THE INFORMATION HIGHWAY WAS ONCE A DIRT ROAD
Timothy J. Quinn
B.A., University of Colorado, 1970
J.D., University of Colorado, 1973
A thesis submitted to the
Faculty of the Graduate School of the
University of Colorado at Denver
in partial fulfillment
of the requirements for the degree of
Master of Arts
1994 by Timothy J. Quinn
All rights reserved.
This thesis for the Master of Arts
Timothy J. Quinn
has been approved for the
Mark S. Foster
Quinn, Timothy J. (M.A., History)
The Information Highway Was Once a Dirt Road
Thesis directed by Professor Mark S. Foster
In 1993, telephone companies and cable operators
attempted to merge. This paper examines the parallels and
contrasts between the development of the Bell Telephone
system and the cable television industry as well as the
factors bearing on the attempts to merge the two.
Applying concepts of industry structure and development,
behavior of firms in competitive and monopolistic
environments and regulation, this paper concludes that the
industries have similarities in development and competitive
behavior. Regional consolidation of the cable industry
parallels the consolidation of the Bell System. Like Bell,
the cable industry welcomed federal regulation to resolve
problems arising at the local level and developed working
relationships with regulators. Many responses to cable of
Congress and the FCC were conditioned by the experiences of
the past with the Bell System which created institutions
and perceptions of possibilities. The failure of the
present effort to merge firms in the two industries leads
to efforts on the part of each industry to enter the
markets of the other. Future competition, cooperation and
regulation of this effort will be conditioned by the
historical experiences described in the paper.
This abstract accurately represents the content of the
candidate's thesis. I recommend its publication.
Mark S. Foster
2. BELL TELEPHONE SYSTEM..........................10
3. LIMITATIONS ON PHONE COMPETITION
WITH CABLE COMPANIES...........................26
4. CABLE TELEVISION: THE EARLY YEARS..............33
5. TELECOMMUNICATIONS REGULATION..................39
6. REGULATION THROUGH FRANCHISING.................46
7 . REREGULATION...................................54
The papers were full of merger deals in 1993.
Multibillion dollar telecommunications mergers involving
phone companies and some of the largest cable operators
in the country were in the works. In May, US West, a
local Bell Operating Company (BOC) agreed to purchase 25%
of Time Warner Entertainment Company, the number two
cable operator in the nation. In August, ATT agreed to
purchase McCaw Cellular Communications, the nation's
biggest cellular telephone company.1 By year's end this
deal was challenged in Judge Greene's Court, the federal
district court supervising the break-up of the Bell
monopoly. In November, Cox Enterprises, the fifth
largest cable operation, agreed to be purchased by
Southwestern Bell, another Baby Bell spun off in the 1982
divestiture. This deal collapsed after the FCC
reregulated cable TV rates and changed the economics of
tireless is an important piece of the
telecommunications puzzle but beyond the scope of this
the transaction. In November, Jones Intercable, the
second largest cable multiple system operator (MSO)
agreed to sell a 30% stake to Bell Canada (BCE). The
deal was changed to reflect the effect of the FCC rate
cuts in September, 1993 and January, 1994 but has held
together perhaps because the Canadian company is not
subject to the same limiting antitrust and FCC regulation
as its American counterparts.
The largest deal was announced October 13, 1993 when
Bell Atlantic (another BOC) agreed to purchase
Telecommunications, Inc. (TCI), the nation's largest
cable operator, in a package allegedly worth $33 billion.
Newsweek described the transaction as history making, the
biggest media merger of all time which unites huge
potential rivals. "They're also taking a multibillion-
dollar gamble, betting that regulation will come tumbling
down and consumers will fork over more money for all the
services...."2 The cable industry and TCI in particular
has grown by merger and acquisition. Now TCI became the
target of a friendly take-over. TCI is of regional
2"Dial U for Uncertainty," Newsweek, 25 October 1993,
interest because it serves most of the Denver
Metropolitan area and recently acquired the Denver
franchise. After multiple postponements, the TCI-Bell
Atlantic deal failed February 23, 1994 with the rate
roll-backs by the FCC and deterioration of Bell Atlantic
stock prices given as reasons. TCI blamed the FCC rate
action almost exclusively. TCI undercut its own
credibility on the effects of the rate reregulation when
an internal TCI memorandum became public which said "We
cannot be dissuaded from the charges simply because
consumers object...The best news of all is, we can blame
it on reregulation and the government."3 Bell Atlantic
said this was only one of several factors which caused
the deal to fail. TCI continues to expand by merger and
acquisition. On June 16, 1994, Bell Atlantic applied to
the FCC for permission to provide video services in six
metropolitan areas which would give the consumer for the
first time a choice between cable television or phone
companies for television service.
3"TCI Apologizes," Rockv Mountain News. 17 October
1993, 45(A) and 46(A) contained the TCI apology for the
BOC and MSO, phones and cable TV, Judge Greene and
the FCC. These are concepts and players which will
become familiar as I review the similarities and
contrasts between the two industries in development and
coming together as partners or competitors in the
emerging unified telecommunications market. This yields
a framework to suggest the paper's themes: the impact of
the history of ATT and its interaction with government
regulation on the development of the cable industry and
on the merger of the two industries at the moment in time
the TCI-Atlantic Bell merger was attempted. My subjects
are the telephone industry, the Cable television industry
and the relationship between them. I review the
development of the phone system and specific areas of
interest like Bell's relationship to government. I
review the development of the cable television industry,
similarities and differences between the two industries
as well as the efforts to merge telephone and cable
In the 1870s, a new era in telecommunications began
with the patenting and dissemination of telephone
technology. This paper reviews the early years when the
Bell enterprise was protected by the patent law and the
competitive period when independent phone companies were
able to more freely enter the market. In order to avoid
dealing with many state jurisdictions, ATT welcomed the
prospect of federal regulation initiating a period of
regulated monopoly under, first, the ICC and, then, the
FCC. From the beginning of the 20th Century, this
immense enterprise was the subject of antitrust scrutiny
The methods the company used to acquire its competitors
brought repeated antitrust actions by the states, then
the federal government and by private parties, Bell
competitors. The last federal antitrust action led to
the breakup of the Bell System in 1982.
The cable industry grew in the 1960s and 1970s to
present a real threat of an alternative medium of
telecommunications. Cable lacked only interactive
capacity to directly compete with ATT. Cable generally
has a local monopoly within its sphere based on a local
franchise. Integration of cable systems in the large
metropolitan areas and integration of the national multi
system operators (MSO) describes the early and
competitive periods of the cable industry. By 1984, the
operators themselves sought federal regulation to
nationalize the maze of local regulation and restrict the
potential for interference by municipal authorities. The
deregulation era after 1984 presented opportunities for
profit and abuse by the industry. The industry used the
profits to consolidate rapidly. Consolidation of
regional systems and national MSOs took the place of
expensive innovation or investment in new technology.
The regional telephone companies (Telcos or BOCs)
observed not only the profit but cable's potential as a
competitor once fiberoptic cable provided interactive
capacity. A race to upgrade systems for the telephone
companies to compete with cable presented the prospect of
enormous investment in what appeared to be a competitive
market. The prospect of competition may have motivated
the movement in the 1990s to merge the two industries.
The merger negotiation between TCI and Bell Atlantic was
only the largest of a number of such transactions.
The two industries had to deal with the historical
legacy of antitrust laws, prior antitrust decrees and FCC
regulations concerning cross-ownership as well as the
prospect of new antitrust complaints about the merger of
industry giants unless Congress provided specific
authorization. In 1992, Congress delayed the process by
reregulating cable rates making the mergers less
financially attractive and the prospects of the industry
less certain. The motivation to consolidate to prevent
costly and destructive competition remains to be worked
out as does the relationship to federal regulation.
This paper seeks the common themes and experiences
of the two industries. Are the common characteristics of
the two facets of the telecommunications industry similar
enough to permit historical inferences to be drawn? I
look carefully at the relationship of the Bell system and
the cable industry to federal regulation. Gabriel Kolko4
and others question the view that government regulation
was forced on industry to protect the public against
rapacious monopoly. Both ATT and cable operators
welcomed federal regulation as a way to rationalize the
regulatory structure and protect their monopoly power.
4G. Kolko, The Triumph of Conservatism: A
Reinterpretation of American History, 1900-1916 (New
York: Free Press, 1963) and Railroad and Regulation;
1877-1916 (Princeton: Princeton University Press, 1965)
for the revisionists; see also Alfred Kahn, The Economics
of Regulation (New York: Wiley, 1970, 1971) for the
"captive agency" hypothesis.
The relationship of the industries to antitrust also
needs investigation. In the past, ATT compromised its
conflicts in ways which restricted its freedom but always
protected its core monopoly until 1982. The result of
the 1982 negotiation was to permit a broadening of the
markets in which the Bell companies could compete. The
technological environment was changing so rapidly that to
be constricted was to risk being a dinosaur like the
Western Union of the 19th century. The antitrust case
forced a decision but the company made the decision in
favor of entering the competitive marketplace.
I want to look at the horizontal integration of the
cable industry and compare it with that of its telephone
predecessor. Here we can examine responses to
competition as well as the place of cooperation in each
industry. Cooperation and anticompetitive behavior in
the past drew antitrust attention will frame the
questions for the cable experience. The discussion of
the capacities of cable have taken place now for over
twenty years. The glowing prospects for interactive two-
way circuitry discussed in 1973 remain potential, not
Is the Telephone and Cable Television System one
Telecommunications Industry one and, if so, what are the
characteristics of that industry? Commentators like
Glenn Porter and Alfred Chandler, Jr.5 distinguished
"core" industries which integrate well from peripheral
industries which do not. The former have relatively high
fixed costs, are capital intensive and have returns to
scale. The definition of a natural monopoly has been
questioned although often thought applicable to
franchised industries like phones and cables. Chandler
suggests the nature of the industry conditions its
historical development and explains similarities
developing cross-culturally under quite different
historical, cultural and governmental environments. How
would this analysis apply to the components of the
5Glenn Porter, The Rise of Big Business. 1860-1910
(Arlington Heights, IL.: Harlan Davidson, 1973), 81; see
also Alfred Chandler, Jr., Scale and Scope. The Dynamics
of Industrial Capitalism (Cambridge, Mass.: Belknap
Press, 1990), 605.
BELL TELEPHONE SYSTEM
To understand the structure of the telephone
industry in 1993 and the limitations on the business
options available to it we must review how that industry
developed. Bell's history conditioned and informed
perceptions of options and limits for the entire
communications industry. Douglass C. North says that
"Institutions define and limit the set of choices of
individuals."6 Bell's experience created the
institutions within which cable would operate.
The Bell System originated with the idea and 1876
patents of Alexander Graham Bell. Bell assembled friends
and associates in a venture to exploit the patents. He
taught deaf children and two of his students' fathers
offered to finance the venture. The venturers sought a
corporate charter from the Massachusetts legislature for
the purpose of conducting the business. Massachusetts
6Douglass C. North, Institutions. Institutional
Change and Economic Performance (New York: Cambridge
University Press, 1990), 4.
authorized the Bell Telephone Company in July, 1877. To
assemble the investment needed to establish telephone
exchanges, the Bell group franchised local operating
companies which had the responsibility to finance the
most expensive stages. The Bell group maintained
ownership of the equipment. The first operating entity,
the New England Telephone Company, was formed in
February, 1878 but was not alone in the marketplace.
Western Union incorporated the American Speaking
Telephone Company in December, 1877 with its own patents.
Western Union was primarily interested in protecting its
local stock exchange information transmission monopoly.
The Bell group offered to sell its rights to Western
Union which refused.7 Bell and Western Union competition
took place in the major metropolitan areas and in the
courts.8 This competition continued until November, 1879
7Gerald Brock, The Telecommunication Industry. The
Dynamics of Market Structure (Cambridge, Mass.: Harvard
University Press, 1981). Brock begins his summary of the
industry with the telegraph which is beyond my scope.
8The place of patent monopoly in the development of
business enterprise and especially the function of
litigation in increasing the market power of control over
technology is the subject of a considerable literature.
when Western Union sold its telephone business to Bell
and Bell agreed to stay out of the telegraph business.
This precedent of settlement in order to protect the core
business recurs throughout Bell history.9
The Western Union agreement consolidated Bell's
position in the telephone industry. Bell continued its
research and development in long distance technology and
expanded coverage as rapidly as possible. These steps
provided products and services for customers and created
barriers to entry by potential competitors. Bell
reorganized as the American Bell Company in 1880 to bring
in additional capital. The license agreements were
renegotiated to give franchisees permanent rights while
Bell took an equity position in each operating company.
Title to equipment remained with Bell as an additional
controlling device and an effort to manage the equipment
attaching to the system.
9George David Smith, The Anatomy of a Business
Strategy: Bell, Western Electric and the Origins of the
American Telephone Industry (Baltimore: Johns Hopkins
University Press, 1985) 35-96.
Bell failed to extend service to small towns and
rural areas. Independent phone companies filled this gap
when Bell's patent protection ended. Independents began
developing in 1894. Cities franchised some local
independents. Often the promoter of the independent
owned the construction company which was paid to build
the system. After an exploitative construction period,
the independent might be left on a poor economic base for
operations.10 This procedure encouraged new entrants but
undercut longer term competition. When competition from
an Independent became serious, Bell responded with patent
infringement litigation and price reductions. Bell was
10This cross-ownership can lead to abuses as the
nation learned from the experience with the Union Pacific
construction company, Credit Mobilier, which so
embarrassed the Grant administration. C. Joseph
Pusateri, A History of American Business. 2nd Ed.,
(Arlington Heights, IL.: Harlan Davidson, 1988), 177.
The profits to be made in subdivision of land served by a
railroad stimulated interest in franchises. Sam Bass
Warner, Streetcar Suburbs. The Process of Growth in
Boston (1870-1900). 2nd Ed., (Cambridge, Mass.: Harvard
University Press, 1962, 1978), 23-31. Mark S. Foster,
From Streetcar to Superhighway (Philadelphia: Temple
University Press, 1981), 16-20. The franchises
themselves could become commodities to be traded and
consolidated by "robber barons." Kenneth Jackson,
Crabgrass Frontiers: The Urbanization of the United
States (New York: Oxford University Press, 1985; Oxford
University Press Paperback, 1987), 109-113.
still perfecting its long distance monopoly which later
would be a weapon in this competition. Bell aggressively
sought to assimilate attractive Independents. Price
competition between 1894 and 1907 was not severe enough
to destroy the Independents but weakened them enough to
look favorably on a buy-out offer. After 1907 Bell, with
the assistance of the Morgan banking interests,
aggressively sought to acquire Independents. In 1909, ATT
acquired control of Western Union and was accused of
channeling all phone generated telegraph business to its
newly related company.11 Bell's merger attempts were met
with private and state antitrust actions.
The U.S. Department of Justice began investigating
Bell activity. Predatory competitive practices and
aggressive acquisition policies attracted attention.12
Bell had embraced the possibility of federal regulation
rather than fighting it. In 1910, the Interstate
Commerce Commission was given jurisdiction over long
nBrock, pp. 151-155.
12Robin Garnett, The Telephone Enterprise: The
Evolution of the Bell System's Horizontal Structure.
1876-1909 (Baltimore: Johns Hopkins Press, 1983), 133-
distance service. This openness to regulation was
rewarded in the 1920s when the regulatory climate changed
and the regulators permitted 500 Bell acquisitions. Bell
even reacquired the very company the merger with which
had precipitated the Kingsbury Commitment which will be
described in the next sections.13 The Bell system
continued to interact with the antitrust authorities.
The Bell system was the subject of antitrust scrutiny
which led to the 1913 Kingsbury Commitment, the 1956
Consent Decree and to the 1982 Breakup of the Bell
The period 1894 to 1913 was described as the "Period
of Competition" in the 1939 FCC report, Investigation of
the Telephone Industry in the United States.14 Bell
interests had preempted most of the lucrative markets
13U.S., Federal Communications Commission,
Investigation of the Telephone Industry. FCC Documents,
Vol. 123, #1034, 76th Congressional Session, 1939, pp.
141-143. Peter Temin with Louis Galambos, The Fall of
the Bell System (New York: Cambridge University Press,
1987; paperback edition, 1989), 11.
14U.S. Federal Communications Commission,
Investigation, 129-139. The FCC report and N. R.
Danielian, A.T.&T.: The Story of Industrial Conguest
(New York: Vanguard Press, 1939) are the basis for most
of the narrative which follows.
during the previous period in which its monopoly was
protected by its patents. Numerous independent operators
sprang up until the number of independent stations almost
equalled the Bell total by 1907. The movement to connect
to the Bell system advanced until the late thirties when
only 70,000 stations remained unconnected. The Bell
advantage lay with access to its integrated long distance
network. In 1899, the Independents established a
competing long distance network, The Telephone, Telegraph
and Cable Company. When Independents ran into financial
difficulty, agents for Bell anonymously purchased the
debt and stock of its competition for a fraction of the
initial investment. The competitor then dissolved.
The Bell system met competition with rate wars. By
1910, the Bell Company stated in its annual report that
government regulation would be more acceptable than
continuing duplicated services. Bell used other methods
to eliminate competition. In the beginning, Bell
strategy had centered on tightening its grip on
technology by developing or purchasing critical patents.
Bell also sought to protect these patents by extensive
litigation for infringement. Bell extended its network
quickly to occupy the field. When Morgan banking
interests purchased an interest in Bell, this new
financial strength was turned to purchasing competitors.
Bell supplemented its acquisition strategy with
propaganda campaigns designed to undercut confidence of
bankers, potential investors and government bodies. Bell
refused to connect Independents to the long distance
network until required to do so by state legislatures.
Bell refused to sell telephone instruments to non-Bell
companies or on the open market and sought to control
independent manufacturers. As in the case of the
independent long distance service, Bell agents secretly
purchased interests in its manufacturing competition
until prohibited by state anti-monopoly actions.15 Bell
and Morgan would systematically undercut sources of
investment capital for its competitors.
These complaints brought an investigation by the
Department of Justice which found certain acquisitions
could violate the Sherman Anti-Trust Act. Bell avoided
15Harry MacMeal, The Story of Independent Telephony
(Independent Pioneer Telephone Association, 1934),
138ff., describes the Kellogg Manufacturing sale
an antitrust prosecution through the "Kingsbury
Commitment," named after its vice president who sent the
letter. Bell agreed that it would not acquire or control
competing companies. It would connect Independents to
the long distance system on request for toll services.
Bell would divest its 1909 acquisition of Western Union.
Even Independents were unhappy with a total
prohibition of acquisitions by Bell since some of them
looked forward to cashing out in a sale to Bell. Both
Bell and the Independents sought a modification in
Congress which responded with the Willis-Graham Act of
1921 permitting acquisitions with approval of state and
federal authorities. Little resistance to such
acquisitions was found in the Harding, Coolidge or Hoover
administrations as Bell acquired almost one million
independent stations by 1934 when the FCC came into
existence. From a position of dominance, Bell sought a
cooperative relationship with Independents to improve
public relations and to forestall unfavorable
Based on the findings of the FCC in its 1939 Report,
the Department of Justice filed an antitrust lawsuit in
1949.17 Justice sought to break the connection between
Bell and Western Electric, its equipment manufacturing
arm. The Justice Department sought to break the vertical
monopoly. After the 1952 election, the new Eisenhower
administration negotiated to settle the suit. The 1956
Consent Decree provided that Bell would not engage in any
business other than the furnishing of common carrier
services. The restriction of Bell to regulated services
assumed great importance when new communications and
16There may be a place here to look at the Hoover
Associative State. Ellis Hawley in The Great War and the
Search for Modern Order (New York: St. Martin's Press,
1979) lOOff. describes the "New Era" permission for
previously-illegal associations and communication between
competitors. He does not make reference to an
association in the telephone industry. The cooperation
of the antitrust authorities is documented in the FCC
report noted above. The cooperation of the Independents
and Bell is described by MacMeal, 205ff. See also
Willis-Graham Act of 1921, ch. 20, 42 Stat. 27, 1921.
17The ten year delay between report and enforcement was
caused by the nation's involvement in WWII and the
unquestionable service provided by the Bell system in that
computer industries emerged which were not common carrier
After the 1956 resolution, Bell expanded rapidly to
meet the need for new phones and service. It served well
its traditional goal of universal service. The FCC
continued to worry about "cross-subsidization," the use
of regulated profits to subsidize unregulated business.
The allocation (separation) of local operating company
costs became a theoretical and political battleground.
Competitive forces entered the telecommunications
market.18 Thomas Carter of Carter Electronics wanted ATT
to permit the use of his acoustical device for relaying
mobile radio and telephone messages. This attacked ATT's
control over the equipment which attached to its
system.19 William McGowan of Microwave Communications,
Inc. (MCI) applied to build a private microwave line and
sell services to others. To make this system work, MCI
customers would use ATT lines to connect to the private
lines. McGowan wanted to be protected as a competitor of
18Peter Temin, p. 28ff.
19Carterphone, 13 F.C.C.2d 42 0 (1968) .
ATT. ATT argued that MCI was cream-skimming; MCI wanted
the lucrative long distance service to high density, low
cost markets while leaving the higher cost service to
ATT. The FCC approved MCI's application and established
a procedure to handle similar requests by these
"Specialized Common Carriers."
ATT sought to change its approach from a service
oriented, technologically based utility to a market
driven organization with financial measures replacing
technological evaluation. ATT's new president, John
deButts publicly set the policy of competing rather than
cooperating. The new policy raised fears of the monopoly
power of the world's largest corporation. In 1973, the
Justice Department initiated an investigation into ATT's
relations with the specialized common carriers. After a
series of market and legal moves described by Temin, ATT
gained a legal advantage but "badly overplayed its hand."
ATT cut all foreign exchange connection for MCI. Since
Vail's days in the early twentieth century, ATT had
avoided conflicts with government by not using its full
economic power. The FCC ordered service restored to MCI
and condemned the giant company. Later this action and
the one week interruption in service would play a large
part in convincing jurors and regulators alike of the bad
faith of the Company in exploiting its regulated
monopoly. DeButts and ATT refused to negotiate the
private antitrust lawsuits or the government's suit filed
in 1974 .20 ATT defended aggressively and took its case
to Congress for relief.
Internal business strategies were changing at ATT.
Universal residential service with its public utility
orientation was giving way to the changing needs of
business in the information age. Consultants drew
attention to the analysis of Alfred Chandler, Jr. in
Strategy and Structure21 that vertical integration and a
divisional structure organized by product rather than by
function had been keys to success for some of America's
largest companies. The change in philosophy was
20ATT lost both the MCI and Litton suits. The Court
of Appeals overturned both the theory and the huge
damages awarded to MCI. MCI v. ATT, 708 F.2d 1081 (7th
21Alfred Chandler, Jr., Strategy and Structure:
Chapters in the History of the American Industrial
Enterprise (Cambridge, Mass.: MIT Press, 1962; paperback
signified by a change in leadership. Charles Brown
replaced John deButts as CEO.
The FCC in its Second Computer Inquiry, Computer
II,22 sought to permit common carriers to provide data
processing services through subsidiaries with precautions
against cross-subsidies. ATT was authorized without
reference to the limits of the 1956 Decree. ATT sought
clarification of the 1956 Decree to see if the FCC action
permitted it to compete in unregulated markets. The
Department of Justice objected. No decision would be
forthcoming until 1981, when Judge Biunno supported ATT
and the FCC.
In 1982, the Reagan Administration and ATT settled
the antitrust lawsuit based on a divestiture of the Bell
Operating Companies. The settlement was subject to Court
approval and a public interest examination of the terms
22U.S., Federal Communications Commission, Second
Computer Inquiry, Computer II, FCC Docket No. 20828,
Final Decision, 77 F.C.C.2d 384, 420 (1980).
of the settlement under the Tunney Act23 which required
public disclosure of the settlement terms so all views
might be considered. The new Administration's commitment
to antitrust enforcement was questioned since it had just
dismissed the IBM antitrust lawsuit. Congressman Wirth of
the House Subcommittee on Communications wanted to be
sure that, if ATT was free to enter any business, it
shouldn't be able to use revenues from its monopoly to
compete. He proposed a new bill which would insure
continuing FCC jurisdiction. When the Administration
could not agree on a policy, Wirth made his suggestions
to Judge Greene who included some of them in his required
revisions to the agreement. Most of the modifications
dealt with increased ability of the new Bell Operating
Companies (BOCs) to provide services and products at the
expense of the parent company. At the wish of the
publishing industry, via Wirth, ATT was prohibited from
electronic publishing for seven years.24 The BOCs could
23Antitrust Procedures and Penalties Act, 15 USC 16
(b) (1974). Scandals involving the Nixon Administration
handling of antitrust settlements had resulted in this
24Temin, pp. 283-291.
apply to the court for the right to provide non-regulated
services if there would be no substantial possibility
that competition in the new market would be impeded.
This provision will be seen again as the BOCs sought to
move into the cable television industry.
LIMITATIONS ON PHONE COMPETITION WITH CABLE COMPANIES
The limitations on telephone company entry into
cable television markets are found in statutes, FCC
regulations and in the history of Bell's struggle with
antitrust laws.25 The provisions of the 1982 Decree
prohibited the regional companies (BOCS) from providing
"information services," offering the capacity for
generation, acquiring, retrieving, utilizing or making
available information conveyable via telecommunications.
In 1987, the court removed the restriction on the
transmission of information as well as the restriction on
the entry of the BOC into non-telecommunications markets
but refused to change the information generation
restriction. The Court of Appeals disagreed on the last
point and required the judge to consider whether the BOC
Stuart Brotman, ed., Telephone Company and Cable
Television Competition: Key Technical. Economic, Legal
and Policy Issues (Boston: Artech House, 1990).
would have the ability to raise prices or restrict output
in the proposed market.26
The trial judge, Harold Greene, was concerned that
the BOC would have the power to discriminate against
competitors if it were in the information services market
and controlled the medium required for transmission of
the information. The Court called this "bottleneck
control."27 The Court found that the BOCs employed this
pattern in their operations when they were part of the
Bell System. When he allowed entry into other activities
thinking the likelihood of anticompetitive conduct seemed
small, the BOCs had "managed to engage in such conduct."
The BOCs designed the voice messaging system to be
incompatible with its competitors' standard equipment and
priced in a manner to raise competitors' costs. The BOC
used as selling points the availability of features which
it withheld from competitors. The BOCs required
26U.S. v. Western Electric, et al. 900 F.2d 283
(D.C. Cir., 1990).
27U.S. v. Western Electric, et al. 767 F. Supp. 3 08
(D.D.C., 1991) 993 F.2d 1572 (DCC, 1993), cert, denied,
126 L.Ed.2d 438, 114 S.Ct. 487 (1993). November 15,
1993, the U.S. Supreme Court refused to interfere with
the BOC entry into the information services market.
disclosures of proprietary information which the BOCs
then could use to determine if they would provide
Despite Judge Greene's opinion that removal of
restrictions would risk significant anticompetitive
activities, he permitted BOCs to enter into information
services. He felt the opinion of the Appeals Court
directed this result. Other obstacles remained to the
entry of the telephone companies into the cable
The 1984 Cable Communications Policy Act provided
that cable operations could not be owned by television
broadcasters or telephone companies in their service
areas.29 The prohibition of telephone company (BOC)
cross ownership restates the FCC regulation first
28Judge Greene recognized that these allegations were
presented by the biased affidavits of experts provided by
the BOC's competitors but noted that the BOC responded
not with contrary information but by saying that the
allegations were indefinite or had been resolved by
29Cable Communications Policy Act of 1984, 47 USC
521, 553 (a) and (b).
promulgated in 1970.30 Since the rule has been codified
only Congress can change it. The FCC continued to assert
its previous authority to grant waivers. In 1988, the
FCC began a discussion of the extent and terms of such
waivers. The initial rules were intended to preserve
competition by excluding telephone companies from
engaging in the sale of CATV service to the viewing
public in the BOC's own service area. The FCC defined
its question as whether the cross-ownership prohibitions
remained necessary in light of changed marketplace
conditions and new regulatory tools.
The FCC suggested the restrictions may be out of
date since the cable industry had grown to maturity since
1970 and because "nonstructural" safeguards could prevent
carrier anticompetitive conduct. In fact, the BOCs
submitted evidence that the cable companies enjoyed
monopoly pricing advantages and engaged in
anticompetitive conduct by limiting programming
diversity. The Motion Picture Association of America
30Facilities for provision of video programming by a
telephone common carrier in its telephone service area,
47 CFR 63.54 (a) and (b).
submitted evidence that cable operators are an
unregulated monopoly and refuse to carry programming of
unaffiliated entities. On the other hand, cable
companies cite the opinion of Judge Greene in the
antitrust case in support of the means and incentives of
the BOCs to discriminate against competitors when allowed
to be more than common carriers. The FCC was convinced
that outright prohibition was harming, not helping
competition and that its own structural and nonstructural
safeguards suggested in Computer II and Computer III,
when the FCC permitted entry into unregulated services
and customer premises equipment, would protect the
market. Structural protections included requiring a
totally separated subsidiary to operate the unregulated
business. Nonstructural protections referred to
restrictions on practices, required accountings and
In 1991, the FCC determined that neither a BOC nor
its customer programmers needed to obtain a second local
franchise to provide Video Dialtone services in addition
to "plain old telephone service" (POTS). In 1992, the
FCC permitted the BOC to offer "Video Dialtone" to
encourage widespread distribution of video programming
"based for the first time on nondiscriminatory video
common carriage made available to and supporting multiple
programmers." As long as the BOC was acting as a carrier
only it could transmit television programming as well as
The FCC modified its definition of ownership to
increase what could be owned by a BOC without violating
the cross-ownership rules to the same percentages
permitted for a broadcaster. The FCC refused to allow
the BOC to acquire existing cable facilities even if
operated under the protective rules applicable to Video
Dialtone. Proposals to Congress included abandoning the
blanket prohibitions as long as structural and
31In 1983 Pacific Bell proposed to build a fiberoptic
and coaxial cable network to serve Palo Alto. Pacific
Bell called for partnerships with cable operators. The
BOC actively considered hybrids in their business plans
at that time. W. Baer, "Telephone and Cable Companies:
Rivals or Partners in Video Distribution," in Video Media
Communications: Regulation, Economics and Technology,
ed. E. Noam (Columbia, 1985), 187-8 and 207.
nonstructural protection to insure competition are
The court relinquished antitrust restriction of the
BOCs while the administrative agency eliminated not only
its prohibitions but also limited local control by
finding no franchise needed.33 What was the status of
the cable television industry the BOC sought to enter?
32The FCC acted in a series of decisions issued under
the name In re Telephone Company-Cable Television Cross-
Ownership Rules, FCC Docket No. 87-266; Further Notice of
Inquiry and Notice of Proposed Rulemaking, 7/8/88, FCC
88-249; Further Notice of Proposed Rulemaking, First
Report and Order and Second Further Notice of Inquiry, 7
FCC Red 300 (1991); Second Report and Order,
Recommendations to Congress and Second Further Notice of
Proposed Rulemaking, 7/16/92, FCC 92-327.
33Another view is presented by Alfred Kahn who quotes
Robert Crandall's observation, of how little deregulation
had occurred in the Telecommunications industry. Most
transactions are yet thoroughly regulated outside of
customer premises equipment and ATT, which divested its
natural monopolies to compete in other markets, continues
to be heavily regulated. A. Kahn, "Regulation in the
1990s," 7 Yale Journal on Regulation 325, 326 (1990).
The positions of regulators and the telephone industry
are set out in A. Danielsen and D. Kamerschen, ed.,
Telecommunication in the Post-Divestiture Era (Lexington,
CABLE TELEVISION: THE EARLY YEARS
In the early 1950s Cable Television was a marginal
participant in the communications industry. Community
Antenna Television (CATV) provided access to broadcast
programming for communities blocked by geography or
distance from the broadcast signals from the lucrative
urban markets.34 These markets were not served by the
broadcasters. Unlicensed transmitters were developed by
television dealers, repairmen and electricians backed by
local service clubs. This development is reminiscent of
the development of broadcast media itself with stations
started by people who built and sold radios.35 Don LeDuc
tells of the Montana operation installed in an old bus on
34Robert Copple, "Cable Television and the Allocation
of Regulatory Power: A Study of Demarcation and Roles,"
44 Federal Communications Law Journal. 1 (1991), 13.
35In this respect the industry looks like early radio
in which broadcasters often were motivated by their
interest in selling the receivers. Pusateri, pp. 269-
a hill.36 By 1959, cable had reached the edges of
communities large enough to support television stations
and, by the end of the 1960s, cable was a real
participant in the communications industry. The Sloan
Commission described the attractiveness of cable at this
time as the quality of signal rather than diversity of
choice. TV signals bounce off tall buildings creating
ghost images and interference. What was a nuisance in
black and white became intolerable for color
transmissions. Cable did offer additional choices in
sports programming.37 In the early 1970s the potential
for commercial as well as entertainment uses of cable
were widely discussed.
The people who created Telecommunications, Inc. were
representative of this industry profile. Bob Magness,
now TCI's chairman, was described as a part-time cattle
rancher and cottonseed salesman who wanted to improve
36Don LeDuc, Cable Television and the FCC. A Crisis
in Media Control (Philadelphia: Temple University Press,
37Sloan Commission, On the Cable. The Television of
Abundance (McGraw-Hill, 1971) 26-27.
television reception in rural areas.38 Magness completed
his first system in 1956 for Memphis, Texas. "Bob
climbed the poles and strung the wire while Betsy managed
the office..."; the 1993 Annual Report says, "The cable
system they completed in 1956 served 700 subscribers.
When the Magnesses expanded their operations to nearby
Plainview a year later, they added another 3000
customers." In 1958, Magness began importing signals
into rural Montana by microwave. To reach remote sites
for antennas, Magness would use helicopters, ski lifts
and snowshoes. The system grew slowly until 1968 when he
combined his cable and microwave operations to form Tele-
communications, Inc. (TCI). In 1972, Magness hired a new
president, John Malone, an electrical engineer with a
Ph.D in operations research who had worked for Bell Labs
and ran the cable television division of General
Instrument Company. Ten years later, TCI became the
nation's largest cable television operator. Malone said
that to succeed the company must achieve economies of
38Ken Auletta, "John Malone: Flying Solo," The New
Yorker. 7 February 1994, 52-67. This article and the
corporate history in the TCI 1993 Annual Report form the
basis for this narrative.
scale and created an acquisition policy to include tiny
rural systems and large urban markets.
Like Bell, the tactics used by TCI have drawn
criticism and antitrust scrutiny. Chairman of the Senate
Subcommittee on Antitrust, Monopoly and Business Rights,
Howard Metzenbaum, regularly assails TCI as monopolistic.
Ken Auletta says,
"Accounts of TCI's coarse tactics are
legendary. In 1973, when TCI and city
officials in Vail, Colorado, could not agree
on cable rates, TCI pulled all its
programming for an entire weekend,
substituting on TV screens the names and home
phone numbers of city officials. The city
surrendered. Eight years later, in Jefferson
City, Missouri, TCI threatened to let the
screen go blank if the city didn't renew its
franchise. Again, city officials succumbed.
A cable competitor filed an antitrust lawsuit
against TCI and a jury fined Malone's company
thirty-six million dollars."39
Auletta goes on to describe coercive tactics used by TCI
against programmers. Malone suggested to a potential
purchaser of the Learning Channel that TCI planned to
drop that programming. When the purchase failed a buyer
partly owned by TCI stepped forward to purchase the
Learning Channel for less money. TCI removed HBO from
39Ken Auletta, pp. 55, 57.
some Texas systems to "get their attention." Such power
over programmers forms the basis for regulators' concerns
about cross-ownership of programmers by cable operators.
The Report of the Director of the Denver
Telecommunications Office on the proposed acquisition of
the franchise by TCI indicated that TCI had been involved
in some rather spectacular litigation with smaller
systems but only once in a large city.40
The first serious cable competition was met by legal
efforts of the broadcasters to protect their markets.
Broadcasters thought the uncompensated use of their
signals was unfair and prohibited by copyright
protection. In 1968, the Supreme Court decided that
copyright protection did not prohibit retransmission of
broadcast signals.41 This meant the cable companies did
not have to pay the broadcasters to transmit that
programming to cable customers. Telephone companies had
^Denver, Telecommunications Office, Report, 20
January 1993, filed with the Denver City Clerk 1 February
1993 under No. 93-0067.
41Copple, p. 14.; Fortnightly Corp. v. United Artists
Television, Inc., 392 U.S. 390 (1968). See Chapter 5 for
the response of the FCC and Congress.
tolerated cable use of poles until the profit potential
became clear. Bell was prohibited from engaging in cable
television but sought to profit from the use of its
facilities. Independent phone companies were not subject
to the 1956 decree and could enter the cable field
directly until restrained by the FCC.42 Broadcasters
themselves began seeking cable operations of their own.
The competitive implications of such ownership had yet to
be worked out.
42LeDuc, pp. 160-162.
The history of the Telecommunications Industry
cannot be told without describing the pervasive influence
of government regulation. In patents and intellectual
property, the government defines the nature and extent of
the property right which a cable operator owns.
Municipalities grant franchises to phone or cable
companies. In the 19th century states controlled
business by limiting the permissible uses of corporate
charters prior to general incorporation laws. States
designate permissible uses of easements and condemnation
powers necessary to build a cable or phone system. State
Public Utilities Commissions regulate common carriers
within the state. The federal government began its
regulation of telecommunications with ICC jurisdiction
over long distance phone service in 1910. The Radio Act
of 1927 and Communications Act of 193443 (creating the
^Communications Act of 1934, 47 USC 1, et seq.
FCC) sought to control broadcast media. The
Communications Act set goals of universal wire and radio
service at reasonable charges. The FCC has been called a
"captive" agency. This means at least that the agency is
generally sensitive to the problems and needs of its
In the early years of cable development, the FCC
denied that it had the right or the responsibility to
regulate cable.45 The FCC also suggested that it could
not license broadcast stations to serve small markets
which would have to look to community antenna
systems(CATV). LeDuc describes the FCC and Congress
struggling with the tensions between cable and
broadcaster when the economics did not justify
intervention. By 1963, the FCC had used its control over
microwave importation of programming to protect the
^LeDuc, p. 34. Others think the FCC became the
captive of A.T.&T. "'Jump' says A.T.&T and the Federal
Communications Commission jumps." K. Aubrey Stone, I'm
Sorry, The Monopoly You have Reached is Not in Service
(New York: Ballantine/Grassroots, 1973), 151.
45Frontier Broadcasting v. Collier, 16 RR 1005
(1958); LeDuc, pp. 89-90.
economic interests of broadcasters, In 1966, it set
procedures to regulate approval of such importation.
Without the ability to offer signals imported from
distant and desirable locations, cable companies could
not compete with broadcasters in metropolitan markets.
After the Supreme Court determined that copyright laws
did not prohibit retransmission of broadcast signals,46
the FCC expanded its broadcast controls to provide its
broadcasters protection that the courts and Congress had
refused. In its 1972 Order, the FCC relaxed these rules
so long as local broadcasters could be protected.47 The
FCC required a minimum 20-channel capacity in a cable
system serving a top 100 market as well as free access
for public, educational and governmental (PEG) use. The
effect of the FCC major market restrictions on
rebroadcasting was to redirect investment into medium and
46Fortnightlv Corn, v. United Artists. 3 92 US 3 90
(1968) In 1976, Congress amended the Copyright law to
provide for a compulsory licensing system. Copyright
Revision Act of 1976, 17 USC 101-118 (1988).
47LeDuc, p. 11; Stanley Besen and Robert Crandall,
"The Deregulation of Cable Television," 44 Law and
Contemporary Problems 77, 97 (1981); U.S., FCC, Copple,
smaller markets and to encourage integration of existing
systems in major markets to be able to bear the increased
cost of compliance.
Robert Copple picks up the story of FCC regulation
where LeDuc leaves it. As a result of inadequacies in
local franchise regulation, discussed later, the FCC
asserted federal jurisdiction in the 1972 Report and
Order. The FCC set technical standards to meet charges
of obsolescence including a prospective requirement of
two-way interactive capacity and required public,
educational and government access (PEG access). The FCC
set detailed limits and requirements of the franchising
process.48 Almost as the FCC promulgated its regulation,
pressures within the FCC itself, the courts and the
political process led to a dismantling of the regulatory
structure. By 1978, the FCC local requirements had so
atrophied that the certification process was replaced by
a simple registration requirement.
48U. S Federal Communications Commission, Cable
Television Report and Order, 36 F.C.C.2d 143, 24 R.R.2d
1501 (1972); Copple describes the substance of each
category on 29-32.
In 1984 Congress applied deregulation concepts to
the cable television industry. Copple describes the
interests which brought the 1984 Cable Act into being.
Many elements of the process were local in nature. The
people served should have some control. The national
market for programming and the market power of the new
multiple system operators (MSO) increased beyond the
ability of municipalities to regulate. The cable industry
encouraged federal jurisdiction to escape local demands
and abuses. Operators objected to extortionate franchise
fees and the fear that unfair requirements would be
imposed when renewal was considered. The 1984 Cable
Act49 provided a detailed system for regulation of cable
by the FCC and by local authorities. The 1984 Act
addressed ownership restrictions as well as rate
deregulation, franchise fee limits and franchise
49The Cable Communications Policy Act of 1984, 47 USC
521, et seq., P.L. 98-549, 98 Stat. 2801.
modification and renewal rights.50 Copple concludes that
Congress acted in 1984 to protect the cable industry from
municipal overreaching and local abuse in rates,
franchise fees, renewal extortion and other abuses.
Congress left local government to deal with the problems
of cable's natural monopoly and monopolistic behavior.
Copple forgot the lessons of big business and antitrust
in U.S. history. His optimistic conclusion did not
reflect the caution shown in his introduction when he
described the movement to reregulate cable in the early
1990s. Complaints about the behavior of unregulated
cable operators included the quality and cost of service
and the business practices of the industry. By 1990 the
FCC and Congress were addressing industry abuses made
possible by the deregulation of cable. Congress found
the cable industry had abused the freedom accorded during
the post-1984 deregulation and responded with the Cable
50Copple describes these and other provisions of the
Act on pp. 38-168. Discussing renewal, Copple opposes the
statements of industry witnesses against city
representatives in the House hearings. A mayor did not
want to give up the threat of non-renewal to enforce all
the franchise provisions as well as to require service,
facilities and equipment upgrades, pp. 99-100.
Television Consumer Protection and Competition Act of
1992. The FCC was to assume jurisdiction over rates.
The Act went on to address a number of issues large and
small, technical and political in nature. Some,
including Denver's Bill Bradley, characterized many of
these issues as micromanagement of issues more properly
addressed at the local level.
REGULATION THROUGH FRANCHISING
The first significant contact of the cable company
with government appeared at the local level. The cable
company needed access to the easements necessary to lay
cable or for poles on which to string cable. This latter
usually meant having access to the phone easements and
lines. This could be mandated by local government. LeDuc
found that the lack of federal or state involvement in
the 1960s left the only functioning control in the hands
of local municipalities. Prior to the 1960s, cities were
so eager for service or unsophisticated that agreements
favored operators. As municipal organizations developed
and exchanged expertise, procedures and demands made on
operators became more onerous. Fears of the increasing
costs of franchising and state intervention led cable
operators to seek preemptive federal regulation.51
Copple describes the same process as the increasing
demand for cable services and competition for cable
51LeDuc, pp. 127-8.
franchises exceeding the capacity of municipalities to
regulate. Because the local franchising process was
rare, local governments lacked the expertise, experience
or resources to successfully evaluate and negotiate with
sophisticated franchise applicants. Cities failed to
require state-of-the-art systems and looked at the
process as a revenue generator. Franchises were granted
to speculators and not developed. Franchise fees could
be exorbitant. Bill Bradley told of a Colorado Springs,
Colorado franchisor which sought an annual franchise fee
of 36% gross revenue. The rate was limited to 5% by
statute later. Bribery and abuse were not unheard of.
Fragmented jurisdictional boundaries created problems for
cable systems as in other areas of municipal services.52
These problems led to the first major FCC involvement in
the franchising process in 1972 and in the protection for
operators inherent in the 1984 Cable Act.
52Copple, pp. 23 and 78-9.
One example of the local cable franchise can be
found in Denver.53 In 1967, Mountain Bell, the local
Bell Operating Company (BOC), informed the Denver City
Council of its intent to use its easements to provide
cable services. In 1967, Courts indicated that, if a
phone company had a franchise to erect poles and string
wire, the transmission of cable signals did not
constitute an additional use of the public ways and did
not require a separate franchise.54 The Council
responded with an ordinance prohibiting cable without a
permit from the city. Several operators approached the
council with proposals. Those interested included
Daniels and Associates, a predecessor to TCI, and a local
TV broadcaster owned by Time. The Council couldn't agree
and little public interest was shown so the project was
shelved. Cable could offer little more than broadcast
television and Denver had few line-of-sight interference
problems. Until the first satellite, HBO, cable was
53This section is based substantially on an interview
with William Bradley, the former executive director of
the Denver Telecommunications Office who participated in
all Denver's decision-making until he retired in 1994 and
on materials provided by the Telecommunications Office.
54Copple, p. 21.
dependent on landline and microwave transmission which
limited programming options.
In 1979, Daniels and ATC (Time) again approached the
city. Only three proposals were submitted. Other
operators may have been overcommitted since Denver
entered the process late for a mid-size city. One of the
bidders lost credibility when it collapsed and was bought
out in the middle of the process. The Council identified
issues including multiple permits to encourage
competition, the amount of the franchise fee, access
issues, customer service and local ownership. In 1980,
the electorate amended the charter to provide for a cable
franchise. In 1982, the city awarded the franchise to
Mile Hi Cablevision, the Daniels/ATC entry with whom a
large group of local notables invested and lent their
names. The city established a telecommunications office
to deal with regulatory matters and hired William Bradley
as the executive director. The electorate approved the
franchise in 1984.
Bill Bradley was appointed Denver's first Director
of Telecommunications in 1982.55 The office was unusual
in that it was an independent agency outside civil
service, directly under the Council not the Mayor. Where
did expertise come from when the industry was so new?
Bradley had developed his expertise on the job as
legislative analyst and staff director to the Denver City
Council. He responded to Council information requests
during the initial cable inquiries in the 1960s. His
journalism degree from Notre Dame gave him media
background but no specific telecommunications training.
Some of the people he assembled had connections to local
broadcasting. Bradley was a charter member of the
National Association of Telecommunications Officers and
Administrators (NATOA) in 1979. (He became president in
1985.) This organization was formed to pool and exchange
ideas and experiences among regulators who were at a
disadvantage dealing infrequently with franchise issues
that cable operators routinely processed.
55Interviews, 1 June 1994, with the acting director
of the Telecommunications Office, Christopher Clark, and
Helen McGuire whose connection with the Office began in
1982 provided valuable insight into the Bill Bradley
Bradley gained a reputation for seeing all sides of
issues and looking for common ground with operators
rather than an adversarial relationship. In
administrating the local franchise, he suggested council
modification of the franchise to eliminate requirements
which would not provide real benefits for the rate-paying
consumers. This empathy with the industry was not always
appreciated but the Council generally followed his
suggestions. Highly technical issues frequently were
decided on staff recommendation when the Council relied
upon its staff for expertise. This relationship to
industry had another side. Even after Congress stripped
away rate authority, Bradley jawboned the local operator
out of proposed increases by appealing to public opinion
and image as well as the threat of reregulation.
The 1972 intervention of the FCC in the local
franchising process had proven transitory. With the
chorus of complaints about local regulatory problems came
calls for national legislation from operators.
Responsive proposals issued from Congress. Senator
Goldwater sponsored SB66 which expressed industry wishes
and would have limited local authority. Congressman
Wirth sponsored legislation which similarly favored
operators over regulators.56 The National League of
Cities, after some initial confusion, rallied its forces
to oppose these bills. The City of Denver expressed its
opposition. In light of the municipal opposition, House
Energy and Commerce Committee Chairman Dingle indicated
that nothing would happen unless the opposing interests
could compromise. Denver's Bill Bradley, speaking for
the National Association of Telecommunications Office
Administrators and Trygve Myhren of ATC and the National
Cable Television Association, negotiated a compromise
between operators and regulators. The combined lobbying
power of the industry and the League of Cities pushed the
1984 Act through Congress. The operators wanted
deregulation of rates and protection of renewal rights.
Regulators wanted franchise fee protection, local and PEG
access requirements, and the ability to enforce customer
56Temin, pp. 286-7. Tim Wirth's place in U.S.
telecommunications policy, both phone and cable, deserves
further investigation. Wirth chaired the Subcommittee on
Communications of the House Committee on Energy and
Commerce. He was involved in the legislative side of the
Bell break-up in 1982.
service requirements. Each obtained its basic minimum in
the 1984 Cable Act.
The interaction of federal and local regulators with
the industry appears in operational contexts as well. In
1985, the FCC preempted technical standards for cable
operations. This caused chaos since the FCC standards
were thirteen years old at the time and out of tune with
standard practice. Again the leaders of NATOA and NCTA
joined forces to meet common needs. The industry and
regulators' experts generated a set of technical
standards. The project took about four years. When
presented to the FCC, these standards were generally
accepted as national standards in a 1992 regulation. The
joint standards committee of the industry and regulatory
groups remains active today.
With federal limits on local regulation and FCC
power, the Cable industry followed a classic course for
an unregulated monopoly.57 Average prices rose
precipitously. The industry was concentrating ownership
and horizontally integrating markets. Without
competition the operators put more money into mergers and
acquisitions than into innovation. Congress studied the
industry and found the average monthly cable rate
increased at three times the inflation rate. Congress
found little local competition resulting in undue market
power for the cable operator compared with consumer or
programmer. Congress concluded that the cable industry
was highly concentrated creating barriers to entry for
new programmers and a reduction in the number of media
voices available to consumers. Since cable operators and
cable programmers often have common ownership, cable
57P. Boeckman, "The Effects of Recent Developments on
the TELCO/CATV Cross-Ownership Prohibitions," 56 Missouri
Law Rev. 1069, 1075-6 (1991).
operators have the incentive and ability to favor
affiliated programmers, making it more difficult for
unaffiliated programmers to be heard.58
When Congress acted to remedy perceived cable
industry abuses by the Cable Television Consumer
Protection and Competition Act of 1992, the City of
Denver supported a veto by President Bush. The local
regulator objected to the administrative burden the Act
would place on local and federal resources. He failed to
see how the complex rate regulation would help most
consumers and thought the proposal would chill
innovation. Generally, Bradley opposed micro-management
Privately, Mr. Bradley discussed the current
industry trends. Operators needed the larger scale to
support the new capital investment required for
fiberoptic cable. Consolidation would reduce costs.
With new technology, a single head-end could replace as
many as twelve present stations. In the case of the
58The Cable Television Consumer Protection and
Competition Act of 1992, 47 USC 521 et seq., P.L. 102-
385, 106 Stat. 1460. U.S. Congress, House, Conference
Report No. 102-862, pp. 49-104.
consolidation of the Denver metropolitan area, TCI
established its control by purchasing Mile High
Cablevision Inc. Bradley points out that a major
interest in Mile High had to be sold to satisfy FCC
cross-ownership rules when the local BOC, U.S. West,
purchased Time/Warner. A phone company could not own a
cable company in its service area. The City approved the
franchise transfer in 1993. Bradley thought the rate
increases were justified.
Industry observers like Bradley feel that
competition will serve the public interest better that
overregulation, especially if that micromanagement
emanated from Washington at such a distance from local
needs and concerns. The competition they envisaged
cannot come from the industry itself. Perhaps the entry
of financially powerful, advantageously positioned
competition from the telephone companies (Telco) would
change the market. Telcos have existing franchises and
physical plants and the resources to make the fiberoptic
investment. Other potentially technologies, like
"wireless," appear positioned like the cable companies of
The industry concentration found by Congress was
reflected in the Denver Metropolitan area.
Telecommunications, Inc. (TCI) accomplished a horizontal
integration of the Denver metropolitan area market. This
movement was part of a larger consolidation as TCI grew
to be the nation's largest cable operator.59 In 1988,
TCI acquired a number of operating interests from Daniels
and Associates which had an interest in Mile High
Cablevision, Inc. In 1989, TCI merged with United
Artists which controlled most of the Denver suburbs. In
1993, TCI acquired control over Denver's franchise.
The cable industry engaged in a "clustering"
movement. The new megasystems could make the capital
investments involved in the fiber optic technologies
necessary to compete with potential Telco competition.
Major operators engaged in swaps which eliminated
competition in major metropolitan markets.60 TCI
consolidated the Denver area by purchasing the ATC/Time-
59Tele-communications, Inc., annual reports and lOKs,
Bradley interview, 16 March 1994.
Warner interest in Mile High. ATC consolidated the
Orlando market by purchasing the TCI interests there.
ATC/Time might have been motivated by the cross-ownership
rules brought into play with the US West entry into the
cable market by purchasing Time/Warner. One merger
begets another. The City of Denver approved the TCI
acquisition and formed the Greater Metro Cable
Consortium to deal with TCI with more authority than any
single regulator could. As the scope of franchisee
operations exceeds the jurisdiction of the franchisor,
the regulator loses power. Historically, state or
federal assumption of jurisdiction followed. In the Bell
case, state public utilities commissions and federal
agencies replace local franchisors.
This paper examined the parallels and contrasts
between the development of the Bell Telephone system and
the cable television industry. It asked questions
suggested by recent scholarly literature. An analysis of
the facts in light of those theories is appropriate.
First, similarities between the industries include
reliance on a cable which requires a franchise to have
the legal rights necessary to complete a system. The
phone company developed out of new technology protected
by patents. Litigation over patent rights provided
protection for the emerging system and created barriers
to entry by potential competitors. Since Bell
consolidated in the period of patent protection, little
interest has been shown in the franchises of the Bell
system. The Bell system quickly outgrew the local
boundaries which led states to assign responsibility for
regulation to State-wide Public Utilities Commissions.
The local franchise remains the first level of contact
with regulation for the cable industry. The Bell
experience would suggest that with "clustering" and
regional consolidation beyond municipal boundaries
proposals for state jurisdiction may emerge. If the
TELCO, already regulated by the PUC, enters the cable
market, states will be faced with a conflict between
local and state regulation. This loss of control by
local franchisors may explain the Congressional decision
to increase the federal role.
Second, Bell welcomed federal regulation in the
first decades of the twentieth century as did the cable
industry in the early 1980s. Each sought to rationalize
a patchwork regulatory structure. The cable industry
felt its property rights in the franchise could be
arbitrarily undercut by local authorities, especially on
renewal. The institutions and experience of the FCC were
developed in its dealings with Bell and the broadcasters.
These institutions established the options and
limitations as well as informing the discussion of cable
Third, when unregulated monopolies in both
industries developed, each has shown propensities to
exploit that market power. Bell directed its power at
competitors to protect and extend its monopoly. Cable
exploited its opportunity to raise prices and to
consolidate its regional monopolies. Congress drew on
the federal experience with Bell regulation to place
responsibility for rate regulation at the federal level.
In both industries, perceived abuses were met by
governmental regulation which also met the needs of the
Fourth, the consolidation of regional cable
operators parallels the horizontal development of the
Bell system. That consolidation should continue as
smaller systems become more vulnerable under rate
regulation and less able to make the fiberoptic
investment to compete with a TELCO entrant into the
market. The 1993 attempts of the TELCOS to merge with
cable television operators raises the question of the
future relationship of the two industries: competition
or merger. The first merger attempts stumbled over
negotiating obstacles and were never tested by FCC or
antitrust authorities. Congress is discussing
legislation which remove barriers to the entry of phone
companies into the cable industry and cable companies
into the phone business.61 At the expense of its
ratepayers, each industry is laying fiberoptic cable that
it does not need to provide present service in order to
compete in a unified market. As indicated in the
Introduction, Bell Atlantic seeks permission to enter six
metropolitan video markets. BellSouth announced its
plans to test an offering of video services in Atlanta.62
The Video Dialtone options discussed by the FCC above are
moving to actuality. The natural monopoly theory
suggests that competition between two companies offering
phone and cable services will lead to further
consolidation. In the Bell experience, customers wanted
all options not just those available on one exchange.
Video customers want to chose from all the programming,
not to make a choice between systems or to purchase
61"House OKs Telecommunication Bills," Denver Post.
29 June 1994.
62,1 A Video Test By BellSouth, New York Times. 3 0
Baer, W. "Telephone and Cable Companies: Rivals or
Partners in Video Distribution" in Video Media
Communications: Regulation, Economics, and
Technology edited by E. Noam. New York: Columbia
University Press, 1985.
Brock, Gerald. The Telecommunications Industry; The
Dynamics of Market Structure Cambridge, Mass.:
Harvard University Press, 1981.
Brotman, Stuart N., ed. Telephone Company and Cable
Television Competition: Key Technical. Economic.
Legal and Policy Issues. Boston: Artech House,
Chandler, Alfred, Jr. Scale and Scope, The Dynamics of
Industrial Capitalism. Cambridge, Mass.: Belknap
________. Strategy and Structure: Chapters in the
History of the American Industrial Enterprise.
Cambridge, Mass.: MIT Press, 1962; paperback
Danielian, N.R., A.T.&T.: The Story of Industrial
Conquest. New York: Vanguard Press, 1939.
Danielsen, A. and Kamerschen D., ed. Telecommunications
in the Post-Divestiture Era. Lexington, 1986.
Foster, Mark S. From Streetcar to Superhighway.
Philadelphia: Temple University Press, 1981.
Garnett, Robin. The Telephone Enterprise: The Evolution
of the Bell Systems's Horizontal Structure. 1876-
1909. Baltimore: Johns Hopkins Press, 1983.
Hawley, Ellis. The Great War and the Search for Modern
Order. New York: St. Martin's Press, 1979.
Jackson, Kenneth. Crabgrass Frontiers: The Urbanization
of the United States. New York: Oxford University
Press, 1985; Oxford University Press paperback,
Kahn, Alfred. The Economics of Regulation. New York:
Wiley, 1970, 1971.
Kolko, Gabriel. The Triumph of Conservatism: A
Reinterpretation of American History, 1900-1916.
New York: Free Press, 1963.
________. Railroads and Regulation: 1877-1916.
Princeton: Princeton University Press, 1965.
LeDuc, Don. Cable Television and the FCC, A Crisis in
Media Control. Philadelphia: Temple University
MacMeal, Harry. The Storv of Independent Telephony.
Independent Pioneer Telephone Association, 1934.
North, Douglass C. Institutions. Institutional Change and
Economic Performance. New York: Cambridge
University Press, 1990.
Porter, Glenn. The Rise of Big Business. 1860-1910.
Arlington Heights, IL.: Harlan Davidson, 1973.
Pusateri, C. Joseph. A History of American Business.
2nd. Ed. Arlington Heights, IL.: Harlan Davidson,
Sloan Commission. On the Cable. The Television of
Abundance. New York: McGraw-Hill, 1971.
Smith, George. Anatomy of a Business Strategy: Bell,
Western Electric and the Origins of the American
Telephone Industry. Baltimore, Johns Hopkins Press,
Stone, K. Aubrey. I'm Sorrv. the Monopoly You Have
Reached is Not in Service. New York:
Temin, Peter with Galambos, Louis. The Fall of the Bell
System. New York, Cambridge University Press, 1987;
paperback edition, 1989.
Warner, Sam Bass. Streetcar Suburbs. The Process of
Growth in Boston (1870-1900). 2nd. ed. Cambridge,
Mass.: Harvard University Press, 1962, 1978.
"A Video Test By BellSouth." New York Times. 30 June
Auletta, Ken. "John Malone: Flying Solo." The New
Yorker. 7 February 1994, pp. 52-67.
Besen, Stanley, and Crandall, Robert. "The Deregulation
of Cable Television," 44 Law and Contemporary
Problems 77-124 (1981) .
Boeckman, P. "The effects of Recent Developments on the
TELCO/CATV Cross-Ownership Prohibitions." 56
Missouri Law Review 1069 (1991) .
Copple, Robert. "Cable Television and the Allocation of
Regulatory Power: A Study of Demarcation and
Roles." 44 Federal Communications Law Journal 1
"Dial U For Uncertainty," Newsweek. 25 October 1993.
"House OKs Telecommunications Bills," Denver Post. 29
June 1994 and various issues in 1993-1994.
Kahn, A. "Regulation in the 1990s", 7 Yale Journal on
Regulation 325 (1990) .
"TCI Apologizes," Rocky Mountain News. 17 November 1993.
Denver. Telecommunications Office. Report. 20 January
1993, filed with the Denver City Clerk 1 February
1993 under No. 93-0067.
U.S. Congress. House. Conference Report No. 102-862, pp.
U.S. Federal Communications Commission. Cable Television
Report and Order, 36 F.C.C. 2d 143, 24 R.R. 2d 1501
U.S. Federal Communications Commission. Investigation of
the Telephone Industry. F.C.C. Documents, Vol. 123,
#1034, 76th Congressional Session, 1939.
U.S. Federal Communications Commission. Second Computer
Inquiry, FCC Docket No. 20828, Final Decision, 77
F.C.C. 2d 384, 420 (1980) .
U.S. Federal Communications Commission. In re Telephone
Company-Cable Television Cross-Ownership Rules,
F.C.C. Docket No. 87-266; Further Notice of Inquiry
and Notice of Proposed Rulemaking, 8 July 1988,
F.C.C. 88-249; Further Notice of Proposed
Rulemaking, First Report and Order and Second
Further Notice of Inquiry, 7 F.C.C. Fed 300 (1991);
Second Report and Order, Recommendations to Congress
and Second Further Notice of Proposed Rulemaking, 16
July 1992, F.C.C. 92-327.
STATUTES AND REGULATIONS
Antitrust Procedure and Penalties Act. 15 USC 16 (b)
Cable Communications Policy Act of 1984. 47 USC 521 et
seq. P.L. 98-549. 98 STAT 2801.
Cable Television Consumer Protection and Competition Act
of 1992. 47 USC 521, et seq. P.L. 102-385. 106 STAT
Communications Act of 1934. 47 USC 151, et seq.
Copyright Revision Act of 1976. 17 USC 101- 118 (1988)
Facilities for provision of video programming by a
telephone common carrier in its telephone service
area. 47 CFR 63.54 (a) and (b).
Willis-Graham Act of 1921. ch. 20. 42 Stat. 27, 1921.
Carterphone. 13 F.C.C. 2d 420 (1968).
Fortnightly Corp. v. United Artists Television, Inc. 392
U.S. 390 (1968) .
Frontier Broadcasting v. Collier. 16 RR 1005 (1958) .
MCI v. ATT. 708 F.2d 1081 (7th Cir., 1983).
Second Computer Inquiry, Computer II, Fee Docket No.
20828, Final Decision. 77 F.C.C.2d 384, 420 (1980).
U.S. v. Western Electric, et al. 900 F.2d 283 (D.C.
U.S. v. Western Electric, et al. 767 F. Supp. 308
(D.D.C., 1991); 993 F.2d 1572 (DCC, 1993); cert,
denied, 126 L.Ed.2d 438, 114 S.Ct. 487.
Bradley, William. Denver Telecommunications Office.
Interview, March 16, 1994.
Clark, Christopher. Denver Telecommunications Office.
Interview, June 1, 1994.
McGuire, Helen. Denver Telecommunications Office.
Interview, June 1. 1994.
Tele-Communications, Inc. Annual Reports and 10-Ks for
The bibliography assembled by Don Leduc for FCC
sources up to the 1970s is helpful. Robert Copple's
Article has no such section but his footnotes update the
materials covered by LeDuc especially focusing on the
legal literature. Copple also summarizes the Broadcast
regulation sources briefly in his notes at page 9. Bell
history is widely available. The Bibliography in George
Smith's monograph is helpful as is Gerald Brock's.
My introduction was a composite of information
provided by The Denver Post and Denver Business Journal
in various issues in 1993 and 1994, as well as articles
in Cablevision. 14 March 1994 and Broadcast and Cable. 28
February 1994. The clippings are available.