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Spring 1998
   
Gotham’s Hidden Infrastructure Boom
Peter W. Huber
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Location: street level, 1133 Avenue of the Americas at 44th Street. It looks like a war room, with a big electronic map on the wall. Lights blink on every building that's been hit. One can easily picture a bustle of generals clustered around, reckoning up the damage—but they're examining a map of southern Manhattan. And therein lies a story. To paraphrase the Walrus, it concerns chips and mips and cybernerds, and megabits and rings.

It is a story about bandwidth, the capacity a wire or radio has to haul information from here to anywhere—to move the e-mail, Web pages, stock trades, TV feeds, and all the rest of the value that digital bits convey. AT&T, Bell Atlantic, Sprint, and WorldCom sell bandwidth. And they sell far, far more of it in New York City than anywhere else. Which is not very surprising, unless you've been reading too much cyber-theory.

According to theory, bandwidth is killing the great city. Tom Wolfe's Masters of the Universe no longer need to pack themselves into the city's cement anthills; they can work their mastery from the wide-open spaces, where the deer and the antelope play. And the oracles of cyber-punditry generally seem quite pleased about it, too. The other thing they say (they're furious about this part) is that there's a dearth of bandwidth. Phone companies could provide it, but somehow they just won't.

The pundits are wrong, on both counts. Bandwidth is here, more is coming, and lots of it. But forget Palo Alto. New York City is where the cyber meets the road.

You could check out the war room yourself: it's the front office of a company called RCN. You've seen their post-Orwellian posters. One runs in huge block letters on a long billboard along the west side of Times Square: "You choose your President, why not your phone and cable company?" Others, plastered all over the city, depict Lenin's statue, about to be toppled. Lenin represents your totalitarian monopoly phone company, Bell Atlantic. RCN aspires to be the toppler. But if New York were a delicatessen, RCN would have to take a number.

Though RCN has the most noticeable ads, it is a late arrival. For well over a decade, the telecom revolution has been unfolding under the streets and in the air of this vast city. And no wonder: the five boroughs of New York occupy one ten-thousandth of the nation's land area but generate one-twentieth of the revenues earned in local markets by all U.S. local phone companies combined.

RCN mainly targets residential customers: hence the garish advertising all over town. In April 1996, RCN's parent company, Peter Kiewit Sons, acquired 80 percent of Liberty Cable. RCN soon began stringing fiber-optic cable ("fiber" or "glass" in technospeak) under the streets—about 80 miles worth so far—and installed a telephone switch. In August 1996, it began offering competitive packages of local and long-distance phone service, cable TV, and Internet access throughout Gotham's metro area. It undercuts Bell Atlantic's local service by a bit, and AT&T's long-distance service by a bit more. It recently waived all monthly charges for basic phone service for people who also subscribe to its cable service.

The New York metro area is now packed with companies like RCN. Most of them have been here a good bit longer and have done more, though with less fanfare. What makes RCN and its brethren so significant is that just about everything they are doing would have been illegal 15 years ago. Telephone service was a monopoly, established by law; New York Telephone had held an "exclusive franchise" since time immemorial. For state and federal authorities, peddling sex from a storefront on the Avenue of the Americas would have been more acceptable than slipping passersby a ticket to leer at competitive local phone service.

Early in the century, the authorities in New York, as elsewhere, had embraced the idea that telecom should be a monopoly. Competition, they believed, was uneconomical and inconvenient. In 1879, three telephone exchanges had been operating in Manhattan, but they didn't interconnect, and that was hardly convenient. Later, economic theory would definitively "prove" that the whole business was a "natural monopoly," that a single provider could serve local phone markets more cheaply than two or more competitors.

New York was one of the first states to change its mind. The state began opening all its telecom markets to competition in the early 1980s and had largely completed the liberation by 1996, when Congress passed a sweeping new Telecom Act intended to send the whole nation down the same path to competition and deregulation.

As part of that liberation, Merrill Lynch, Western Union, and the Port Authority received permission in 1985 to set up the Teleport Communica-tions Group (TCG), to offer satellite uplinks for the region's financial institutions and broadcasters. Legally, this was something new; with few exceptions, only incumbent monopolists like New York Telephone and AT&T had the right to sell such telecom services in local markets like New York City. TCG linked 17 big dishes on Staten Island by fiber-optic cable to companies across downtown Manhattan. The cable itself turned out to be more useful, simply to transport bits quickly and securely throughout the metro area and to interconnect directly with wire-line long-distance networks of companies like AT&T and MCI. So TCG unloaded the dishes and, with $50 million from Merrill Lynch, began to deploy more glass.

Today, 580 miles of glass and five big telephone switches later, TCG operates the most extensive competitive network in the area, within easy reach of just about every business in Manhattan. In January, AT&T announced plans to buy TCG for $11 billion. Not bad, for what started out as wire to connect a backyard satellite dish to New York's downtown den.

Similarly, WorldCom, AT&T's largest competitor, is buying up a bunch of the numerous other companies now in the same business. It has acquired Metropolitan Fiber Service (MFS), operational since 1991, with a 100-mile network that extends into Brooklyn and White Plains; Brooks Fiber, operational since 1997, with a 28-mile network that reaches out to White Plains and Long Island; and MCImetro, operational since 1996, with a 25-mile network in Manhattan.

Companies like TCG and MFS targeted businesses first, because they generate the most traffic and profit. In New York, as elsewhere, telecom's equivalent of rent control has delayed competitive entry into residential markets. Regulators have pushed down Bell Atlantic's basic residential rates well below cost, and the company makes up the shortfall in part by inflated business rates. Try opening a competitive bakery in a place where the state requires a large, established incumbent to price its bagels below cost. But competition for business customers has begun to put practical limits on such regulatory gimmicks. And rapidly rising demand for new services—wireless and high-speed Internet access in particular—has begun to attract competition to the residential side, too, at least in the biggest cities.

Well before RCN arrived on the scene, Cablevision began providing cut-rate local phone service and high-speed Internet access over a recently upgraded network to businesses on Long Island. Last July the company began serving residences as well. Time Warner now offers similar packages to business customers in Manhattan, over its 77-mile fiber network, with cable specially designed to carry high-bandwidth cable TV and telephone service.

The ground forces are getting plenty of new air cover as well. Six new providers of "personal communications services" (PCS) have recently joined the two cellular carriers that have served the area since the mid-1980s. Among them, Sprint Spectrum, Omnipoint, and WinStar are up and running; NextWave will begin offering wholesale service this year. In Manhattan, wireless phones are pretty old news by now, but there's huge growth now in wireless data. Be grateful: instead of making loud phone calls during dinner at Lespinasse, the Master of the Universe will be able to surf the Net silently on his palm-top.

It is a lot easier to start a competing local phone company today than it used to be, because competitors are given direct access to the hardest-to-duplicate part, the "local loop." That's the several thousand feet of wire that physically connects your telephone to a nearby "wire center." Tens of thousands of wires converge in a well-fortified basement, and then feed into mammoth electronic switches—highly specialized mainframe computers that process the signals and route the calls. Under FCC and state regulatory mandates that long predate the new 1996 Telecom Act, Bell Atlantic has offered competitors direct access to these loops.

As a result, numerous competitors now "co-locate" their own equipment in Bell Atlantic's New York City wire centers. This allows them to connect their own switches and trunks directly to the far end of the telephone wire that comes out of the wall in your apartment, without having to dig up the streets to duplicate the wire itself. In such cases, Bell Atlantic supplies only a stripped- down "loop," nothing more; the competitor supplies the dial tone, the ring, the billing—perhaps also the customer service, Call Waiting, and all the rest of what turns a wire into a usable service.

Taking advantage of such arrangements, competing local phone companies probably invested about $1 billion in the New York metro area last year. Overall, competitors are known to operate nearly 1,700 route miles of fiber and at least 15 big switches in the metro area. But nobody keeps official count, and there's no process at all for metering the bits moving through these systems. Much of the time, not even the companies that operate the systems know that much themselves.

The competitors are almost wholly deregulated. They must disclose what they intend to charge for local service in tariffs filed with the state, but they can add other services (cable, Internet) or offer promotions so freely that, in effect, they can alter price at will. They market fancy bundles and discount packages. They combine basic phone service with Caller ID, Call Waiting, and voice mail, often at steep discounts, then throw in some Internet or cable TV—or do it the other way around, throwing in the phone service if you take enough cable. Falling prices and improving quality are steadily narrowing the competitive gap between wireless and wire-line service. And because wireless offers the great convenience of mobility, it is beginning to compete with wire-line even at premium prices, in much the same way cable competes with free broadcast television.

Similar things are happening in San Francisco, Houston, Denver, and Miami. The cities attract the bandwidth for two simple reasons. First, that's where the customers are. The New York metro area generates 80 percent of the total local business revenues Bell Atlantic earns in New York State, and half of the total revenues it earns in its entire 14-state region.

Second, service is a lot cheaper to provide, on a per-customer basis, in densely populated areas than in the boondocks. A switch in a Manhattan wire center can reach more customers than one placed anywhere else in the country. A good share of the cost of service lies in deploying and operating these mainframe behemoths, and the more people you can reach with one, the cheaper things get on a per-customer basis. Just 12 wire centers in southern Manhattan generate 30 percent of Bell Atlantic's business-customer revenues statewide. Manhattan has a density of over 100,000 telephone access lines per square mile. In Oswego, New York, there might be 100. Because of the relative shortness of these lines in urban areas, requiring less digging and much less cable, competitors can lease naked loops from Bell Atlantic for about $12 a month. In the rest of the state, they run about $19.

Which brings us back to the big cyber-city paradox. It might indeed be possible to run the world's financial markets from Hot Springs, Arkansas, if you could just plant all of New York's new bandwidth there. But it isn't being planted there. It's being planted in New York instead, precisely because that's where the world's financial markets already are. So are the world's TV networks, advertising companies, accountants, and law firms. Demand for bandwidth attracts supply, and supply attracts still more demand. The city prospers.

People who like cities, and people who run them, have good reason to help make sure things stay that way. The objective isn't to deprive Hot Springs of any bandwidth; it's just to make sure public policy gets set in a way appropriate to the here-and-now competitive realities of urban telecom markets.

Here things get politically delicate. The 1996 Telecom Act directs certain key deregulatory calls to be made state by state. The most important of these calls is the last really big issue in U.S. telecom policy: when to free up local phone companies like Bell Atlantic to build region-wide voice and data networks. And the act says that the local telephone company does not get deregulated until it can show that its market is open and competition is under way. Long-distance carriers like AT&T stop the local phone company from competing against them by keeping the policy-makers' focus on the places where competition isn't happening, not on the places where it is. This is why you hear AT&T loudly insisting that local competition is not well under way, even as it shells out $11 billion for a company (TCG) that describes itself as "the other local phone company."

The policy calls are hugely important, though few people outside the halls of telecom wonkery have even a vague idea what the fight is all about. The local phone companies still represent roughly half of all telecom revenues and assets nationwide. It's easy to deride them as yesterday's complacent monopolists but foolish to assume that their vast reservoirs of labor, capital, and engineering know-how have nothing to contribute to the building of the cyber-future. Lots of other companies are building high-speed data networks and Internet backbones, and plenty more are selling discount packages of wired and wireless, video and voice, voice and data. But in a market that's growing at double-digit, and in some sectors triple-digit, annual rates, walling in half the capacity of an industry whose entire mission is to transcend walls is going to have serious consequences.

And walled in it is. In its New York City operations, Bell Atlantic currently must stay within the boundaries of "LATA 132," a region that includes the five boroughs of New York City, all of Long Island, Westchester County, Rockland County, and a substantial portion of Putnam County. This obscure but all-important political subdivision is a "local access and transport area," invented in 1984 in the course of the Bell System breakup, which carved the nation into 164 LATAs. Ever since, the law has strictly barred local phone companies from providing any wire-line service that crosses from one LATA into another.

The policy dilemma today is straightforward, and it sharply divides town and country. Regulation may make monopolies behave a bit better, but it invariably makes markets behave a lot worse. Local telecom markets are competitive in the city, or are becoming so quickly. In telecom markets, more than any other, cities can benefit enormously from the simple, tax-free stimulus of deregulation. The cities need to keep building the best, the fastest, to maintain their raison d'être in a digital world so eager to flatten them. In telecom, half the industry is pleading for the right to build new infrastructure, and the most important kind—spending shareholder dollars, not taxes, the same way subways and bridges once got built in a day when bandwidth meant moving people, not bits. The best way to get still more glass, more switches, more radios, more bandwidth, more competition, into the city is to deregulate more, sooner. As Ronald Reagan might have put it, standing boldly against the grim backdrop of an invisible barrier that slashes across the cyber-landscape of Putnam County: "Tear down this wall."

Deregulated, unconfined by walls as they already are, competitors like RCN are following the people and the money. They are racing to build new local telecom infrastructure where the revenues are highest and the per-customer costs are lowest. Don't trade your co-op for a hog farm yet. Bandwidth came to level the city. It has decided to live here instead.

 

 

 
Private companies are churning out the telecom capacity we need to dominate the Information Age.
City Journal Spring 1998.
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