Pothole Alert for the Information Superhighway : Communications: Requiring universal access would be premature and a drag on the interactive TV revolution.

At the “superhighway summit” today in Los Angeles, Vice President Al Gore will unveil details of the Clinton Administration’s new regulatory climate to promote the revolution in telecommunications. While the Administration deserves credit for the emerging consensus in favor of competition, deregulation and entrepreneurial dynamism, one aspect of its plan threatens to undermine the market aspects and severely dilute the economic benefits of the digital revolution.

The Administration appears to be urging that the vague and oft-misunderstood concept of “universal service” be applied to the wide range of new services about to become available because of the rapid advance of digital telecommunications technology. It would be a huge mistake for this dynamic and potentially competitive market to be shackled by the heavy government regulation needed to achieve anything resembling universal service.

A bit of history is instructive. Consider the classic case of universal telephone service. Universality has never been well-defined. In practice, the concept has simply meant requiring artificially low residential rates to increase subscribership. Residential rates have been subsidized by “loading” local telephone costs on long-distance, urban and business users.

In recent years, competition, the true agent of consumer protection, has threatened this regulatory shell game. Highly efficient new entrants to the local telephone-service market are taking away the high-margin customers, such as long-distance users, who now provide more than $20 billion a year to cover the costs of serving the lower-margin users. Now the Clinton Administration apparently wants to expand the concept of universal service to include interactive video, access to huge data bases and interactive shopping as well as basic voice telephone service. Gore recently said that the Administration wanted to avoid creation of a society of information “haves and have-nots,” warning against “blind adherence to the dead hand of a free-market economist.”

Before passively accepting the need for such a vast expansion of universal service, policy-makers need to examine how we are going to pay for it, how it will affect the economics of the digital telecommunications revolution and how many of us want or need all of these new services.

Interactive video services cannot, by any stretch of the imagination, be considered a necessity. Safety-of-life objectives are met by the current telephone system. Consider what interactive video services are likely to be viable and capable of paying for themselves: video on demand--VCR rentals generate $12 billion a year, video games $6 billion a year and home shopping $51 billion a year.

Furthermore, while it would be unwise to bet against the ultimate success of interactive video services, whether--or where and when--they will prove popular with consumers is too speculative to require investors and customers to pay for building a universal two-way video network. An impressive roster of companies has already lost millions of dollars on the premature hope that consumers wanted interactive services: Time Warner, Knight Ridder, Times Mirror and IBM / Sears (Prodigy). A conservative estimate for upgrading the telecommunications system to provide interactive video services is $100 billion--roughly equal to the combined current revenue of the cable and regional telephone industries.

A better approach would be to consider some more modest regulatory reforms for basic telephone service before creating a huge new regulatory entitlement. First, subsidies should be targeted to those who really need them. Many affluent people are now subsidized. Subsidies should be restricted to low-income customers or those in extremely high-cost areas. Second, the monies needed to fund universal service should be raised in ways that do not distort the competitive process or suppress demand. Third, new entrants must support the universal-service fund to avoid skewing the competitive process in favor of one technology or group of companies.

Most important, universal service should not be extended to cover interactive video services before we have a better understanding of the economics and demand structure of the new services. The market will determine the level of demand and the economics of the new services more quickly and efficiently than the “dead hand” of government.

It’s one thing to nurture and maintain an information superhighway. It’s quite another to force everyone to pay for a Cadillac to drive on it.