How The Bells Stole America's Digital Future

California's "Information Superhighway"

Between 1984 and 1992 more than 95 percent of Pacific Telesis' unregulated businesses were funded by local phone monopoly assets.[15] In 1993, Pacific Bell acknowledged that its network needed to be upgraded and announced plans for "California First," an audacious statewide information superhighway.[16] The company boasted that it would spend a whopping $16 billion dollars to replace the state's existing copper wire network with fiber optic technology. Manufactured from glass rather than copper, fiber optic networks are capable of delivering information at speeds up to 100 times faster than digital subscriber line (DSL) technology, which uses the existing copper wire infrastructure and typically provides high speeds for downloads only. By the year 2000, PacBell planned to have 5 million homes rewired:

"In November 1993, Pacific Bell announced a capital investment plan totaling $16 billion over the next seven years to upgrade core network infrastructure and to begin building California's 'Communications Superhighway.' This will be an integrated telecommunications, information and entertainment network providing advanced voice, data and video services. Using a combination of fiber optics and coaxial cable, Pacific Bell expects to provide broadband services to more than 1.5 million homes by the end of 1996, 5 million homes by the end of the decade."[17] (Emphasis added.)

As envisioned by PacBell, "California First" would not just supply regular cable and online services, it would also give customers up to 300 digital channels:

"...Pacific Bell's proposed platform, consisting of 70 analog channels and between 150 and 300 digital channels, would offer sufficient capacity to serve multiple programmers."[18]

Consumers would receive a cornucopia of services, from "multi-media, virtual reality computer games," to "unlimited programming choices at flexible times for TV watchers."[19]

But along with the hype, there were questions. California Senator Steve Peace (D-El Cajon) worried that PacBell's plan would create a schism between communities that were wired and those that weren't–a portent of today's digital divide:

"You're going to have two societies out there–one that's plugged in and one that's not plugged in," Peace said. "Pacific Bell has carved out where the wealth is in the county, and it's going to give those communities a head start. The gap is going to get wide and we'll never catch up."[20]

Pacific Bell started construction in May 1994, initially targeting the San Francisco Bay Area in Northern California, and Los Angeles, Orange, Riverside and San Diego counties in Southern California.[21]

In addition to the billions that Pacific Bell would be spending on the California First plan, the company announced plans to spend $100 million over a three-year period to wire more than 7,400 public schools, community colleges and libraries.

"By the year 2000, phone company officials predicted, every classroom will be wired to handle voice, data and video telecommunications."[22]

An Information Highway to Nowhere

Today, miles of fiber optic wire line the streets of San Diego, Los Angeles, Orange Country and San Jose. But little of it is being used for its intended purpose; most of it is "dark fiber" now. Most California consumers still don't have access to two-way, interactive, full-motion, digital video service, and Pacific Bell only recently began widespread deployment of digital subscriber line (DSL) technology over its existing copper wire network. Regulators had expected much more:

"... Pacific's proposals will produce new investment in an advanced telecommunications infrastructure, bring additional competition in the distribution of video services, and give consumers in those areas additional choices in video programming and interactive digital services."[23]

What happened? Quite simply, Pacific Bell didn't do what it promised. An examination of Pacific Bell's construction expenditures through 1996 reveals no major increase in spending for network construction. In fact, the company spent more money on its telecommunications infrastructure in the mid-1980s than it did in the three years after it announced the California First plan.

Pacific Telesis Capital Expenditures for Construction, 1984-1996

(In Billions)

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
$2.1 $2.3 $2.2 $2.2 $1.6 $1.9 $2.1 $1.7 $1.8 $1.9 $1.7 $2.1 $1.8

Source: Pacific Telesis Annual Reports, 1984-1996.

If the company had implemented the plan to spend $16 billion on California First, capital expenditures from 1994 on would have been about $2.3 billion per year above the average spent during the period from 1984-1993. But that didn't happen.[24]

"Pacific and Southwestern Video Curtailment/Purchase Commitments–SBC also announced in 1997 that it was scaling back its limited direct investment in video services in the areas also served by Pacific Bell Telephone Company (PacBell) and Southwestern Bell Telephone Company (SWBell). As a result of this curtailment, SBC halted construction on the Advanced Communications Network (CAN) in California. As part of an agreement with the ACN vendor, SBC paid the liabilities of the ACN trust that owned and financed ACN construction, incurred costs to shut down all construction previously conducted under the trust and received certain consideration from the vendor. In the second quarter of 1997, SBC recognized net expense of $553 million ($346 million net of tax) associated with these activities. During the third quarter of 1997, SBC recorded the corresponding short-term debt of $610 million previously incurred by the ACN trust on its balance sheet.
Additionally, SBC curtailed certain other video-related activities including discontinuing its broadband network video trials in Richardson, Texas, and San Jose, California, substantially scaling back its involvement in the Tele-TV joint venture and withdrawing its operations in territory served by SWBell from the Americast venture. During 1999, SBC negotiated a settlement with its Americast partners related to the withdrawal. The settlement did not have a material impact on SBC's financial condition or results of operations. The collective impact of these decisions and actions by SBC resulted in a charge of $145 million ($92 million net of tax) in the second quarter of 1997."[25]

Although Pacific Bell didn't spend the $16 billion, the company wrote off what it did spend. Customers never benefited from the network or the write-offs.

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