyond the confines of anysingle business arena. Table 3 summarizesthe conflicts that have arisen between the ITindustry and other communication-relatedsectors—the local telephone companies,television broadcasters, the Hollywood filmcommunity, and consumer electronicsmanufacturers. The next section willexamine these simultaneous conflicts.

The Local Telephone Industry: TheImmovable Meets the Unstoppable

I was quite surprised by [computercompanies’ filing against RBOC ISDN

rate raise requests].... We worked verywell with them to enablevideoconferencing with ISDN.

—Mary Hancock, Pacific Bell17

The ‘Power’ Trip: Computer Folks AreBeing Nice to Cable to Get the Bells inLine.

—Cablevision18

Logically, there shouldn’t be muchconflict between local telephone companies(local exchange carriers or LECs) and thecomputer industry. Each benefits from thecore business and technical expertise of theother. They are mutually dependent uponone another—computer communicationrequires a transport network; LECs profitwhen customers make more calls by replac-ing “snail mail” with fax and e-mail.

This seemingly win/win situation hastransformed into a zero-sum game, withboth parties locked into an adversarialrelationship, filled with miscommunicationand bitter recrimination. The sparring beganas early as 1980 with the first of the FederalCommunications Commission inquiries thatattempted to make a distinction betweeninformation processing and communication.After the second inquiry (called ComputerInquiry II or CI II), the FCC limited commoncarrier regulation to basic services andexempted enhanced service providers (ESPs)that offer such services as access to adatabase, Internet access, and voice mail. Inthis series of arguments, the IT industry

Table 3Conflicts Between Different Sectors of the Communication Industry

Local Telephone Broadcast Film Consumer Elec-Industry (LECs) Industry Industry tronics Industry

Last mile Digital TV transmission Protection of intel- Digital TV set/- low bandwidth standards. lectual property receivers standards.- failure to implement Delivery mechanism. - DVD encryption DVD encryption.ISDN standards Spectrum allocation. standards AC-3 Dolby vs.- failure to implement - WIPO MPEG-2ADSL - Internet

Access reforms for ISPs

Source: J. Van Tassel

Many managersseem barelyaware of thegrowing pains ofconvergence untilan IT represent-ative ambushesthem in a con-sumer agency,standards com-mittee, court, orpublic utilitycommission.

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argued in favor of the ESPs, while the LECswere opposed to their exemption.

A similar division occurred over theFCC’s proposed Open Network Architecture,which would allow all companies equalaccess to the LEC networks. In practice, thiswould mean that standardized interconnec-tion to any network function would bepossible, a concept referred to as “un-bundled” service. Naturally, IT companieswere in favor of the open architecture, whilethe LECs successfully resisted the initiativethrough intense lobbying, obfuscation, foot-dragging, and outright refusal to perform.

This opposition is based on soundbusiness realities. The local telephonecompanies are not anxious to see theirprofits eroded by competition in the localloop, which open standards would makemuch easier.

Yet, IT companies require open stan-dards because of the cost of product devel-opment. “Cringely’s Second Law states thatin computers, ease-of-use with equivalentperformances varies with the square root ofthe cost of development. That means that acomputer that’s 10 times easier touse...would cost 100 times as muchmoney...[so] the next generation will costaround $5 billion.... The only place such acomputer is going to come from, in fact, is acollaboration of computer and semiconduc-tor companies. That’s why the computerworld is suddenly talking about opensystems, because building hardware andsoftware that plug-and-play across theproduct lines and R&D budgets of a hun-dred companies is the only way that thefuture is going to be born,” writes RobertCringely.19

According to Mark Jamison, director oftelecom studies at the Public Utility ResearchCenter at the University of Florida, thecomputer/telco conflict has changed sincethe early clashes. “The conflict before washow to divide up markets. IBM wanted toencroach on AT&T and vice versa. So, therewas a collision between companies going inthe same direction from different directions.

“What we have now is that the indus-tries are interdependent and the service the

telephone companies have traditionallyprovided doesn’t fit with what the computercompanies want. The telephone companiesoffer narrow, dedicated bandwidth. Thecomputer industry wants high-bandwidthnetworks that can handle bursty traffic.Fundamentally, the telephone network andpricing don’t fit what the computer worldneeds,” says Jamison.

LEC Requests for ISDN Rate HikesIronically, the opening challenge to the

local telephone companies was precipitatedby the LECs themselves when they re-quested substantial rate hikes for ISDNservice. In Washington and Arizona, U SWEST tried to raise the flat monthly fee from$63 to $184. In New Mexico, they wanted$189 per month. California’s Pacific Bellasked to replace its $24.50 off-peak flat ratewith a rate of $32.50 for 20 hours andmetered service thereafter, ending the off-peak discount entirely.20

Unbeknownst to the LECs, this actionposed a direct threat to the business con-cerns of microprocessor chip and computermanufacturers. Dhruv Khanna, Intel’sformer legal counsel who represented thecomputer industry in the IT industry’s mostrecent jousts with the local telcos, explainsthe reasoning that prompted the first actionagainst the LECs.

In late 1995, market data indicated thatthe recent phenomenon of communicationvia computer would be driving the demandfor more powerful machines. To enablenetwork applications such as high-speedInternet access, videoconferencing, reliabletelecommunications, and remote LANtelecommuting, computer communicatorswould need enormous amounts of rawprocessing power. In other words, themarketing message was that in order to sellever-faster, more powerful chips andcomputers, consumers would need to beable to use them on higher-bandwidthapplications. And for these apps, theywould need robust, high-bandwidth net-works.

“We needed more bandwidth at a massmarket price point,” Khanna recognized.

That’s why thecomputer worldis suddenlytalking aboutopen systems,because buildinghardware andsoftware thatplug-and-playacross theproduct lines andR&D budgets ofa hundredcompanies is theonly way that thefuture is going tobe born.

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“So, we filed in state public utility commis-sions against the LECs’ requests to chargehigher rates for home ISDN service. ISDNhas been around for 15 years. At this point,the local telephone companies can provision80% of the population with ISDN, makingonly minor hardware and software modifica-tions. They don’t need to install any newfiber, no new switches, no new wire, sothere’s no digging. But, they want to keepthe meters running as long as possible.”

“The problem is that there is no compe-tition in the local loop to give them anincentive to improve service and lowerprices,” says Khanna, with some vehemence.Self-described as an attorney who will takeon the telcos for his clients, Khanna hassince started his own legal practice, Conver-gence Law Group, in Palo Alto.

The language about the LECs isn’tgentle. In the first draft of a filing againstPacific Bell in California, Khanna wrote inpart: “...against Pacific Bell for violations ofSections 451, 453,...of the Code in offeringand providing Integrated Service DigitalNetwork (ISDN) services (i) at unreasonableand unjust rates and charges; (ii) withinadequate, inefficient, unjust and unreason-able customer service; and (iii) using unjustand unreasonable rules and practices.”21

In New Mexico, the computer compa-nies advanced the following rationale inopposition to U S WEST: “In enhancing itsanalog POTS offering to ISDN service, U SWEST has demonstrated all of the ills ofmonopoly, including monopoly pricing,unavailability of service, and poor customerservice. Not driven by competition, U SWEST has not been motivated to innovateand deploy and offer ISDN, which involvesmodest modifications to its analog POTSnetwork.”22

The rate hike requests showed theregulation-averse, independent, and com-petitive IT companies that they needed toband together and take a stand. So, al-though Intel acted alone against the LECs inArizona, Texas, 23 Utah,24 and Washington,25

other companies in the IT industry soonjoined to argue against ISDN raises. InCalifornia, Compaq filed with Intel against

Pacific Bell and, in New Mexico, U S WESTwas opposed by a group of companiesincluding Intel, Allied Signal, Motorola,Philips Semiconductors, Honeywell, andothers, forming an alliance called theTechnology Industry Association (TIA).

David Beats Goliath—So FarConfrontations over ISDN in the local

loop are fought out before state public utilitycommissions where the telephone compa-nies enjoy a significant advantage in fire-power. The computer industry has only atiny Washington presence to deal with tradeissues and has no people, offices, or repre-sentation on the ground at the state level.

Despite their relative disadvantage, inmost of the states where the IT industry hasintervened against LEC rate hikes, they haveachieved at least some success. In Washing-ton state and Arizona, U S WEST withdrewits proposals for $184 per-month charges. InTexas, Southwestern Bell reduced its ISDNinstallation charge from $485 to $250, withfurther reductions for agreements for long-term service. In New Mexico, U S WESTreduced its monthly flat fee for ISDN from$189 to $75, and on May 13, the NewMexico Corporation Commission orderedU S WEST to establish ISDN residential flatrate service for $40.86 per month.

In Delaware, the digital forces wererepresented by James Love, head of RalphNader’s Taxpayers’ Assets Project, whichfiled on behalf of consumers against BellAtlantic’s request for $249 per month flatrate ISDN service. The group won a signalvictory when the regulatory agency orderedBell Atlantic to establish service for less than10% of the request—$20.49 per month. Asof this writing, the decision of the CaliforniaPublic Utility Commission has not yetreturned its decision.

Access ReformA second issue raised by the LECs also

appears to have backfired against them byfurther unifying the IT industry. This time, itwas the local telephone companies’ requestto the FCC asking the agency to revisit theexemption of ESPs from paying local telco

The problem isthat there is nocompetition inthe local loop togive them anincentive toimprove serviceand lower prices.

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access fees. This action harks back to theComputer Inquiry II ruling in the early 1980s(described earlier) when the FCC firstexempted businesses that offered telephoneservices that encouraged more use of theLEC networks. ESPs include database accessproviders and on-line and Internet serviceproviders.

The telephone companies have chafedunder that exemption even more since themassive increase of people coming on-linein 1994. In November 1996, the LECspetitioned the FCC to repeal the exemptionand to consider Internet calls the same asvoice calls. According to the telcos, Internetusers stay on the telephone longer than thenetworks can handle, potentially triggering adisastrous breakdown of the public switchedtelephone network (PSTN).

Not so, say the computer companiesand Internet service providers. The LECs areexaggerating. A statement issued by PaulMisener, Intel’s key Washington lobbyist,delivered a verbal slap to the local telcos:“Rather than meeting the demand forInternet access, the phone companies wantto suppress it by applying a surcharge.”

Misener’s accusation of failing to re-spond to public demand echoes an oft-heardtheme, as written into the Intel filing againstU S WEST in Utah. In a section entitled,“Reasons for the RBOCs’ Non-Responsive-ness to the Demand for Higher Bandwidthto the Home,” Tad Hetu wrote, “The RBOCsseem to be focused on regulatory and publicpolicy matters related to the passage andaftermath of the Federal Telecommunica-tions Act of 1996, the setting of their POTSrates, and a host of other regulatory issues,acquiring cable companies outside theirregions, merging with each other, andentering into the long distance business.Making greater bandwidth services easilyand affordably available to the home doesnot appear to be a corporate priority.”26

Paul Misener, describes the IT compa-nies’ reactions to the telco move against ISPsat the FCC: “Several key PC companiesrecognized this access charge issue wasimportant to the industry and that the Bellswere telling the story that there is congestion

because PC users are putting a burden onthe network when they connect to ISPs.The Bells’ lobbying efforts began in earnest,showing studies of PC users clogging thenetwork.”

“A few of us got together from Intel,Compaq, IBM, Digital, Novell, and Microsoftsat down and said, “What can we do?We’ve got to get organized.” So, we formedthe Internet Access Coalition (IAC), about adozen companies and half dozen tradeassociations, all speaking with one voice.”

The IAC is something new. For onething, Microsoft is involved, which, on thewhole, hasn’t happened before. Previously,Microsoft was a member of the BusinessSoftware Alliance with Lotus, Oracle, Sybase,and other software companies, and ofteneven preferred to fight its regulatory battlesalone.

One of the first acts of the new alliancewas to fund an independent study showingthat Internet access is not the cause ofnetwork congestion. To no one’s surprise,the study found that the telcos’ failure toplan for overall growth of all uses of thenetwork was the culprit behind networkfailures.

IT Wins AgainIn this most recent head-on collision,

the computer interests achieved an impor-tant victory when the FCC scheduled aNotice of Inquiry over the issue of ESPexemption from access charges. The LECshad requested that the FCC schedule aNotice of Proposed Rule Making (NPRM),which would have set the stage for therepeal of the ESP exemption. The ITcontingent argued that the FCC should issuea Notice of Inquiry rather than an NPRM sothat they could collect information withoutthe pressure of possible new regulations.(An NOI cannot result in a change ofregulations, which must be preceded by anNPRM.)

Members of the newly-formed IT lobbysay that computer lobbying will provideimportant information to decision makers.They scoff at what they regard as the lameperformance of the subsidy-dependent, non-

To no one’ssurprise, thestudy found thatthe telcos’ failureto plan for overallgrowth of alluses of thenetwork was theculprit behindnetwork failures.

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competitive LECs. They see the RBOCs’desire to charge access fees to ESPs as justanother way that fat and lazy telephonecompanies manipulate the political/regula-tory system for profit instead of makingmoney the old-fashioned way.

They insist that the computer companieswill not emulate the regulatory behaviorsthey loathe in their opponents and that theirefforts aren’t lobbying as usual, with bour-bon over a golf game. According to PaulMisener, the coalition has set up a series oftechnical meetings (about 20 so far) with theFCC chairman and his staff, making the ITindustry’s positions known and supportingthem with detail.

Collateral DamageSuspicion toward the telcos permeates

the general population of computer users,well beyond the sphere of the IT companiesthemselves. For example, Jim Warren,Webmeister of the public interest listserve,Government Access, believes that thetelephone companies are setting up astrategy similar to that of the oil companiesin the mid-1970s. In Warren’s scenario,telco warnings of network overload will befollowed by massive failures and crises. Thetelcos will manipulate these problems toshove through a huge rate raise whileeveryone is panicked about loss of service.

The telephone companies naturally donot see the situation through the samelenses. They argue that network reliability istheir most important responsibility to thepublic and that they are doing their best.And their chief responsibility to their stock-holders, many of whom have purchasedtheir utility stocks to provide a regularretirement income, is to maintain the level ofdividends.

On the whole, the IT industry and thepart of the public that wants to communicatewith their computers find these argumentsunconvincing, and the telephone companieshave been unable to articulate their positionconvincingly to them. The LECs sometimesalso undermine their own credibility. Whiletelco technical people are fully conversantwith digital technology, their sales and

media relations people are often woefullyunderinformed. If the Intel filings andInternet discussion groups of ISDN users areto be believed, members of LEC sales forceseither lack knowledge or are entirelyunavailable. In press interviews, the spokes-persons occasionally make unbelievable,unsupportable, or accusatory statements thatreveal their lack of understanding of com-puter users.

For example, a Pacific Bell spokesper-son said to me in the most incredulous anddisapproving tones: “Do you know thatabout 25% of those Internet users tie uptheir telephone lines for hours?!!?” I askedher, “Do you have a computer on your deskattached to the company LAN?” “Yes,” shesaid. “How often do you turn it off?” Iasked—she did not answer.

The Broadcast Industry: TV Meetsthe New Vids on the Block

Bill Gates has held digital televisionhostage to his determination to move TVdistribution to the desktop.

—A senior ABC executive

There are some people in cable who havefelt that when it got down to the wire, thebroadcasters would find a way to fumblethe ball before they got [advanced TV]across the goal line.... In fairness, I thinkit’s a combination of the broadcastersand politicians.

—Robert Rast, General Instrument Corporation27

Will broadcasters, FCC derail digital TV?—Headline in CED: Communications

Engineering & Design28

The IT industry’s relationship withtelevision broadcasters has been no lesscontentious than it has been with thetelephone companies. In arguments topersuade the FCC and key Congressionallegislators (members of the House Telecom-munications Subcommittee, the SenateCommerce Committee, and the SenateCommunications Subcommittee) that theirrespective positions are right, the analog

The RBOCs’desire to chargeaccess fees toESPs is justanother way thatfat and lazytelephone com-panies mani-pulate thepolitical/regulatorysystem for profitinstead ofmaking moneythe old-fashionedway.

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broadcast forces and the digital computerforces have engaged in a decade-longdebate. At stake are the standards foradvanced television, including high-defini-tion television (HDTV) and digital television(DTV).

The clash is intensified by heightenedfears of broadcasters in the face of the ever-growing Internet and the movement towardwebcasting. Craig Birkmaier summarizes thenightmare scenario that haunts TV execu-tives: “The hard-driving rhythms of arapidly-emerging digital world are seepingaway the foundation upon which thebroadcast industry was built—the few-to-many paradigm, the gatekeepers of contentfor millions of faceless eyeballs. The digitalbeat is sweeping away the foundation uponwhich the cable industry was built—thenarrowcasting paradigm, the gatekeepers ofcontent for those trying to bypass thegatekeepers in broadcasting. Welcome to theDTV party! We are entering the era of databroadcasting.”29

Even before the Internet explosion, localbroadcasters were wary of HDTV and itsclose companion, digital TV (DTV). Theproblem of HDTV for them is the cost toindividual stations of installing HDTVtransmission equipment. The networksweren’t as concerned for their programming-provider functions, since the 35mm standardfor entertainment programming is more thanadequate for the higher bandwidth standard.

DTV was developed by General Instru-ment Corporation in the course of theirwork on their TV signal scrambling technol-ogy, DigiCypher. As broadcasters came torealize that digitizing their signals wouldgive them more channels in the samebandwidth in which they now carry onlyone 6 MHz channel, their opposition less-ened. Since the spectrum allocation to themwas without charge, they began to mount acampaign to obtain the new spectrum forDTV—without the expensive HDTV bag-gage.

The members of the Grand Alliance(General Instrument, Zenith, Philips, andSarnoff Laboratories) who had spent millionsdeveloping HDTV were outraged at the

prospect that the FCC might even entertainsuch a notion. “We’re being jilted at thealtar here,” complained General Instrument’sRobert Rast.30

However, it made far less difference toIT companies not in the Grand Alliance.Whether broadcasters adopt HDTV or DTV,they stand to benefit in two ways:

(1) They will make the chips and decoderboxes that DTV entails.

(2) TV signals will become computer-compatible.

Or so they thought, until it looked likethe FCC might actually approve interlacedtransmission and display standards forHDTV and DTV.

Interlaced or Progressive Scan?Transmission and display standards are

linked in that receivers must be able todecode the transmission format. The ITindustry battled a determined campaign todislodge the interlaced standard.

The current TV standard, NTSC, is aninterlaced format, which means that 60 timeseach second, one-half of the picture istransmitted—first all the odd lines, then allthe even lines. The gradual decay of screenphosphors used in TV sets and human“persistence of vision” tricks the brain intothinking it is seeing the whole picture.

By contrast, computer screens aredesigned for a progressive scan format.Here, every line of the picture appears inorder, from top to bottom.

The IT community pitted itself againstthe broadcast industry, the Grand Alliancegiants, and the consumer electronics indus-try in the fight for a progressive scanstandard that would be compatible withcomputer technology. When it became clearthey would lose a progressive-scan-onlybattle, they proposed dual-scan capable setsthat would have both standards built in.However, the consumer electronics industrybalked at this expensive proposition.

As the FCC decision on advancedtelevision standards came down to the wire,with everyone predicting a “use it or lose it”

The IT communitypitted itselfagainst thebroadcastindustry, theGrand Alliancegiants, and theconsumerelectronicsindustry in thefight for aprogressive scanstandard thatwould becompatible withcomputertechnology.

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scenario for digital TV, these groups did finda compromise agreement that was a win foreverybody. The deadline was December 31,1996. On November 25, 1996, they made apact to leave the transmission and receiverscanning format up to the market, with nomandated standard.31

The agreement left open the issue ofwhether digital spectrum would be auc-tioned or given free to broadcasters, but thiswas not of great interest to the other players.If television doesn’t take up the spectrum,the chip-intensive mobile land services willuse it. However, as a matter of principle,the IT industry opposes giving spectrum tobroadcasters, asking “Why should they get agovernment handout no one else receives?”

Nor did the pact address the fears of thebroadcasters of being eaten alive by yetanother media delivery system, the Internet.Having already lost significant audienceshare—hence, revenue—to multichannelservices (the cable industry and digital DBSsatellite operators), local broadcasters arerunning scared.

Research continues to fuel their fears.According to Find/SVP, TV viewing declinesdramatically when children have a PCavailable to them. Two-thirds of parents in1,200 computer households reported thattheir kids watch less TV as a result of usingthe PC, and parents approve of the timespent on the computer. Surprisingly, girlsuse the computer even more than boys dountil the 7th grade.

Networks, as programmers, are alsoconcerned. Moreover, their future is tied tothe fortunes of local broadcasting becausean important source of their income comesfrom their affiliates and their highly profit-able owned-and-operated local stations. Asthe Internet becomes capable of carryingbroadband material, the minimum they willbe forced to address is a changing businessmodel.

Reeling from the erosion of audienceshare due to the added competition intro-duced by cable, the relationship betweennetworks and affiliates has deteriorated.Now, new competition from digital media,including DBS and the Internet, make the

division even more rancorous. “The net-works and the affiliates have a love/haterelationship. It used to be a true partner-ship, but now they screw each other regu-larly,” observed one attorney who representsbroadcast clients.

As with the telephone companies, thetelevision industry faces very real businessproblems posed by the rise of IT communi-cations. Similar, too, is the division causedby a perception of differing cultural as-sumptions and practices. Many IT peopledespise broadcasters’ resistance to innova-tion and technical change, as well as thebland, middle-of-the-road, lowest-common-denominator communication style of muchTV programming. They are also contemptu-ous of what they see as the televisionindustry’s practice of shameless lobbyingand influence-peddling to block potentiallycompetitive market entrants that mightthreaten their dominance.

However, it is easy to overstate theopposition between the two industries,which share some commonalities. They areboth competitive businesses with largelymarket-defined winners and losers. Somepeople in television are more hopeful thanfearful. They see the benefits of digitalmedia and believe they present manyopportunities.

The IT/TV ScorecardThe final decision on digital television

was also a success from the IT point ofview. In fact, all parties were pleased withthe results of the final decision on DTV toallow market forces to decide the questionof digital versus analog transmission andtelevision sets. The Grand Alliance mem-bers were happy because it would getHDTV moving. The consumer electronicspeople were relieved to finally be able tostart marketing product, without beingsaddled with an expensive dual-scanrequirement. The interlaced option pleasedbroadcasters because it allows them to godigital in the near future and to upgrade toprogressive scan later—when they are surethere is revenue to justify the expense and60-frame scan receivers are robust. The IT

Two-thirds ofparents in 1,200computerhouseholdsreported thattheir kids watchless TV as aresult of usingthe PC.Surprisingly, girlsuse thecomputer evenmore than boysdo until the 7thgrade.

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community, sure of the digital destiny, areconvinced that broadcasters will eventuallybe driven to make their signals entirelycomputer-compatible and that the computerindustry can beat out all the others in acompetitive market anyway.

The Film Industry: The DatatroidsVersus the Celluloids

[Computer industry leaders] were furiouswe hadn’t brought them into the process[of setting DVD encryption standards].They thought we had based our decisionson technology that was junk. In retro-spect, we should have approached themsooner and when they did come onboard, they made valuable contributionsto the final encryption standards.

—Negotiator for a major motion picture studio

The DVD ControversyAlthough it seems unlikely that bad

feelings should exist between the IT andfilm industries, they have nevertheless arisenin the last two years. The precipitatingfactor was the development of the digitalversatile disc (DVD) by two consortia ofconsumer electronics companies which,themselves, fought over competing stan-dards for discs and players.

The motion picture industry didn’t muchcare which set of standards was adopted forDVD, beyond an intense commitment toDolby AC-3 audio as opposed to the Euro-pean-adopted MPEG-2 audio standard.What interested the studios was protectionof their material, and they shuddered at thethought of converting their expensive-to-produce proprietary material to an easilycopied and transported digital format.

They informed the computer electronicsmanufacturers making the players that, ifthey didn’t meet the needs of the filmcommunity, they would have to do withoutHollywood motion pictures. The consumerelectronics companies knew that it wasmovies that would drive the sale of DVD,just as it had been the lure to bring cableinto so many TV households more than a

decade before, so they were forced toaddress the film industry’s concerns.

A negotiator for one of the major studiossays that the DVD encryption standardsbegan as internal talks between one studio,Sony, and Matsushita which were designingthe DVD for the consumer market. Then, themeetings were extended to include the restof the motion picture industry and consumerelectronics firms. In the middle of thenegotiations, someone said, “Should webring in the computer people because theyare going to have something to say aboutthis?”

“A consensus was developed (whichfew people will admit to having supported)that we were having enough trouble reach-ing an agreement among ourselves, so wedecided to reach an agreement amongourselves first before involving others,”describes the negotiator.

“So we proceeded down that road,reached an agreement, and showed it to thecomputer industry. They went a littleberserk and said something to the effect of‘How could you go behind our backs andnegotiate this massive legislation that affectsour entire industry?’ and they took tremen-dous offense at the bill. There were a lot ofbad feelings and bruised egos over it,” herecalls.

As it turned out, the IT technical peoplehad valuable contributions to make to theprocess. What was most interesting is thatone of the two greatest concerns to thecomputer interests was that “they werephilosophically opposed to putting anytechnological standards into legislation.However, as major content providers, thereare certain kinds of copying protections weneed in the analog-to-digital environment,and the only way we know to get the anti-copying systems into place is to mandate theuse of a specific system. If they can comeup with a better approach, we’d listen. Andthat, at a general level, is the biggest contro-versy between us,” this studio executivedescribes of the relative positions of the ITand film people.

The two sides still have not reached anagreement, although the decibel level has

The consumerelectronicscompanies knewthat it wasmovies thatwould drive thesale of DVD, sothey were forcedto address thefilm industry’sconcerns.

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lowered from shouts to conversational tones.A congenial working atmosphere has beenrestored, and it is likely an agreement willbe reached on the standards for DVDencryption this year.

However, DVD was just the first battlein what could prove to be a much largerconflict. The dispute that started as essen-tially technical and cost issues opened up agrand canyon of opposition over intellectualproperty rights protection between the ITindustry and the studios, producers, writers,and stars who create entertainment proper-ties. Since that same issue concerned musiccopyright holders, and studios themselvescounted as some owners of all, these troopswere soon recruited to studios’ cause.

Wipeout at WIPOThe collision between the IT and

entertainment industries occurred in Novem-ber 1996 at the World Intellectual PropertyOrganization meeting in Geneva. The ITand on-line groups battled hard against theprocess of signing an international agree-ment before discussion in Congress, as wellas some of the provisions in the WIPOtreaty. Of particular concern to IT interestswere what they believed to be severerestrictions on the fair use of material andthe surveillance and enforcement of intellec-tual property rights that would violate thepublic’s right to privacy. IT proponentssimply did not believe that governments andprivate businesses should be able to trackstatements between private citizens.

WIPO was particularly interestingbecause of the way it cut across so manydifferent interest groups.

• The computer hardware and softwarecompanies agreed to disagree on this one.

• Telephone companies were pitted againstcontent providers, hardware, and softwaregroups.

• Computer software and entertainmentinterests found themselves on the sameside.

“The computer hardware industry hasdifferent interests than either the software

companies, including computer software andentertainment firms, and the telephoneindustry. The hardware and network peopleneed a free flow of information; manysoftware companies see the ’Net as asurveillance tool for unauthorized use; andthe telephone companies want to be re-lieved of liability for the material that crossestheir networks,” explains James Love,speaking for the Taxpayer Assets Project andthe Consumer Project on Technology at theCenter for Study of Responsive Law.

In the area of intellectual property, theIT community has formed an organization toblock the lobbying efforts of the motionpicture industry. The Digital Future Coali-tion (DFC) is a 26-member Washington, D.C.group that was created to defeat the Infra-structure Copyright Act (S 1284 and HR2441). When the WIPO conference wasscheduled, this same group argued thecomputer industry positions against thecontent providers in Geneva.

The studios formed an alliance calledthe Creative Incentive Coalition that, in theeyes of the IT interests, promulgated ex-treme positions in favor of sweeping newintellectual property rights. “Their version ofthe treaty would mean that broad areas oftechnology, such as the VCR and the generalpurpose computer, could themselves bedeclared illegal. Then, too, it locked uppublic materials and databases so tight evenDun & Bradstreet and Bloomberg opposedthese provisions,” says Love.

In addition to the studios’ actual com-ments, the IT representatives were amusedand disgusted by the campaign Hollywoodmounted to further their aims. From Lon-don, Madonna and Tom Hanks madestatements on behalf of the studios’ positionson the WIPO treaty. Most IT people thoughtthese performers were manipulated by thestudios into commenting on provisions theyknew little about.

The IT/Studio ScorecardNeither of the two conflicts between the

computer community and the film studios isentirely resolved. The issue over DVDencryption to protect intellectual property

The dispute thatstarted asessentiallytechnical andcost issuesopened up agrand canyon ofopposition overintellectualproperty rightsprotectionbetween the ITindustry and thestudios,producers,writers, and starswho createentertainmentproperties.

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against unauthorized copying is still undernegotiation. However, IT interests wereeffective in improving the technology of theencryption process, and they have beeninvited by the studios to propose alternativeenforcement procedures.

At the recent Geneva Conference of theWorld Intellectual Property Organization,computer people came away with most ofthe alterations to the proposed treaty theyasked for. The provisions that would alterfair use were moderated, and rigid databaseprotections were tabled for later consider-ation. Passages were deleted that wouldhave considered the temporary computerstorage of information during transmission(as on the World Wide Web) as an infringe-ment of copyright. Technologies that couldcopy information weren’t prohibited; rather,efforts would be made to keep technologiesfrom being used for circumvention forunlawful purposes. Other language wassoftened to allow librarians to catalog andorganize information. Finally, althoughnetwork operators didn’t win the specificexemption from liability for carrying copiedmaterial they were seeking, they did getlanguage that said mere provision of facili-ties doesn’t amount to communication.

These were important gains for the ITindustry, as well as significant losses for thestudios which were fierce proponents of allthese protections. And the disappointmentwas a second legislative setback for the filmindustry. As James Love of the TaxpayerAssets Project noted, “Hollywood got hosedin the Telecommunications Act of 1996. Itwas weak on common carrier issues, such asopen platforms and interoperability. Theywere very important for content providers toprovide competition for delivery into thehome. Without it, the money goes to thepeople who own the last mile.”

The issues raised by the protection ofintellectual property are difficult to resolve.Some creators want their material dissemi-nated, such as activists trying to influencepublic opinion. Others want distributiononly when compensated. And, still otherswant to restrict distribution sharply tomaintain a high valuation. The computer

hardware faction made the slogan, “Informa-tion wants to be free,” their watchword, butit is clear that this sentiment is not shared bycontent providers.

The Consumer Electronics Industry:If You Build It, They Will Complain

It’s not easy making a mass marketproduct out of a new digital technology.Especially when consumer electronicsmanufacturers just don’t make products thatmeet the high standards of the computerfolks—because dissatisfaction with currentstate-of-the-art is part and parcel of the ITbelief system. Of all the disagreements theIT companies have with related industries,their arguments with the consumer electron-ics manufacturers stand out as very different.For one thing, unlike the other industries, IThardware manufacturers are in direct retailcompetition with the CE companies.

The competition occurs because thecomputer hardware companies manufacturecomputers and other equipment them-selves—owning their own facilities, andmarketing and distributing them under eachcompany’s own brand name. As long as thecomputer was a complicated businessproduct, they were of little concern to theCE industry. But, now that computers haveentered the mass consumer market, CEmanufacturers wonder if they have missed asignificant opportunity.

“[A] clear definition of the computer andelectronics industries may never be the samewith personal computer manufacturersproducing more consumer electronics-likeproducts, and consumer electronics compa-nies making personal computers. It’s goingto be a messy marketplace in the short-termfuture. And it’s going to be a tough callpredicting which products will emerge asthe chosen computing device, especiallywhen there are still over 60% of the U.S.population yet to purchase a computer,”says a Jupiter Communications publication.32

The uncertainty over whether thecomputer market is an opportunity stemsfrom the low profit margin on standardizedPC clones, the need for a specialized salesforce, and the need for ongoing customer

Hollywood gothosed in theTelecom Act of1996.

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support. For example, CE manufacturer andretailer Tandy successfully marketed thelegendary TRS-80 (lovingly called by itsusers the Trash-80), but its later models losttheir appeal because of their proprietarystandards, high prices, and poor productsupport.

Aside from the street level conflict, theother differences dividing the IT forces fromthe CE companies stem from the design ofproducts that flow from standards foremerging technologies: HDTV and DTVreceivers and DVD players. In both cases,CE manufacturers sided against the ITinterests because of the tradeoff betweencost and quality.

Computer makers and CE companiesbring a different set of operating principlesto developing and marketing products. Bothare innovative. But CE products are almostalways aimed at the mass market, at massmarket price points. By contrast, thecomputer market has long been dominatedby technically savvy innovators and earlyadopters who value innovation for its ownsake.

These early adopters don’t mind custom-izing and upgrading their systems by puttingin new cards, chips, and peripherals. Theywant standards so that products fromdifferent sources will interoperate, and theypay the higher prices it takes to buy newproducts early in the release cycle.

Mass market adopters demand a muchgreater level of standardization andinteroperability. They want product pack-ages that put together all the features theywant with plug-and-play capability andtransparent interoperability. They demandmuch lower prices before they will buy.33

Two skirmishes have been foughtbetween CE manufacturers and the ITindustry over the “productization” of emerg-ing technologies. In both cases, the issuewas the cost/quality tradeoff, where the ITpeople insisted on higher quality technologythat would market at too high a price pointfor the CE community to market effectively.

Take digital television receivers—DTVsets. The computer companies weredetermined that HDTV and DTV would be

computer-compatible. This demand firstaffected local TV stations since it called forthe transmission of a digital, progressive-scan signal. When it looked like they wouldlose that battle, the IT industry wanted themanufacturers of TV sets to install anexpensive chip to convert the interlacedformat signal to appear on a progressiveformat display—like the computer monitor.The set makers flatly refused to take on thatprice handicap, and it took almost a year toreach agreement.

The other product was the digitalversatile disc—the DVD. The CE companiessided with the film studios because sales oftheir players were utterly dependent on afavorable decision from movie makers toprovide their content as a driver of con-sumer demand. As mentioned earlier, theycame to an agreement with Hollywood—until the IT industry found out about it.

Thomas Polgar, vice president ofgovernment affairs for Viacom, describeshow the computer companies forced theproduct manufacturers to change theirdesigns: “The computer people respondedby telling us that the technology we werebasing the agreement on was poor. Theywere right. And, as a result, we’ve devel-oped a better system for preventing copying,and that was a major contribution to theeffort made by the computer people.”

The IT/Consumer Electronics ScorecardThe scores of the consumer electronics

industry and the computer companies willbe settled in the marketplace through theircompetition over the sales of products to theconsumer rather than in the halls of regula-tory agencies. To the extent they have metthere, their contact has been through theirassociation with the TV interests and DTVand the film studios and DVD. In the sensethat the consumer electronics companieswere allied against the computer forces, theywere required to adapt to the IT industry’sgains.

From Conflict to CollaborationThis chapter in the history of communi-

cation policy and regulation could well be

In both cases,the issue wasthe cost/qualitytradeoff, wherethe IT peopleinsisted onhigher qualitytechnology thatwould market attoo high a pricepoint for the CEcommunity tomarketeffectively.

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called the invasion of the infowarriors.From December 1995 until the present, ithas been an extraordinary 14 months ofactivity as the IT industry takes its place vis-à-vis other industries. The year 1996 saw:

• Filings against LECs in six states.• The final negotiations on digital television

and HDTV.• The scuttling of DVD encryption stan-

dards by the IT forces.• Toe-to-toe jousting with the consumer

electronics industry over theproductization of DTV and DVD.

In these skirmishes, the IT industry is aDavid against Goliath, or a small guerrillaforce launching surprise attacks againstponderous, indecisive giants who believedthey were unassailable until their weak-nesses were publicly exposed. It is rare fora computer company to have more than justa handful of people in Washington, and theyare mostly concerned with internationaltrade issues. To the extent IT staffs reachany size, it is because they are involved inproduct sales to the government, rather thanlobbying.

As a practical matter, the telephonecompanies and the broadcasters have had astrong Washington presence for many years.The typical office for a Baby Bell is 20 to 30people spending their time just on regula-tions. However, sheer numbers don’talways carry the day.

Mark Jamison notes, “When you aredealing with a regulatory issue, certainly thetelephone companies are more adept thanthe computer industry because they’ve beenregulated for decades. But, it doesn’tnecessarily give them an advantage becauseit depends on how people view the differentindustries and which way the customerswant to move. My guess is that customerswant to move the way the computer indus-try wants to move and that that will workagainst the local telephone companies.”

Nevertheless, the computer industry is areluctant player in this environment. One ITlobbyist said that the computer companieshave done a good job of making their

positions known on international issues.However, when it comes to opposing theLECs, they’re wary. “We worry aboutincumbents in highly-regulated environ-ments because they might pull us into anarea where they have a competitive advan-tage because they have so much moreexperience dealing with regulators. There isa long history of the telephone companiesusing the regulatory environment to battertheir competitors. So we think it’s an arenato avoid,” observed this expert.

In the past year, information companiesorganized their resources to achieve theiraims in state and federal regulatory proceed-ings. They have enjoyed a remarkable seriesof skirmishes and partial victories. How-ever, sooner or later, they must turn theirattention toward working with the industriesthey now oppose.

There is a general consensus that eachof these giant, powerful interest groups hasan interest in working with the digitalforces—that, indeed, digital communicationis the future. Each of them relies on theinnovation brought about by the ITindustry’s extraordinary commitment toresearch and development that none of theothers can claim.

The telephone companies have the mostto gain, although they appear distracted bytheir quixotic desires to act as media contentproducers. The growing use of the Internethas already brought them millions of dollarsin profits from the many second lines thathave been installed for ’Net access, and thisbusiness can only increase over time.

According to expert Mark Jamison,“Whether and when they will work together[LECs and IT industry] is a mixed bag. Atsome point, they will realize they have a lotin common. So, in the long run, they willfind some way to get together. But there’sno set timeframe. It depends on how long ittakes for their corporate cultures to changeenough to accommodate working togetherand the path that deregulation follows.”

The broadcasters are in a somewhatmore difficult position. The televisionnetworks are essentially programmingservices that rely on the affiliate system (and

The IT industry isa David againstGoliath, or asmall guerrillaforce launchingsurprise attacksagainstponderous,indecisive giantswho believedthey wereunassailableuntil theirweaknesseswere publiclyexposed.

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their profitable owned-and-operated sta-tions) for revenues. As programmers, theyshould be pleased that there is anotherdistribution mechanism, which should raisethe value of their much-watched offerings.However, as local station owners, they willcompete against a broadband network thatcan deliver quality video and audio. Such adevelopment is probably seven to 10 yearsaway, but it casts a long shadow over therelationship between broadcasters and theIT industry.

Neal Friedman comments, “Right now,they’ve decided to make peace. We canhope it will last for a while. The more savvybroadcasters see that the system of deliverythat’s been in place over the last 50 years isgoing to change. I remember talking to onestation engineer, ‘Our transmitter will needto be replaced, and our owners have askedme to find out whether we should even buyone.’ It was a provocative question then,and today it’s an even more provocativeone.”

The computer hardware manufacturersand the studios disagree over intellectualproperty, and this conflict will probablycontinue for some time. However, the issuepushes a wedge between the IT hardwareand software companies, with the softwarepeople siding more closely with the studios’position on the protection of intellectualproperty rights.

This dispute will probably be wagedover a long period of time, in many differentvenues, between several interest groups—including publishers of books, magazines,and newspapers, video distributors, broad-casters, and others. However, there are noreal difficulties between the IT and filmindustries.

Indeed, both sides have much to gainby close contact. The creative communitythat makes movies is a fascinated user ofdigital technology, and innovations reflectedin their movies lead to consumer demandfor the ability to make similar effects—spurring sales of computer equipment.Entertainment is also an important topic onon-line services.

The IT interests are also in a position tohelp the studios through their efforts toestablish open network architecture andincreased bandwidth to the home. Thestudios themselves have been slow to realizethese changes would be beneficial to them,and they have not supported the IT commu-nity in those efforts.

Only the consumer electronics industryis in direct competition with the computercompanies. While there may be competitionin the marketplace, it is clear that theconsumer electronics companies are amongthe chief beneficiaries of digital technolo-gies. However, computer hardware compa-nies could learn a great deal from theircompetition about brand building andmarketing to the mass market consumer.

ConclusionThis story began as a small sidebar to an

article I wrote for the Los Angeles Times onthe problem of low bandwidth Internetaccess in March 1996. Then, I learned of theIntel filings against the LECs and spoke withthen Intel attorney, Dhruv Khanna.

I realized that it was important but, as Iexplored the story and acquired moreinformation over the year, I realized that itwas just the beginning for a much largerfabric. It is the story of the birth of aninterest group. Just as Robert Cringelycharacterized the entire industry as “acciden-tal empires,” so too is it an accidentalinterest group.

There is a likelihood that none of theparticipants in this round dance will emergeunchanged—even the IT industry. Com-puter companies bring a fresh exuberancefor competition and innovation to Americanbusiness, not just hypocritical sloganeering.And perhaps the now-genteel practitionersof big business will succeed in harnessingthat energy to ride this magnificent opportu-nity into the winner’s circle for a resurgencein U.S. international success.

The opposite is truly frightening: Thatbig business should deaden the nerve andsoaring ambition for excellence that drivesthe IT industry and take from it the narrow-

The creativecommunity thatmakes movies isa fascinated userof digital tech-nology, andinnovationsreflected in theirmovies lead toconsumerdemand for theability to makesimilar effects—spurring sales ofcomputerequipment.

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minded genius-eat-retard competitivephilosophy that permeates the IQ-richinformation industries.

In the meantime, I don’t know aboutyou, but I want my Internet TV!

1 “Hot Seat: Gates Gets on the ’Net,” InfoWorld, Vol.18, No. 12 (March 18, 1996).2 Andrew Grove, “The Big Issue,” Forbes ASAP(December 2, 1996).3 This chart was prepared by UUNet (derived fromNorth River Venture “Black Hole in Cyberspace”). Itappeared in Telephony, Vol. 231, No. 24 (December 9,1996):36.4 InfoWorld (August 27, 1996):14.5 Federico Faggin, “The Future of the Microprocessor,”Forbes ASAP (December 2, 1996).6 Robert X. Cringely, Accidental Empires (Reading, MA:Addison-Wesley), p. 14.7 Alan Cane, Analysys Publications, St. Giles Court, 24Castle Street, Cambridge, U.K. (March 25, 1996).8 Financial Times (March 14, 1995):20.9 Frost & Sullivan, World Multimedia Hardware andSoftware Markets (1995).10 “Internet-Related Market Valued at $6 Billion,”Investor’s Business Daily (October 10, 1995):A8.11 James Flanigan, “High-Technology Futures Switchesto a New Mode,” Los Angeles Times (March 18,1996):D1, D4.12 Estimate by DFC Intelligence, (619) 484-5145.13 Television Digest, Vol. 36, No. 16 (April 15, 1996):17.14 Cited in Cablevision Blue Book (1996), p. 34.15 Cited in tele.com, 1996 Annual Report, p. 58.16 Investor’s Business Daily (March 21, 1996):A8.17 Telephone interview with Mary Hancock, Pacific Bellspokesperson.18 “The ‘Power’ Trip: Computer Folks Are Being Nice toCable to Get the Bells in Line,” Cablevision, Vol. 20, No.15 (February 19, 1996):36.19 Cringely, Accidental Empires, pp. 189-190.20 Prepared testimony of Richard C. Hall, received fromIntel Corporation (Santa Clara, California).21 Complaint filed by Compaq Computer Corporationand Intel Corporation v. Pacific Bell (U-1001-C),Document No. C 96 02 002 (February 1, 1996).22 Technology Industry Association’s motion for lateintervention, provisional approval, and leave to file latetestimony, Before the New Mexico State CorporationCommission, Docket No. 95-769-TC (January 19, 1996).23 Motion to intervene of Intel Corporation, Before theState Office of Administrative Hearings, SOAH DocketNo. 473-96-0116, PUC Docket No. 15024 (January 23,1996).24 Intel Corporation’s position statement in Docket No.94-049-T20, Before the Public Service Commission ofUtah (April 30, 1996).25 Motion for limited intervention and for continuance/deferral of U S WEST ISDN rate increase proposal,Before the Washington Utilities and TransportationCommission, Docket No. UT-950200 (December 28,1995).

26 Intel Corporation’s position statement, Before thePublic Service Commission of Utah, p. 25.27 Robert Rast, Vice President, Technical BusinessDevelopment, General Instrument Corporation, quotedin CED: Communications Engineering & Design (April1996).28 “Will Broadcasters, FCC Derail Digital TV?” CED:Communications Engineering & Design (March 1995).29 Craig Birkmaier, “The End of the Broadcast Era,” TVBroadcast (October 1996):1, 70.30 Chris McConnell, “FCC Worries ATV Advocates,”Broadcasting & Cable, Vol. 126, No. 16 (April 15,1996):14.31 “U.S. Ready to Launch HDTV Following Pact,” NewMedia Strategist, Vol. 3 (December 6, 1996).32 W. C. Liao, R. S. Rubin, and D. Coplin, “The ThreeFaces of PC/CE Convergence,” Interactive Home (JupiterCommunications), pp. 5-7.33 Chris Halliwell, “The Role of Standards in DifferentMarket Segments,” IEEE Proceedings on Computers(1995).