Copyright 1995 by Peter Huber. Electronic copies of this document may be distributed freely, provided that this notice accompanies all copies.
This article previously appeared in the City Journal, a periodical of the Manhattan Institute for Policy Research. To subscribe to the City Journal, call 212-599-7000.
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It's about to rain. You're standing at the corner of Park Avenue and 55th Street, a human semaphore, your right arm waving uselessly at the sky. There are empty cabs cruising the streets two blocks away -- you know it. If your arm were just 150 yards longer, the connection would be made. This is a failure to telecommunicate.
Why are there still so many New Yorkers to hail cabs anyway? Before fiber-optic glass, asymmetric digital lines, and the Internet, the answer was obvious. The grime and crime didn't matter: legal, financial, and intellectual talent flocked to the city regardless, because everyone else did, or already had, or soon would. If you wanted to borrow a billion, or wrap up the deal in legal paper, or entertain around the world, the people you needed were a cab ride away. You had to be there because they were.
With today's tele-electronics, you don't. Anyone anywhere can have a virtual seat on the stock exchange, or a video-conferenced presence in the boardroom. Being on Wall Street or Madison Avenue in the flesh isn't such an advantage any more. To be sure, you can't lubricate a deal over lunch at Lutece by way of the Internet. But an enormous number of connections people used to make by taxicab can now be made by wire. If we were inventing the stock exchange today, it would not be a building in New York; it would be a far-flung network, a sort of Internet of brokers, traders, and principals.
There is, indeed, a small, all-electronic futures exchange up and running on the Internet. Also on-line are the interbank currency market (which dwarfs the stock market), Globex (an after-hours global electronic exchange for financial futures), Access (an after-hours global electronic extension of the New York Mercantile Exchange), and Nasdaq, which markets itself as "the stock market for the next 100 years" (although twice the entire system was brought down by a squirrel with a taste for telecom cables). Every financial, legal, pedagogical, and entrepreneurial enterprise of importance is being networked -- first within offices, then across cities; then the networks themselves are networked, within cities and beyond.
Architecturally speaking, the Internet is the exact opposite of the traditional metropolis: it is urban sprawl carried to the electronic limit, a network of networks, with Aspen's and New York's of equal dignity so far as the routing of bits and fortunes is concerned. The great traditional centers of capital and influence should be flattening out, the skyscrapers melting not just into New Jersey but into Kansas. The telecom revolution should be bad news for the metropolis. But it isn't. And with proper management, it won't be.
New York begins with its inheritance. A trillion dollars of financial transactions move over New York's telephone lines every day. More than 13,000 businesses are headquartered in Manhattan alone. ABC, CBS, NBC, and FOX are here. George Soros is here. One-third of all national cable networks are headquartered in the city or nearby, twice as many as in southern California. In the film and TV industry, the city is second only to Los Angeles. New York has 100 sound studios, 100 sound stages, 60 camera lighting companies, and 100 editing companies; all told, more than 6,000 businesses support New York-area film and video production. Madison Avenue rustles up the advertising that supports most of the broadcast media.
"The talent," in short, still shaves, models, dines, and strokes in the city. A huge share of the flesh-to-flesh contact that's still so central to human creativity still occurs in a densely packed downtown and midtown Manhattan. Countless millions want a piece of New York talent, to invest in, bank with, trade through, or just laugh at late on a Saturday night. That's the good news.
The bad news is that those millions don't care -- often don't even know -- where the talent is performing. New York, Hollywood, London ... it doesn't matter, so long as the stock moves, the bits sum up on the spreadsheet, the pixels light up entertainingly on the screen. If you could pick up New York's talent -- the whole seething beehive -- one Friday evening, and set it down in Oshkosh on Saturday, the money, the news, and the laughter would still work their same magic around the globe come Monday morning.
Or would they? For the other thing the city still has far more of than anyplace else is the raw, technical power to coordinate and project the talent outward, through glass, coaxial cable, microwave, and satellite. What makes Bill Cosby funny is the whimsical software loaded in a few cubic inches of his skull; what makes him rich is television. What makes New York rich is talent too -- plus the unequalled power to project talent electronically around the planet.
Here too, the city owes much to its inheritance. The American Telephone and Telegraph Company, formed in 1885, claimed New York as its headquarters. The inventors, the patents, and the Yankee entrepreneurs were in Boston, recounts historian Robert Garnet; but New York married big business and big finance with transportation and telecommunication. (See "The Robber Barrons' Bum Rap, page 90.) New York Telephone installed its first exchange at 82 Nassau Street in 1879; that same year New York and Brooklyn were connected by four cables across the Brooklyn bridge. By 1903, Manhattan generated 20 percent of Bell's nationwide profits. The first transcontinental call was made from New York, by Alexander Graham Bell, to his assistant, Watson, in San Francisco. In 1935, two AT&T executives in the same New York City building talked to each other over the first telephone signal to circle the globe.
Without question, New York remains the unrivalled telecom hub of the planet today. By itself it generates 5 percent -- $7.5 billion -- of the telephone industry's $150 billion annual nationwide revenues. All programming that originates in the Manhattan studios of the four major TV networks, all the programming for their national radio and cable networks, flows out from the city to the rest of the country over a vast ganglion of telecommunications that begins and ends in the heart of Manhattan. Before the distilled product goes out, an even larger torrent of raw information pours in, over equally capacious electronic facilities. In electromagnetic terms, the city is both a huge, quivering antenna -- a giant receptor of telephone, radio, and photonics -- and also the brightest beacon on the planet, a cyber-quasar pumping out vast amounts of energy in the form of radio waves and glass-encapsulated laser light.
CBS's Manhattan-based newsgathering organization, for example, coordinates 105 remote satellite earth station "uplinks," which transmit video feeds from earth to satellite, and back down to Manhattan. Viacom (owner of MTV and Nickelodeon) and HBO both connect to satellites in geosynchronous orbit through earth stations on Long Island. Westinghouse-owned Group W Satellite Communications, the largest satellite video distribution company in the country, uses an earth station in Glenbrook, Connecticut, to distribute programming not only for broadcast and cable networks, but also for the private video networks of GE, IBM, and GTE. IDB Communications, another major provider of satellite services, operates an earth station on Staten Island, a switching center in Manhattan, and a satellite uplink atop the World Trade Center. Through facilities like these, the city draws in information from everywhere, processes it through the human and electronic talent, mixes, combines, synergizes, adds value, and then sends it back out again around the globe.
Staying far ahead of the telecom pack is not easy. It requires doubling the power and sophistication of your wires and transmitters about every two years: that's how fast the technology improves -- how fast a contender can grab a technological edge, and then widen it, and then aspirate the talent, like a liposuction surgeon going after the cellulite. Almost a century ago, New York lost the movies because Hollywood offered better lighting -- more sun. In 1975, Manhattan missed the first wave of cable-casting, because Ted Turner happened to live in Atlanta. Cable -- a $20 billion-plus industry today -- was nothing until Turner transformed his small UHF station in Atlanta into a "superstation," by beaming the signal up to a satellite and then down to cable systems across the continent. Far more Americans love (or love to hate) the Yankees than the Braves; more people in Butte would be interested in tuning in to New York's "local" fare than Atlanta's. The first superstations, and the whole satellite cable-casting industry they spawned, should therefore have been launched from New York. Somebody dropped the ball, and they weren't.
Happily for the city, however, lots of other things have gone right. A fortunate confluence of market forces and forward-looking regulatory policy has kept New York out ahead of the pack. So far, at least.
In assessing the state of New York's telecosm, the thing to understand first is that the telecosm revolves around telephone, not television. Television, with all its glitz, is about a $26 billion market nationwide, cable another $24 billion. Telephony, by contrast, generates about $150 billion a year. Calls to 800 numbers alone generate some $7.8 billion a year, more than the total television revenues of CBS and NBC combined. Though scarcely a decade old, and still growing at breakneck speed, cellular telephony is already an $11 billion industry. Wealth -- the city's, and everyone else's -- depends for the immediate future far more on the two-way wires next to the sewers than on the one-way perturbations of the electromagnetic spectrum in the stratosphere.
And in the vicinity of its sewers, New York is still doing very well indeed. The city's telecom subway, its underground spider-web of glass, coaxial cable, and copper, is the best there is -- a digital bullet train in a world that still relies mostly on horses. The telecosm below, lit by laser, bounded by glass, maintained by skillful telecom troglodytes, is the one that really counts.
Bell's legatee, New York Telephone (recently renamed Nynex New York), is the oldest and still by far the largest provider of service in the city. But today it is by no means alone. The dial tone you hear on your office phone most likely isn't generated by Nynex at all. Dial a four-digit extension, and the call most likely will be completed without touching public wires or a public switch. The nondescript, humming file cabinet probably situated in the utility room down the hall or in your building's basement is a "private branch exchange" (PBX) -- telephony's equivalent of a powerful desktop computer, capable of handling all internal calls for an office or the whole World Trade Center.
New York led the way in opening up competition beyond the customer's own premises. In 1983, Merrill Lynch, Western Union, and the Port Authority created the Teleport Communications Group (TCG) to provide satellite uplinks for the region's financial institutions and broadcasters. TCG started with 17 earth stations on Staten Island, linked by fiber-optic cable to downtown Manhattan. Large businesses, it turned out, were more interested in using the new cables to carry traffic within the city -- because of their technological capabilities and reasonable prices -- and to hook up to interexchange carriers like AT&T. For TCG, a new, lucrative business sprang up, centered not on satellites but on building new, local, state-of-the-art networks in urban areas. TCG unloaded the dishes and began to deploy more glass. This was the nation's first "Competitive Access Provider," or "CAP." Six now serve the city, and a seventh is being built, sending prices down and reliability and quality up.
Competition has not hit the residential sector yet, but it soon will, spearheaded by the cable TV industry. Your cable company will soon be offering you two-way phone service along with one-way video. Time-Warner and U S West have already announced 1995 plans to do just that over Time Warner's cable affiliate in Rochester. Time Warner has been granted the right to provide local service in New York City. It begins with a base of a million cable subscribers in the metro area, and a partner -- U S West -- that is Nynex's Bell counterpart in 14 western states. (Through a cable affiliate, Nynex itself provides telephone service in England -- in direct competition with the incumbent giant British Telecom.)
Cable's most direct, across-the-board assault on telephony will involve wireless technology. Later this year, cable alliances will bid for radio licenses to provide wireless "personal communications services" -- a new generation of wireless phone and data service. Telephony and cable TV are converging fast: in the digital world, a bit is a bit; the same networks readily carry voice, video, and data.
Few New Yorkers have any real awareness of the amazingly fecund telecosm seething under their feet. Accustomed to rent-control dilapidation and bureaucracy-induced paralysis, residents of the city have trouble recognizing good government policies when they stumble upon them. But fortunately for the city, fundamental, mostly sensible changes in government policy cleared the path for this efflorescence of competition. And New Yorkers grasped the opportunities before almost anyone in else in the country or the world.
One has to understand, first, how badly things began. In the twenties and thirties, both state and federal regulators embraced monopoly as the best arrangement for providing telecom common carriage. They saw competition as uneconomical and inconvenient. The telephone, the copper lines, the local exchange, the trunk lines of the long-distance network -- a single provider would take care of them all.
And for decades it did. Almost inevitably, though, Ma Bell became a complacent, corpulent monopolist; technically brilliant, thanks to Bell Labs, but sluggish in bringing that brilliance to market. America had the best telephone system in the world only because the government-owned telephone companies in the rest of the world were even more monopolistic than Bell.
As the electronics revolution unfolded in the sixties, the Federal Communications Commission (FCC) began to rethink things. Gradually, it moved "customer premises equipment" -- handsets, PBXs, modems, and so on -- out of the monopoly franchise of the anointed phone company and into the arena of deregulated competition. This allowed institutional users like Merrill Lynch to build their own telecom hubs, based on private switches and computers. A tiny startup, Microwave Communications Inc., recognized the new possibilities this created: it began offering business customers point-to-point long-distance connections between private hubs on private business premises. The FCC and the courts grudgingly accommodated it; MCI is now a $12 billion concern.
Federal regulators thus cleared the way for competition at the bottom of the network (on customer premises) and at the top (in the long-distance market). But the lion's share of the industry's revenues -- about two-thirds -- is generated in providing the local wires, local switching, and short-haul toll calls. And this quarter pound of beef in the middle of the telecom whopper remained largely under the jurisdiction of state regulators.
Until recently, most of those regulators still liked the old monopolies. Public service commissions can tax and spend far more than most people realize; at the stroke of a pen they move billions of dollars around the franchise by ordering regulators to jack up rates here and push them down there.
To its credit, the New York Public Service Commission was one of the first to embrace competition wholeheartedly. In 1991, it authorized competition for all in-state services, the first state commission to do so. So far as entering the market and providing services went, competing phone companies were to have all the privileges enjoyed by the local incumbents. Six companies have since been certified to compete against Nynex in providing service to the city. They include long-distance carriers, CAPs, and cable television operators.
State regulators have made sure that the newcomers get assigned their own "NXX" codes, the first 3 digits of a 7-digit phone number. This is one of life's little details that induce coma-like sleep in almost anyone but an engineer. But it is an essential detail that regulators have to get right if competition is to prosper. In New York, they did. These NXX assignments serve as an "area code" within a local calling area, designating a switch to which other local, cellular, or long-distance carriers route inbound traffic. Once the assignments are made, competing switches can talk to each other. One competing local carrier has already activated its codes; more codes are now being assigned. Now, a Washington, D.C. caller who dials the consulting firm Gleacher & Co., for example, is dialing an MFS-Intelenet number; the call can be routed directly from AT&T or MCI to the MFS switch, without ever touching a Nynex switch or wire.
Perhaps the finest tribute to regulatory policy is that so much of the new competition has been so easy to swallow. When competition between local phone companies was tried a century ago, it was a disaster. (In 1879, there were three telephone exchanges operating in Manhattan.) Competitors in the same town typically refused to interconnect with each other; businesses often had to advertise that they had "both" telephone lines. It drove everyone nuts.
Not this time around. Smart electronics make possible seamless call handoffs among any number of private switches, wire-line carriers, wireless carriers, CAPs, information providers, long-distance carriers, cable companies, and satellite operators. And regulators are making sure that the hand-offs are made, both coming and going.
Indeed, New York regulators have blanketed Nynex with an almost confiscatory array of interconnection and "equal access" obligations. These afford competitors the same kinds of interconnection that MCI and Sprint won in the long-distance arena a decade ago -- including the right to set up lines and switches on Nynex's own premises, literally yards from its own lines and switches. The last significant piece of the regulatory puzzle dropped into place last April, when the Public Service Commission affirmed its own earlier decision that will place all long-distance carriers in the state on an even footing to compete for short-haul toll calls, such as calls from Manhattan to New Rochelle.
The upshot is a regulatory environment that truly welcomes new entry. So far as regulation goes, it's much easier to start a phone company in the city than to acquire a cab. There is no $100,000 medallion; each new competitor can pick up or hand off digital passengers at literally thousands of transfer points in closets, basements, and tunnels the length of the island.
And yet, for all the progressive changes already made, regulation still remains the biggest impediment to competition and to the city's long-term interests. The policies at issue here are as seductive as rent control -- and as disastrous for New York. The long and short of it is this: New York's basic telephone service is too cheap.
Think of information as tomatoes. Some people grow them by the truckload. Others nurse a few vines in their backyards. What should government do: subsidize the backyard garden by jacking up tolls on the highways and railroads that the big growers need? Or let the wholesalers flood the market? What you like depends on where you live. For New Yorkers, the choice should be clear. Informationally speaking, the city is an Everest of tomatoes.
The trouble for the city is that every government-mediated subsidy, entry-barrier, quarantine, and tax favors the small vines and obstructs the the giants. Across the board, government telecom policy is aimed at subsidizing expensive, short-haul, small-town introverts, at the expense of cheap, long-haul, big-city extroverts.
In the broadcast arena, it's called "localism." The FCC's whole approach to assigning TV and radio spectrum is designed to boost the power of local stations, thus obstructing the development of national networks. For years, cable companies were stymied in their efforts to import "distant" broadcast signals, the theory being that if Oshkoshians could watch the Yankees they might stop watching their own Puddle-Ducks. To this day, cable companies are still forced to pack channels with local TV broadcasts (a constitutional challenge is creeping through the courts), rather than use the same space for out-of-town fare. In other words, countless cable channels that could made available in Aspen or Butte for Broadway or baseball from New York are strictly allocated to local video fare from Aspen or Butte.
In telephony, the prices of long-haul calls are jacked up to subsidize cheap monthly rates for local service. When you call New Rochelle or San Francisco from Manhattan, you pay too much; when you call locally for spring rolls or pizza, you pay too little. And across the board, thanks to a second subsidy arrangement, New Yorkers help subsidize basic phone service in rural areas, where the cost of providing it is far higher. The regulatory tax-and-spend policies that make this happen all go under the noble banner of promoting universal service.
But New York loses more than anyone from such policies -- it has by far the biggest heap of info-tomatoes to unload. For while little subsistence farmers don't care about international trade policy, so to speak, nations with factories do. For New York telecommunicators, the paramount objective is to slash the import-export duties. The price of long-distance phone calls has fallen sharply in the past decade, largely because regulators have slashed the "local access" charges that companies like AT&T pay to companies like Nynex to originate and terminate long-distance calls. But there's plenty more to slash.
The second priority is to unleash the home team. My views on the subject are surely biased -- I've done consulting work for Nynex over the years. New York regulators, however, have recently come around to this position too; the matter is now before the Department of Justice and Harold Greene, the federal judge who, 12 years later, still oversees his decree that broke up the Bell System.
Despite all the competitive inroads that newcomers have made, Nynex remains by far the largest telephone company in the city. It has the most assets, the most employees, the most wires -- and therefore by far the greatest financial stake in making the city's informational economy prosper. But its wires, its switches, every aspect of its operations, are strictly confined within what the lawyers have dubbed "local access and transport areas." The moment Nynex makes a connection between Manhattan and Boston, it is criminal contempt of a federal judge.
The theory for the quarantine, as articulated in 1982, is straightforward enough. The local phone company is a monopoly; if allowed to enter adjacent, competitive markets, like long-distance, its monopoly will give it an insuperable advantage over honest competitors. But the monopoly itself is crumbling fast, as I've just detailed, and what remains of it is shored up by government-imposed subsidies.
For now, however, the quarantine remains in place, and the single largest player in the New York's telecom market is legally barred from entering the long-distance fray and pouring its own, New York-centered investment and innovation into the arena most critical to New York's economy. This is obviously bad for the city. The competition against Nynex has been unleashed, as it should be: companies like MCI are licensed to provide local service in the city and soon will. In theory, the long-distance carriers and the CAPs can put it all together as well as anyone else, but Nynex begins with a legacy of local assets and contacts that would make it particularly effective and aggressive in serving New York customers.
Other local phone companies, never having been part of the Bell System, are for that reason already allowed to compete in the long-distance market, furthering the interests of their home communities. Thus Sprint, with a large local subscriber base in Florida and elsewhere, is the third-largest long-distance company in America. And even foreign phone companies face few obstacles in entering the U.S. market: BT (formerly British Telecom) now owns a major share of MCI, and the French and German local phone companies are allying themselves with Sprint. If the home teams in Orlando, London, Paris, or Bonn can build outward full speed ahead, as they can, the home team in New York should be allowed to as well.
The tentative deal struck recently by the New York Commission and Nynex (as of this writing it has yet to be formally approved) reflects much of the old mindset. Nynex is to freeze residential rates and lower most other rates for seven years -- in exchange for which it will be freed from limits on profits and allowed offer new services. Nynex subscribers will be able to presubscribe (i.e. just dial 1+) to other carriers for the short-haul toll calls that now go automatically to Nynex. And New York regulators will support Nynex's application to be allowed into the long-distance market.
Given political realities, this may be as good a deal as anyone could have struck. Nonetheless, it reeks of the obsolete -- and for New York dangerous -- idea that the paramount objective of New York's largest telecom provider should be to provide residential customers with cheap local service. For New York residents, prosperity has almost nothing to do with paying a couple of dollars more or less on the monthly local phone bill. It has everything to do with projecting New York's talent outward from the city to the rest of the world.
New York's imperatives, in short, are very different from Oshkosh's or Butte's. The city largely solved the problem of local connection decades ago, by packing millions of people so tightly together that they could all connect by taxicab and lunch, when necessary. The job was finished more recently, when state regulators opened wide the city's local telecom markets; as a result, competition to haul bits under the streets of Manhattan is now the most vibrant in the world. Butte still has to worry, perhaps, about stringing subsidized wires out to the ranches ten miles out of town. But Gotham's most urgent priority is to extend its electronic reach to Butte, with the cheapest, most digital, most broadband, most interactive capabilities available -- and then to double those capabilities each year, and indefinitely into the future. Federal policies will always tilt toward subsidizing small ranchers at the expense of large businesses. The paramount priority for New York's pastors and masters is to project the influence of those large businesses outward, over the most advanced, least taxed, least regulated, least quarantined, networks on the planet.
Unfortunately, it's almost impossible to get anyone very angry about localism or residential subsidies, or the unexciting fact that Sprint can hire Candice Bergen to tout long-distance services, but Nynex can't. Few tenants in either Harlem or Trump Tower will gripe loudly about frozen monthly phone rates, and fewer still probably care whether Oshkosh can watch the Yankees. Long-distance prices are lower than they were; getting them lower still just doesn't seem that urgent. New Yorkers are accustomed to -- are comfortable with -- the Steinberg-New Yorker view of the universe -- Broadway and Fifth Avenue are big, detailed, and self-contained; and what lies beyond to the west, if noticed at all, is only tiny, empty, fly-over country, with perhaps a couple of inconsequential glimmers on the Pacific coast. That, however, is the one view of things New York can no longer afford.
The fly-over country is now getting ready to do some overflying itself. It has the power readily at hand. Telemarketers and operators of toll-free phone services already congregate in Omaha, known rather unglamorously as the "800-Number Capital of the World." Labor and real estate are cheap, and being on central standard time is an advantage. Callers don't care where the operators sit, and with glass fiber ubiquitous in the national networks, the telecom costs are almost too cheap to meter. The New York stock exchange is still biggest and best, but around-the-clock-trading has powerful attractions, and London or Tokyo beckons. Again, the communications facilities are at hand to knit the traders altogether. The small investor in Oshkosh will never know the difference.
New York, in other words, could yet become the fly-over. LaGuardia and Kennedy have become so already; Wall Street could too. Yes, a critical mass of talent, and eateries to feed and water it, are still vitally important. And yes, New York still has the best of both. But if the city coasts on what it has, the talent will wake up one of these days to breakfast on home fries, not bagels, served in sight of corn and cows.
There is no escaping the fact that telecom technology flattens and decentralizes. There is no escaping the fact that it complements the centrifugal forces that already pull talent out from the heart of the city toward cheaper housing, safer streets, cleaner air, better schools, and lower taxes. There is no getting away from the evolution of the Internet, what engineers call a "peer-to-peer" linking of nodes and networks on equal footing. The old, centralized, hierarchical networks -- resembling the Pyramid of Cheops, with all the power and wealth in a central chamber of the dead -- are finished.
And yet ... and yet every network, indeed every important sphere of human activity, will always have a clearing house, an exchange, a central office, a hub, a nerve center, an electronic frontal lobe, where the key connections are established, the key events initiated, the key records maintained and developed. Federal Express flies all its packages through Memphis. Wherever the news correspondents sit, there will still be an anchor desk. The Stock Exchange, Citicorp, and NBC are just ceaseless flows of will and thought, but the flows still need a locus -- a center of inspiration and control. And it at those points that a cascade of wealth condenses out of the ether. For now, the main centers of thought and control remain in New York, even as the networks themselves expand their reach out to everywhere. So long as New York maintains not only the best local network but also the best links to everywhere else, the talent will stay put, and the city will prosper.
What the city needs, then -- more than any smaller, less vibrant, less information-intensive community -- is a telecom policy that is relentlessly extroverted, or, at the very least, not actively hostile to distance. New York business shouldn't be subsidizing New York residents; the mutual interest of employers and employees alike is to build outward, not inward. National television policy should not be promoting localism, or the Puddle Ducks over the Yankees. New York City's largest single provider of phone service -- Nynex -- should not be quarantined out of providing any services that dare to reach into New Jersey or Connecticut -- or beyond.
The city has to be able to export its vast intellectual capital better, faster, cheaper, more colorfully, more interactively than anyone else. These capabilities will be the deepwater ports, the railroad exchanges, and the customhouses of the twenty-first century. Long-distance antennas and transcontinental glass, satellite uplinks and downlinks, switchers, routers, and multiplexers, the eyes and ears and vocal cords of the electronic age -- these are what will keep New York the tallest city on the highest hill.