Interview Date: May 2000
Interview Location: Washington, DC
Interviewer: Gerry Yutkin
Collection: Hauser Collection
YUTKIN: Hello, I’m Gerry Yutkin. This oral and video history is made possible by the Hauser Foundation Oral and Video History Project of The National Cable Television Center and Museum in Denver, Colorado. We’re here at the offices of the Federal Communications Commission and we’re talking with Dr. Robert Pepper, who is the Chief of the Office of Plans and Policy. Thank you very much for agreeing to do this. It’s nice to see you again, it’s been a long time and we appreciate you taking the time. You’ve been with the FCC now for about 11 years.
PEPPER: 14, I think.
YUTKIN: 14 years. And how long have you been with the Office of Plans and Policy?
PEPPER: That’s been about 11. I started as Chief of the Office on an acting basis in December of ’89 and then that became permanent a couple of months later. So, for a little over 10 years.
YUTKIN: In the last ten years, your duties have covered all kinds of areas, but a lot of it having to do with cable television?
PEPPER: It comes and goes. It cycles. The cable issues were probably the most prominent after the ’92 Act was passed and then we created a Cable Bureau in, I guess it was ’93 or ’94 and then most of those issues went to the Cable Bureau, but more recently we’ve been working with the Cable Bureau on some of the issues having to do with the transition to digital television, cable compatibility questions and issues having to do with industry structure, and then convergence. So, it comes and goes.
YUTKIN: We’re recording this in May of the year 2000, so let’s put it in perspective. How many chairmen have you worked with? Chairmen of the FCC?
PEPPER: Well, when I came here, I actually worked for a different Commissioner; I was a senior advisor to Commissioner Dennis. At that time, Mark Fowler was Chairman of the Commission, and then joined the Office of Plans and Policy and Dennis Patrick was Chairman. I worked with Dennis and was on the staff and then his successor, Al Sykes, was Chairman and he was the one who appointed me Chief of the Office and then after Al, Jim Cuola was Chairman for an interim period. Of course, Jim had been here as a Commissioner for many years and then Reed Hunt was Chairman and now Bill Cannard is Chairman. So I’ve been here, I’ve seen a number of different Chairmen.
YUTKIN: But you’re not in an appointed capacity?
PEPPER: No, I’m a career person.
YUTKIN: But you were still given your position, you said, at the pleasure of the respective Chairman.
PEPPER: That’s right. As an Office Chief, I sit in my current position at the pleasure of the Chairman and if there’s a new Chairman who comes in and wants me to do something else, then I’ll do something else.
YUTKIN: Let’s go back a little bit. You’re involvement with cable television began a long time ago when you were in graduate school?
PEPPER: Yes.
YUTKIN: Now you’re from New York, but this was at the University of Wisconsin?
PEPPER: Yes, that’s right. Madison. In 1971 I started graduate school in Madison and I’d done undergraduate work there as well.
YUTKIN: In what field?
PEPPER: Communications.
YUTKIN: Oh, always.
PEPPER: Yes. And one of the professors who I worked with as a graduate student, I’d worked with as an undergraduate, Larry Litche, had just been appointed the executive director of then Governor Lucy’s commission on cable communications. Larry had also been appointed – at the time there was a federal/state/local advisory committee here at the FCC created by Dean Burch, who was Chairman, to look at cable TV and the issues at federal, state and local levels. And Governor Lucy appointed Larry to be executive director of this commission to make legislative recommendations to the Governor and as the new graduate student on the block, Larry looked around and said, “Okay, PEPPER:, I need somebody to help me out.” There were two or three of us who ended up staffing that commission. So that was in, I guess it was August, September, sometime in that time period, of 1971 and that was my introduction to the beginning of cable and cable policy.
YUTKIN: And from that they came out with recommendations?
PEPPER: They came out with a legislative proposal. They were a set of recommendations – “A Legislative Proposal for State Regulation”. It created a state regulatory framework because of course there was no federal law at that time. That came out about the same time in ’72 as some really important breakthrough new rules from the FCC, in a compromise that Dean Burch had worked out working with people over at the White House. It was the Office of Telecommunications Policy.
YUTKIN: Under the Nixon administration?
PEPPER: Yes, and the ’72 rules eliminated essentially the FCC’s rules that prevented cable from growing. I mean until then there were all these rules that basically said you couldn’t bring in distant signals. You had these leapfrogging rules where if you were going to bring in a distant signal it had to be the nearest distant signal, it couldn’t be from far away and in ’72 those rules all began to change. The whole idea was that cable television was something that actually would be very consumer friendly, it was in the public interest. So the FCC was beginning to move to de-regulate cable and at the same time at the state and municipal levels there’s a lot more interest in cable television and we were trying to create a framework at the state level. Then I worked a lot at that time with municipalities in Wisconsin and then the entire upper Midwest on local franchising. I remember in Madison, the original cable – what happened there was some guy came along and he applied to the city council to get a cable franchise.
YUTKIN: With a white hat and a Cadillac, right?
PEPPER: No, Madison at that time had three stations and they wanted cable TV and they could bring in an independent from Milwaukee or Chicago. Everybody wanted the Cubs.
YUTKIN: The Cubs.
PEPPER: Right, of course.
YUTKIN: Was that before the Braves?
PEPPER: No, the Braves were there, but everybody wanted the Cubs and of course there were the microwave systems, the old United microwave. And this guy applied to the city council but immediately the three television stations, the ABC, CBS, NBC affiliates, ganged up and went to city council and said, “No, no, no, no. This is going to kill free TV.” You know how that worked.
YUTKIN: Sure.
PEPPER: So what they ended up doing of course, was they made this guy a deal he couldn’t refuse and they created a joint venture that was one-quarter owned by the original applicant, one-quarter by the ABC, one-quarter by the CBS, one-quarter by the NBC affiliates. They got the cable TV franchise in Madison and then surprise, surprise, chose not to build, right? But they had this franchise.
YUTKIN: This was in ‘7-?
PEPPER: No, this was in the ’60’s.
YUTKIN: Oh, it was before.
PEPPER: This was before, and then the commission adopted, the FCC adopted cross-ownership rules in which they said the local broadcast station couldn’t own the local cable system in part precisely for that reason, because the local broadcasters were basically strangling the growth of cable. So what was interesting was that two of the television stations sold their interest in the cable system, one of the television stations said, “There’s a future in cable TV”, and actually kept their interest in the cable system and sold their broadcast interest.
YUTKIN: Oh, really?
PEPPER: Yes, real interesting.
YUTKIN: Those were local owners?
PEPPER: Yes, there were some local owners in Madison who did that.
YUTKIN: Do you remember their name?
PEPPER: I forget.
YUTKIN: It wasn’t the Fitzgerald’s? CHECK TAPE
PEPPER: I don’t know, it could have… It was the total… I think it might have been.
YUTKIN: We did an interview with Newton Minow, who refers to a very interesting situation in the creation of total television.
PEPPER: Well, David Walsh, who was their lawyer and then was involved in this – I think his father was involved in the original cable system in Madison – actually had been a legal advisor for Nick Johnson here at the FCC and then ended up going back to Madison. So it’s a very small world.
YUTKIN: It’s a very small world, yes it is.
PEPPER: But in any case, I got involved in that, so after the work with the Governor’s commission, we then started doing a re-franchising of the cable system in Madison because they’d never built. So I’d gotten involved with a friend of mine, who actually at that point became mayor of Madison, and he knew I knew a little bit about this cable TV thing and he asked me to…
YUTKIN: A little bit at that time was a lot. You were an expert.
PEPPER: Oh, I’d been doing it for six months, right?
YUTKIN: In those days…
PEPPER: He asked me to help him pull together, again, a municipal city commission to evaluate the franchise and re-negotiate the franchise agreement. So I got involved in cable franchising from the municipal side, at that time, and again, that must have been ’72, ’73, in there, after having finished the work with the Governor’s commission and meanwhile, I’m a graduate student and getting involved in city politics and city franchising and then ended up consulting with small cities through Wisconsin and northern Illinois and that whole region.
YUTKIN: Was there any competition at that point? Were other people interested in getting a franchise? Were there any companies that were applying? What motivated this other than the fact that the existing franchise owner did not build it?
PEPPER: Oh, in Madison it was, and again, I forget the details, I think it was a ten-year franchise that was granted in ’65.
YUTKIN: Exclusive, at that time?
PEPPER: I don’t know whether… It was an exclusive franchise, I don’t know whether it was de facto or de jure. It was a single franchise, there was never any consideration for a competing franchise. I don’t think it was somebody else that came in. The city, which was, earlier you had mentioned university towns, there was a lot of interest in public access in those days. Remember, the FCC had had local origination rules back in the early ’70’s.
YUTKIN: Oh sure. From the ’60’s even.
PEPPER: From the ’60’s, nobody had really done anything with that. There were community groups, university groups that were interested in local origination. There were people who – one of the things I did in Madison was hold hearings.
YUTKIN: Did anybody come out?
PEPPER: Tons of people and they were just hopping mad because they’d either been in other cities or towns where they had cable and they could see more than three network affiliates and a PBS affiliate. They wanted to be able to get Milwaukee stations, Chicago stations. The FCC eliminated these limitations. There were now these rules that were still anti-leapfrogging but Madison was a top 100 market so they could import, at that point, two distant signals, one of which had to be from the nearest top 50 market. So, one from Milwaukee, one from Chicago. So there was a lot of interest and the cable operator was saying, “Well, gee, now we’re going to start building now that the FCC has changed these rules and we can actually get people to reasonably subscribe to cable.” But it was at that point – it’s all foggy now, it was a long time ago, it’s 30 years – but at that point you were coming up on the end of the ten-year franchise and the question was whether we should let this company actually build out because it had never built and it didn’t really meet the terms of its franchise. And so the questions was, what should the new ordinance be, what should the new franchise be that we negotiate, under what terms and conditions?
YUTKIN: ????
PEPPER: We held lots of hearings, we drafted a new ordinance, got city council to pass it. As part of that, they created a cable commission and we granted the franchise and oversaw the build out, which turned out to be an incredibly popular system. So it worked out very well and I remember, one of the things that we did was negotiate a local origination studio for public access, to which people said, “No, this is never going to work. Never going to work.” In fact, there was an old storefront on the eastside of Madison that had been vacant and it became a public access facility and, in those days, one of the most active in the country.
YUTKIN: And that’s kind of more common in university communities, probably to this day.
PEPPER: Yes, and later on we’ll talk about Iowa City, but that was clearly the case and actually it worked to the advantage of the cable operator. Remember, that was before HBO on satellite.
YUTKIN: Before anything on satellite.
PEPPER: Before anything on satellite. This was before the crazy man, Ted Turner, thought about taking this UHF TV station in Atlanta that nobody’s watching and putting it on the satellite and creating something called a Superstation. I mean, talk about genius.
YUTKIN: As I recall, WGN was put up on satellite and they were fighting it. They did not want to be on it at that time.
PEPPER: They didn’t want to be on it because they had their microwave network distribution and one of the things in the franchising process, you may remember, that there was the urban institute. A lot of the cities, especially the smaller cities, as they were going through the franchising process in the mid to late ’70’s and there was this bubble being blown up about the enthusiasm about cable and then the bubble burst – share prices went down and there was some scandal with franchising and the CEO of one of the large companies actually went to the slammer.
YUTKIN: That was a long time ago.
PEPPER: That was a long time ago, I’m just saying there was a lot of enthusiasm about cable in the early ’70’s, right? And then people had a lot of difficulty actually fulfilling on that promise and it wasn’t until the satellite service actually came at the end of the ’70’s, beginning of the ’80’s where things really took off. So there was almost this false start and part of it was because of the lack of programming and people were trying to figure how do you fill these channels.
YUTKIN: That’s still a problem in terms of filling them for great periods of time. I mean, the networks are still having that problem too, with content.
PEPPER: Yes, but in those days the issue was, some of the companies were coming in and even then talking about a lot of the blue sky stuff. There was the Qube experiment, there was the beginning of the two-way…
YUTKIN: The CEA [???]
PEPPER: Right, that was later. But there was still a lot of… I mean, Ralph Lee Smith wrote the Wired Nation back in the early ’70’s and this was sort of the vision for public access and two-way services. It’s actually a really interesting book if you go back and take a look at it and it was originally an article for The Nation magazine that he turned into a book back in the early ’70’s.
YUTKIN: Oh, a long time ago.
PEPPER: A very long time ago. And so there’s a lot of companies competing with one another, even in the early ’70’s, on blue sky that nobody had any idea what it meant, nobody had any idea about the satellite services.
YUTKIN: Any examples, besides satellite?
PEPPER: Institutional networks, two-way, things that we’re actually seeing now about linking up, wiring schools and there’s a lot of that and a lot of promises that were being made and in working with municipalities, one of the things in the early ’70’s, even late ’70’s, that I did was try to separate – when companies would come in and make bids to cities or we’d open up a request for proposal and I started talking about the Urban Institute, they worked with the big cities and the little cities couldn’t afford them so they came to graduate students like me and …
YUTKIN: The price was right.
PEPPER: The price was right, helped them with drafting ordinances and negotiating franchise agreements and the things that I focused on in those small towns were things that people really wanted, that were practical. How many channels at what price and do I get the White Sox in addition to the Cubs. And that was what is important to them.
YUTKIN: Sure. So you were working on your dissertation at the same time you were becoming an expert in franchising.
PEPPER: Yeah.
YUTKIN: What was the topic of the dissertation?
PEPPER: It was a political comedy of the creation of PBS.
YUTKIN: Ah. Okay.
(Laughter)
PEPPER: Now you know.
YUTKIN: I don’t want to get into that. Let’s skip forward to Iowa City. You went from Madison to Iowa City?
PEPPER: Finished up in Madison, got my degree.
YUTKIN: Was that ‘7-?
PEPPER: ’75 – ’74,’75, in there. Went to Iowa City.
YUTKIN: As a …?
PEPPER: As an assistant professor in communications. Became head of the, essentially the broadcasting program, chairman of the broadcasting program and mostly taught policy, law, political economy of media telecom and there was no cable franchise and I was doing consulting and got looped in and became chair of the Iowa City cable commission and we went through this competitive process to grant a franchise.
YUTKIN: Which was when we met, in I think 1979.
PEPPER: Right.
YUTKIN: At that time, Iowa had a referendum requirement.
PEPPER: That’s right. I remember that.
YUTKIN: And prior to that, prior to the Iowa City franchise, I’d been with ATC, which is now Time Warner and I was in Council Bluffs and there were four or five, half a dozen competitors and there was a referendum held and ATC received a majority but not a plurality?
PEPPER: Plurality but not a majority.
YUTKIN: Whatever, it wasn’t 50% plus 1. So there was a heated campaign going on. The results of the referendum were inconclusive in spite of the fact that the council had awarded it to ATC and then they went back and had individual referenda for each company, which was much more expensive, it took a long period of time and then ultimately ATC got the franchise. Iowa City, as I recall, was just around that time and followed thereafter. Were you involved during the franchising, at the beginning there?
PEPPER: I was involved in writing the ordinance and then putting out the RFP, holding the hearings and going through the referendum, but what was interesting…
YUTKIN: But it was an individual referenda, or…?
PEPPER: I don’t this it was an individual… I don’t recall.
YUTKIN: Or maybe there was just this one election and ATC got it.
PEPPER: But what was interesting about that was first of all the referendum law actually went back to the turn of the century to the utility law. And it was when people were actually voting on who their phone company and electric company should be. So even though cable was not a utility, although it was not clear what cable was in those days before the 1984 Federal Act, right?
YUTKIN: Sure.
PEPPER: In Iowa there had been some court cases that came under, for franchising purposes, utility law. So that’s where the referendum came from. What we did was essentially put out a request for proposal, had a competitive process, held public hearing and then the city’s commission essentially…
YUTKIN: Of which you were chair.
PEPPER: Right. So we did our evaluation and then made a recommendation to the voters.
YUTKIN: To the voters or to council?
PEPPER: To the voters. To both. As I recall, but I remember that we then actually, and the Iowa City Press Citizen was the local newspaper, there was an insert that the city had published with the pros and cons and it was basically ATC versus Cox, as I recall, in the final vote. And there was a recommendation on the pros and cons of which of the two proposals the city commission recommended and ATC won the election and was franchised and then we were sued by Cox because they wanted a franchise.
YUTKIN: I think that’s a very important point because at that time it was wide open and there was no precedent.
PEPPER: Right, and Cox came in and said, “We want a second franchise.” Because we made sure that we said it was non-exclusive, so it was a non-exclusive franchise, they wanted one, and ATC said, “Wait a second, our bid based upon the number of channels and the price and everything else assumed that we’re going to be the only one, at least initially.”
YUTKIN: Sure.
PEPPER: And so what we did, the cable commission’s recommendation to council, which adopted the recommendation, was to grant, at that time I think we referred to it as the first franchise to ATC, but at that point to not grant a second until we saw how ATC did and it was at that point that Cox sued us in state court and demanding that we must give them a second franchise. Of course they weren’t interested in a second franchise. They weren’t interested in doing an overbuild. We said no and the court upheld us. It was kind of a really interesting time. I’ve wondered since then what would have happened if we had said sure. We’ll actually do what only a couple of other cities had ever done and that was competition.
YUTKIN: I think, was it Allentown?
PEPPER: Allentown, there were about 20 cities around the country that had overbuild systems and it could have been a really interesting experiment, but see, we believed you Gerry, when you came in and said, “Oh, we can’t afford to face competition”, we said, “Oh geez, well let’s see how you do first.”
YUTKIN: Well, I don’t know if we said that about facing competition. And then there was a very strict timeline for presenting.
PEPPER: A very strict timeline.
YUTKIN: I mentioned this before, but I’ll mention it again, we were trying very hard to react and to build within the timelines and then we had a situation in which everything was going along but we had a problem with a tower. At that point something like 99% of the requests filed before the FAA permitted the towers to be built, but we had a problem because it was on the path to an airport and that put us behind just in that area. But why don’t you tell us what you did because I thought that it was a very interesting way for you to incent, kind of a carrot stick situation, which of course as an operator I would say, well we didn’t need that because we were doing it anyway, we were trying to get it through as much as possible. But I thought it was very unique the way that you and the commission handled it.
PEPPER: Well, as I recall… One of the things that we had done in the ordinance and in the franchising agreement, which was not typical at that time, as you know, was put in specific penalties for non-performance and to not make something a death penalty because all too often at that time the only remedy for a city, there was a performance bond and you could revoke – the whole thing would come do or you could pull the franchise. That never made sense to me, so we actually put in graduated penalties and that was part of the ordinance in the franchise and then when you were in non-compliance, we found that in fact you were not, you explained what the problem was, you were still in non-compliance. We went to city council and the penalty I think we got was 1,000 dollars a day.
YUTKIN: It was a fine.
PEPPER: It was a fine but got from the council sort of delegated authority back to the commission to implement that and then we met, right? To see whether in fact you were really – we tried to hold your feet to the fire. I forget, I don’t think you paid anything or did you?
YUTKIN: No, we didn’t.
PEPPER: You didn’t have to.
YUTKIN: I think in fact, if I recall, council voted for it and you said, “Well, our relations have been pretty good with the company and we would suggest that you give us (that is the commission) the authority to impose the fine should we determine that they’re dragging their feet.” And as it happened, I’m almost positive that you did not defer and impose the fine.
PEPPER: I don’t think we did.
YUTKIN: So everything went happily ever after I think. At that point, tell me, wasn’t there a new library that was being built and the cable system was part of that.
PEPPER: Yeah, I was just thinking about that. I haven’t thought about that in a long time.
YUTKIN: Now that doesn’t compare to the trees in Sacramento that the city wanted.
PEPPER: No, in fact again, the approach that we took was more of a partnership.
YUTKIN: With the library and the cable company?
PEPPER: Well, the city and the cable company and the library was one of the things in which we implemented that. And that was the city was building a new public library and we were very interested in local origination. Iowa City is what? About 20 miles south of Cedar Rapids where the TV stations were. There was essentially no local news except if there was a car crash or something, or a fire. There was no local television news about Iowa City and we wanted local programming, local origination. And it was a university town, there was a lot of interest in public access. ATC had talked a lot about local origination of public access and we felt that you were very committed to that. We viewed it as a partnership. The company, ATC, was very interested in local origination and the public access, I mean, more local origination than public access. And in fact, it was in part because that’s one of the things that differentiated Iowa City from Cedar Rapids, so more people, if there was actually local content, more people would subscribe to cable. The city was building a new public library and so viewing this as a partnership, what we did was we said, “Okay, fine. We will build the facility, you help fund its operations.” As I recall.
YUTKIN: What about the equipment?
PEPPER: You provided the equipment. We provided the facility, brand new studio facility. We paid for the cable administrator. It was out of the franchise fees but at least we tried to actually… that’s another thing by the way, we tried to use the franchise fees not to just go into general revenue but actually use the franchise fees to feed back into supporting the cable operation.
YUTKIN: That was unusual because a lot of the cities did not.
PEPPER: Took the money and run.
YUTKIN: Yeah.
PEPPER: We were very consciously trying to use that to reinvest in our side of the cable operation, to help fund. Drew Schaeffer was our cable administrator, great guy, and we had a lot of students and volunteers and so the company supplied the equipment and engineering support and we supplied the facility and some of the staff and we really viewed it much more as a partnership, risk sharing, as well as sharing benefits. That facility became a real model for local origination and public access.
YUTKIN: And you had a place to put the students too.
PEPPER: We needed a place to put students, you bet. I was still wearing that university hat, that academic hat. That worked, I thought, really well.
YUTKIN: It’s 20 years later now. How’s it doing?
PEPPER: I haven’t gone back to Iowa City. I have no idea how it’s working there. I assume it’s still working well. The public access is one of those funny things where it was great in concept and it worked really well in some places but in lots of places it never worked. In fact, there’s some places where not only did it not work, it ended up imposing such significant costs on the systems that it actually raised people’s rates. I mean, I remember I was here at the FCC looking at some of these issues and there were some systems that were charging, I think at the time basic was 18 bucks, $3 of which was directly attributable to the costs of public access, and that is a very, very high price to pay and in fact I think if you said to most of the people in that community, would you rather pay $15 a month without public access or $18 a month with public access, given the level of public access or local origination or content in that community, which was a suburb of Chicago, this one in particular, that I think that the average person in that community would have said 15 bucks without it because there wasn’t a whole lot. Now, I frankly think that in a place like Iowa City, because of the way we did it, I don’t think the costs were – there was not a 20% cost premium, at least you never told me there was, I don’t think there was. And I think even if it was that, although it wasn’t even close to that, viewers in Iowa City valued the local origination because it was local city programming. There was news, there were talk shows, there was the public access program, but it was a lot of local origination programming as well, the city council meetings and so on, and I think people valued that. But it’s a benefit/cost tradeoff and all too often the public access costs just so outstrip any of the perceived benefits by average consumers that I don’t think it really has the kind of support today that it could have had.
YUTKIN: And with few exceptions, I don’t think it had that much support in many of the cable franchises in the ’70’s and ’80’s.
PEPPER: Oh, I think that’s right. In fact, some of the cities, two of the cities I worked with, Madison and Iowa City, are both college towns. A lot of support for local origination and public access and it worked. There were a lot of other smaller communities that I consulted with in which public access was not that important and the kinds of agreements we had did not reflect that level of commitment on the part of the company because the communities didn’t want it or weren’t going to use it and there had to be a balance.
YUTKIN: It sounded very good in franchising.
PEPPER: Oh, it was great in franchising! In fact, there’s a funny story about back in the late ’70’s, what companies were promising and sort of sorting through what was real and what was unreal. And then of course, companies protesting that they could do more than the winning applicant because they were proposing all this blue sky stuff. The funny story was there had been a visiting professor at the University of Iowa, who was visiting from Australia.
YUTKIN: Communications?
PEPPER: Communications, from Melbourne. And she had been a member of the Australian Broadcasting Tribunal.
YUTKIN: Which was…?
PEPPER: Their FCC. And then it became the Australian Broadcasting Commission, so it’s their version of the FCC.
YUTKIN: This is in the late ’70’s?
PEPPER: This is in the late ’70’s, actually she may have been in Iowa City in ’80. I think it was ’80. She went back to Australia and we corresponded. She knew I was doing a lot of work with cable and my franchising and the city commission and so on, and one day she called up and said that she was involved with some cable issues there in Australia and what they called the country or the regional broadcasters, who obviously were not thrilled with having competition from cable, were interested in having sort of an independent expert about cable in the United States because they were hearing a lot from the US cable operators who wanted to get into Australia.
YUTKIN: But at this time, the satellite was up.
PEPPER: Well, at this time they were proposing a satellite service for Australia, and so there was this issue of satellite versus cable TV. They wanted somebody to come to talk about the US cable industry from an unbiased perspective and they wanted me to come over and do these presentations figuring that even though I didn’t support their position of strangling cable, because I thought cable was a nifty thing, whatever I would say would be enough to discombooble the whole debate. So I said, “Well, I’ll do it but I will have a disclaimer saying that I’m not here representing their views, in fact they probably don’t even agree with my views, but I’m happy to testify before the ABT.”
YUTKIN: And they brought you over anyway.
PEPPER: They brought me over anyway, which was great.
YUTKIN: For you.
PEPPER: For me, and I did some other lecturing. I did a lot of work at the university there and so on. It worked out fine. This was, I guess I went over in November of ’81. This was November of ’81. I mentioned Cox, they were trying to get franchises all over eastern Iowa when ATC was competing against them and they got the franchises in Cedar Rapids based in very large part on their proposal for their index system, which was their two-way blue sky system. It was going to have all kinds of polling and two-way and interactivity.
YUTKIN: It was already on a beta test, wasn’t it?
PEPPER: It was a beta test, but that was about all, and in fact, it was one of those technologies that never made it and there were a number of cities in which they never built it out and there were in some cases some suits and a lot of churn at the municipal level because of promises made, promises not kept. It was one of the things that we avoided in Iowa City by just trying to be more practical instead of… the blue sky was great, but that wasn’t the centerpiece of our franchise. Well, that was Cedar Rapids and actually they pulled the plug on index at that point, when I went to Australia. So there’s a whole series of witnesses testifying before the Tribunal and the witness right before me was a guy from Cox and he’s talking about how cable television is going to change everything in terms of the media landscape in Australia and he started talking about index and he started talking about the two-way blue sky services and he used as his example Cedar Rapids, Iowa. He was going on and on about how wonderful all this was. That was fine, but of course they’d already pulled the plug on it.
YUTKIN: And he didn’t know?
PEPPER: Either he didn’t know or he didn’t say. So I was next and I went to testify…
YUTKIN: Well, he certainly didn’t know that you were next!
PEPPER: Oh, he had no idea who I was, right? I sit down, I do the introduction and I say, “And by the way, just before I start talking about the legal framework and the franchising structure and how cable has grown and the number of channels and the growth in subscribers and so on, I’d just like to point out that the previous witness talking about Cedar Rapids, Iowa is something I know a little bit about since it’s 20 miles up the road and I can tell you that in fact it was a complete failure, they’ve cancelled the project, they pulled the plug on it and Cedar Rapids is suing Cox.” And then went on to my presentation.
YUTKIN: Which was kind of pro cable, though?
PEPPER: Yes, it was, I would argue that it was pro consumer, more channels, more choices and cable was a real contributor to that in that there’s sort of a balancing in trying to – yes, it could be viewed as pro cable. I like to think of it as pro consumer. People like more TV, but to do it, again, in a balanced way so that you would have, for example, the things that we were able to negotiate. Things like local origination, things like institutional networks where they made sense and so on. Meanwhile, these guys from Cox are in the back of the room mumbling, “Who is this guy? Where did he come from?” It was actually very funny.
YUTKIN: So what happened? Did they rebut?
PEPPER: No, not that I recall.
YUTKIN: And what happened with the commission?
PEPPER: Oh, well actually what ended up happening was the satellite interests killed cable in Australia. They still don’t have it and it’s just now beginning but basically the satellite interests in Australia killed cable because they basically said, “Look, we need satellite because we’re a very large country, thin population, satellite gets everywhere, cable’s only going to be in the big cities, and so on and so forth.”
YUTKIN: You know, that kind of brings me to a point, because I remember being involved in the franchising process in several operations and I remember a phrase that was frequently used that was “When it becomes economically and technologically feasible.” Now you just mentioned a few minutes ago, you mentioned local origination and how it sounds very good and everybody can get very excited about it but if you don’t get the support from the community then it’s…
PEPPER: Oh, public access. I think there’s a difference between public access and local origination and we blurred the distinction purposely. And the difference was that of course public access depended upon people sort of walking in off the street or training themselves and you never know what the content is and you can’t build a program schedule that people want. Whereas local origination you could.
YUTKIN: But it’s still a question of what’s going to be supported and watched by people.
PEPPER: Sure.
YUTKIN: I mean, in Iowa City maybe you did have a fair number of people watching council meetings, but in lots of other places…
PEPPER: But we also did local origination if you recall, there was also the local news, local sports, local current affairs or public affairs and so there was programming that people in the community had no other way of seeing and the company was actually producing some of it in conjunction with the city, which is different than the public access, which is just a walk in.
YUTKIN: Well, let me get back to my point, which was we would say when it’s economically and technologically feasible. What that meant was if I’m selling you my company, I’m going to want to present it in the best light, the one that is going to be the most advanced, and index, the idea of index, in the same way Qube, which was an experiment in ’78, I think, it was still a great idea and it had problems and it, I guess you could say, it failed, but the idea didn’t. Its time hadn’t come, it wasn’t quite technically practical.
PEPPER: It wasn’t practical.
YUTKIN: But it was a great idea. So actually, what I’d like to ask you is, if you would have been working for a cable company in the franchising process, how would you have sold something that was a little bit blue sky?
PEPPER: Well, look, from a franchising perspective, from the city’s perspective, people were making all kinds of promises that, from our perspective, people were making promises they knew they couldn’t keep. And they did so with impunity because they figured, well, we’ll just, quote, try, and then we’ll say but it’s not economically feasible, the equipment’s not really available, we thought it was going to be available, it costs too much and then we’ll just renegotiate the franchise and not have to do it. There was a whole period of time when promises got out of hand because I think what happened was, there were companies that very legitimately were experimenting, right? But what happened was, people became so enamored with the vision of the experiment, they were no longer presented as experiments. Lots of experiments fail, they don’t work. You don’t do an experiment everywhere. And again, the average citizen wanted to know can I get a lot more TV, is it going to be at a really nice, good price, and can I get (this is before satellite, remember) this microwave stuff, can I get an independent station from Milwaukee, and independent station from Chicago, can I see the Cubs, can I see the Braves, can I see the White Sox?
YUTKIN: Well, but they weren’t talking about two-way interactive at that point in terms of promising it.
PEPPER: In the late ’70’s they were.
YUTKIN: In the late ’70’s. After the satellite.
PEPPER: Well, the satellite started in ’75. When did TBS go up?
YUTKIN: About ’78, ’79.
PEPPER: ’78, ’79. CNN, I can tell you is ’81 – ’80, ’81, in that period. ESPN was ’80, ’81. I remember going to a meeting, I think it was 1980, it could have been ’79 or ’80, in Atlanta at Scientific Atlanta, Sid Topol was the president and they were a satellite company. They were in the business of selling satellite dishes and they were trying to get help to create a market for that. They had a presentation by a bunch of what at the time people thought of as crazy, wild-eyed visionaries. Fred, I forget his last name, the guy who helped create ESPN up in Connecticut and there were a whole bunch of these people who had ideas about delivering television by satellite to cable headends and that was actually a fairly new thing and it was going to be more than just…
YUTKIN: Well, HBO had already…
PEPPER: HBO was on.
YUTKIN: ShowTime.
PEPPER: Cinemax was the second, ShowTime was beginning.
YUTKIN: I think it was HBO, ShowTime, then Cinemax, then Movie Channel.
PEPPER: Right, but then on the non-premium it was WTBS.
YUTKIN: WTBS, and GN…
PEPPER: GN, reluctantly, they tried to fight it because they had this contract with, it was United, wasn’t it, for the microwave distribution. There were these copyright issues that had been swirling around and resolved in the ’76 Copyright Act, but the period between ’78 and ’82 when things broke open, you had MTV, you had ESPN, you had CNN, you began to have the proposals… One of the real geniuses in the programming side of this business is Herb Granath, who at ABC, on a shoestring, put together Arts & Entertainment. And remember – CBS Cable, they spent $100,000 on a party and they had this big roll out. It was sort of the platinum networks version of CBS Cable. It was going to be their classics… it was Arts & Entertainment, but not on the cheap. It was very risky to do, Herb did this thing at it was it. And so you have A&E, you have Lifetime venture, you have, they bought ESPN. There are all of these other programming ventures that ABC did and it was very risky at the time, but all those things started going up on the satellite around the same time, between ’78 and ’82, and that’s what really drove… Remember, we talked earlier about the expectation of cable in the early ’70’s and then the bubble burst and then it started to come back again with the satellite and also some things we did here at the FCC changed in 1976 to eliminate the last remaining restrictions on the importation of distant signals and so on.
YUTKIN: Let me get back to the franchising process, because you certainly present a different viewpoint from the industry. How would you have handled something like that?
PEPPER: I probably would have done the same thing. But it was my job to be a cynic and to say, “Okay, of these promises, which of these are real?” And it depended upon the city and the market and that’s what I was saying; when I was going to some of these smaller communities and we these presentations, and I said, “I want to hear about that. It’s not going to work, it’s not going to be economic in a small town of 10,000 people, it’s not going to happen so don’t even start promising that. I want to know and the people of this town – Ft. Atkinson, Wisconsin – people want to know am I going to be able to get Chicago stations?” And in Ft. Atkinson what was important was, I forget, they had a couple of elementary schools and a junior high school/high school combination, they wanted to link in a ring this school so that they could do cable class instruction but also be able to do sports, basketball, football and so on. So in working with cities what I tried to do was cut through what the blue sky was, another acronym is BS, and then…
YUTKIN: Blue Sky.
PEPPER: Blue Sky. And find out what was real and in some other places, local origination studios and libraries and public access were not blue sky because they’d be supported.
YUTKIN: But nobody knew, nobody really knew. It depends on the community.
PEPPER: It did, but you have to know your communities and that’s the point. But everybody did know that the two-way interactive services were highly experimental, right? In fact, I don’t think ATC was promising two-way interactivity in the late ’70’s.
YUTKIN: I believe that it was certainly included in proposals and I think that it was not something that we, you know, at such and such a date we’re going to do this and we’re going to deliver, because it was still in the formative stages, but I’m sure that it was included in terms of…
PEPPER: Oh, it had to be included at some point but there were some operators that were promising much more of that earlier on.
YUTKIN: Well, that’s my point is that there were…
PEPPER: As a franchising authority you have to sort through and just be practical. Now, what in fact the industry was offering that people valued a lot that the companies could deliver on – it was hard to differentiate because it was available to all of you – were things like Nickelodeon, or Calliope, which came out of Columbus. Calliope became Nickelodeon and having something for kids was highly valued. So, programming like that. C-SPAN – why was C-SPAN created? It was part of the franchising process for the industry. It’s a wonderful institution. Americans now, cable viewers, think it’s sort of constitutionally required. So the industry does, because every time somebody talks about must-carry they say you’re going to lose your C-SPAN, but that’s another issue. There were things that were practical and there were things that were not practical. That’s my point.
YUTKIN: But what you’re really getting down to is the quality of the individual companies in terms of their ability to deliver, their desire to deliver…
PEPPER: And the credibility of what they were promising.
YUTKIN: Do you remember when, I think this was after the Iowa franchises, but they started in with what came to be known as “rent-a-citizen”.
PEPPER: There were some things that were going on, not “rent-a-citizen”, but other things. For example, again, there were other companies that wanted to fly our entire city council down to view their Florida system in January, just a field inspection and I basically told the council, you’re not going to do that. We had a very strong city manager, a guy named Neil Berlin, who’s terrific and we actually talked to the council before that. We also explained to council that any meeting they had with any company should be a public meeting. If you’ll recall there were no meetings with individual council members that were private meetings in Iowa City, and they all agreed to that because they didn’t want to be under that pressure because what would happen to these council members? They’d feel like they were under enormous pressure from these companies that were making all kinds of promises about schools and this and that and they didn’t feel comfortable to be able to sort through what was real and what wasn’t. So the deal was they could meet with these guys but it had to be either in public or with the city manager or myself or other members of the cable commission. We staffed the council member. We were their staff. They would politely listen but then they would turn to us to ask questions and there were a lot of companies that just did not like that because that’s not how they operated. They like to sit down privately with the council members, they wanted to fly the council down to Florida in January from Iowa, that’s not a bad deal, but they wouldn’t do that.
YUTKIN: What if they would have wanted to do it in July?
PEPPER: I don’t think they would have. First of all, I’m not sure the company would have but my recommendation would have been no. In fact, what we can do is we can drive to Davenport to see a cable system.
YUTKIN: Well, but they may have wanted to show you the latest in what they were doing.
PEPPER: Sure. That was always the argument. But I tried to keep it as aboveboard, as straight forward and as practical as possible to cut through… You know, I talked to friends of mine who were on the company side of this and it was real stressful for you guys as well having to go into cities and make promises that you had doubts about.
YUTKIN: I think we had doubts in terms of the timing on the delivery, or the deliverability, but yeah, franchising was a very difficult, interesting, fascinating, fun, and upsetting period for all of us.
PEPPER: A wild west period for everybody, yes, absolutely. And by the way, Cox is one of the absolutely best run cable companies in the country and they’re just terrific people but you get in these franchising battles and you’ll promise almost anything. They learned a lesson on some of that. They don’t do that anymore, obviously.
YUTKIN: Well, at this point there’s no franchising.
PEPPER: No, there isn’t, but even later on. All the companies were doing that. ATC, frankly, less than the others and that was one of the things that, when I was in Iowa City, attracted us to ATC because it seemed to be more straightforward and more realistic and there were some that were way, way, way beyond index. Take a look at what happened in Montgomery County, which is a good example, we’ve been talking about the industry promising and some people over-promising. People would not have been over-promising if there hadn’t been the expectation in a lot of communities to get them to over-promise. So, for example, I would argue that a lot of the franchising process and people in the municipal side, the franchising authorities, are, as much, I’d say in some cases, more to blame, for promises not kept.
YUTKIN: Because they were demanding them.
PEPPER: Because they were demanding them, in fact they were reading this blue sky stuff and believing it and it this community gets it then I want more and it became a game of sort of one-upmanship of how much more can I get. Again, losing the context or perspective of the consumer, the viewer, and if it’s practical and if it’s cost effective the viewers will love it and they love it today because interactive TV is growing finally. There’s the Internet, people are willing to pay for these kinds of things but they weren’t practical at the time but they were getting all these promises. You had communities essentially saying, “Okay, if we’re going to give you our franchise…” we used to joke about fill potholes, plant trees…
YUTKIN: Sacramento was a classic – 3,000 trees or something like that.
PEPPER: Yeah, feed the homeless, clothe the elderly… It was stuff that had nothing to do with cable and yet it kept ratcheting up and the companies were coming in saying, “Sure, we’ll promise this, we’ll promise that, we’ll promise anything.” And there were municipalities demanding more and more and more. So if there hadn’t been the environment of franchising authorities being unreasonable asking for increasingly more, the industries wouldn’t come in. But it was a very symbiotic relationship that ended up with a lot of promises broken and a lot of very unhappy people. Montgomery County is a good example, right?
YUTKIN: Yes, tell us about Montgomery County.
PEPPER: It was well intentioned, they wanted the most cutting edge, high tech, and they basically required and got a franchise for, I think it was originally a dual cable system that didn’t exist anyplace else. The technology did not work.
YUTKIN: This was in the early ’80’s, I think.
PEPPER: Late ’70’s, early ’80’s, yeah. They’d gotten public access commitments – I think it was 4 million dollars. That’s a lot of money for public access support.
YUTKIN: In capital or in operating, do you remember?
PEPPER: Both, because I remember that there were people who were hired by the public access corporation in Montgomery County, or whatever they called it, who were being paid by the company, the cable company, before there was a cable system. Two years before there was a cable system. So I asked one of them, who actually turned out to be a former student from Iowa City, and I said, “Well, what do you do?” She said, “We’re making lists of all the community organizations that might want to participate in public access.” They’d spent most of the money by the time the cable system was up and running. It was a waste. Again, well intentioned, but it was one of these things where it sort of fed on itself. It was a waste of money, it increased the costs, it raised the cable rates, the average viewer didn’t benefit at all. The company has now gone through several iterations, including, at one point, SPC, the phone company from Southwest. They sold it and we have a current operator, I forget who it is, and they’re in the process of selling to Comcast. We still don’t have two-way cable modem service. It’s all one-way. They’re just now upgrading to digital in one of the most affluent counties in the country. Why? Because of the legacy of very high cost promises that were just not practical and that, unfortunately, is not a unique example. So it was a process that I think, the franchising process in the late ’70’s, early ’80’s just got out of hand, on both sides.
YUTKIN: On both sides.
PEPPER: On both sides.
YUTKIN: And that’s the point.
PEPPER: That’s right. And my point is I was trying to be practical all along and try to get a balance that was fair to everybody and my concern was that the viewers, as consumers, got something that they valued at a reasonable price.
YUTKIN: Realistic.
PEPPER: Yes, try to be realistic. Push the edge of the envelope a little bit to keep you guys, you know. But there’s an old saying, Gerry, that when you’re on the cutting edge, be sure you’re behind the blade and there are a lot of these systems that were out in front of the blade and that’s just not practical, it’s not realistic, and that’s what happened. I think it took the cable industry a good deal of time to a) to get out of it and b) to recoup some credibility at the franchising level. So in the long run, it really didn’t help, it was counterproductive.
YUTKIN: Well, but the franchises had to be granted.
PEPPER: Yes, but remember this was also before the 1984 Cable Act, which was the first federal act, which began to put some boundaries on what the cities could ask for.
YUTKIN: What would you say was the essence of that?
PEPPER: Well, it did a couple things. There were some good parts of it and some premature parts of it, not bad really, but it seems to me what it did was it created a federal framework, it capped the franchise fee – remember, there were some cities that were getting 10% franchise fees – and then it basically tried to make, it wasn’t completely successful, tried to make explicit all the side deals that were costing consumers. One of the things that Congress did in the ’84 Cable Act was basically try to make explicit what all of the subsidy stuff was because that was costing consumers and it was hurting the industry and hurting deployment.
YUTKIN: Well, I think it was about 10 years that cable companies started putting in franchise fees as a line item on the bills to the customers.
PEPPER: That’s right, and the cities went berserk. They didn’t like that. Now, one of the things I think it did prematurely was completely de-regulate cable rates back in ’84. It was interesting because there was an assumption about DBS competing with cable TV. DBS was authorized in ’83 but it didn’t actually show up on the market until ’93, ’94.
YUTKIN: Promises?
PEPPER: Well, no, it turns out there were some problems having to do with the availability of programming and one of the things Congress did in the ’92 Cable Act was put in program access. Without that there never would have been the DBS industry and from the cable industry’s perspective that made sense because why do I want competition? I’m not going to sell to my competitor. It was rational but there was a market problem and Congress dipped into that. Now, having said, that I think that they prematurely de-regulated cable rates in ’84. Actually things had worked their way through and in fact what’s interesting is by 1990, in the 1984 Cable Act, Congress required the FCC to do a six year study, in other words, 1990, on the state of competition in cable and make any recommendations back to Congress that we thought were appropriate. And in that 1990 report we said that in fact there was insufficient competition to the cable industry but that the remedy was not to re-impose rate regulation because that would result in all kinds of distortions and unintended negative consequences for consumers in terms of program availability and so on, but rather we should focus on increasing competition to cable and made a recommendation about program access. We also, by the way, made a recommendation to Congress that one of the problems with the failure of competition was that too many municipalities were granting monopoly franchises. De jure monopoly franchises, and that the cities were as much to blame for the failure of competition in the video market place as the industry because the cities, by law, were saying we’re going to grant monopolies. One of the important things the ’92 Act did was repeal those exclusive franchises, not that it’s made a whole lot of difference but it actually – in the upper Midwest, Chicago, the Ameritech system, there was enough overbuild…
YUTKIN: 21st Century, sure.
PEPPER: 21st Century, and now in combination with programming available from the early ’90’s to the satellite industry and now with the Satellite Home Viewer Act, satellite is a real competitor today. It’s taken 16, 17 years longer than people originally thought or had hoped but…
YUTKIN: Well, it took 30 years longer for the cable industry to get going too.
PEPPER: Sure, but it’s there and we have a completely new and different kind of multi-channel video market place today. Fortunately or unfortunately, we were prescient in our recommendation in 1990 to not re-impose rate regulation because that was one of the things that was incorporated in the ’92 Act and of course in its initial implementations it had a very negative effect on the industry investment, upgraded systems, new channels and then the commission had its, what we called “going forward” rules and sort of changed that to become more flexible and since those went into effect, I guess those were in ’95 or ’96, we’ve seen investment again, and significant investment and upgrades. Channel capacity, programming, two-way cable modems, and so on, largely driven, initially, to respond to competition from cable but then also recognizing the opportunities in Internet access over the last two or three years and just now beginning, in terms of some of the voice telephony. Although Cox there has been a real leader. Cox was the early – the upgrades, the two-way, the voice, the Internet. Cox, five or six years ago, began making billions of dollars in investment early on. They were at, again sort of the old hackneyed phrase, they were at the bleeding edge of those investments because they were investing in technologies that were not proven. So maybe I’m contradicting myself on index, but that’s… That was not based on promises, that was based upon business planning and they went in, they invested and they’ve actually – in Southern California they have a very nice telephony business. Where they provide the telephony product they are a big pain to Pacific Telesis, to Pac Bell, because they’re taking real customers and they do a great job at it. So I think you can look at them and see where the industry’s going.
YUTKIN: Why is that, do you think? Service? A combination of foresight, technology?
PEPPER: I think to some extent – they were essentially a privately controlled company. They were less worried about quarter to quarter. The Cox family, the Cox sisters supported Kennedy and Jim Robbins in making what were risky investments. Now, not the promises but actually making the investments. This is just a very, very high quality operation. They have some terrific management, they had some terrific technologists that understand the technology, and they were in it for the long haul. They took some hits on cash flow, but again they were able to do that, and it was hard and they could have been wrong, but they were risking their own money in a sense than publicly traded shareholder money and it made it…
YUTKIN: It’s a public company.
PEPPER: But it’s a minority of the shares. I mean the control of the company is with the family, with the estate, Cox, whatever, and that’s given them a real advantage. I mean look at what, for example, Paul Allen’s done with Charter, okay? He’s betting his own money and he’s making the investments.
YUTKIN: For explanation purposes, Paul Allen was…?
PEPPER: Was the co-founder of Microsoft.
YUTKIN: Microsoft, and since then he’s gotten into…?
PEPPER: Baseball, football, cable TV.
YUTKIN: Cable TV.
PEPPER: Cable TV, and has bought cable systems, is upgrading them, is investing in two-way Internet services. Again, one of the other companies that was among the best managed cable systems was Continental. Amos Hostetter was running it, it was not a publicly traded, in terms of… It was a group that had voting control and they made investments and they were just a superbly managed company. They were investing in technology.
YUTKIN: And then they sold in ’81?
PEPPER: They sold in ’81.
YUTKIN: They’re now…?
PEPPER: As we speak today, we’re in the process of considering their application to be bought by AT&T.
YUTKIN: Somebody just today announced that.
PEPPER: Yesterday the Department of Justice announced that they were approving on the conditional approval for the merger with a consent decree to divest Roadrunner, the minority share in Roadrunner, by Media One and the merger is currently pending at the FCC as we’re doing this interview.
YUTKIN: I won’t ask.
PEPPER: Good.
YUTKIN: You wouldn’t tell me anyway, even if you knew.
PEPPER: That’s right.
YUTKIN: The industry is so much different and you’ve really seen it from even before the inception.
PEPPER: Yes.
YUTKIN: Are you proud of it? Are you happy to have been a part of it during all these years?
PEPPER: Oh yes, I’m thrilled! It’s been terrific.
YUTKIN: What do you think the next 30 years are going to bring? Do you think more consolidation?
PEPPER: Oh, you know, depending upon what happens with the last batch of mergers, we’ve basically got two or three cable companies as it is anyway. I’m not sure you’re going to see consolidation much more. I think what you are going to see is that cable already is morphing into…
YUTKIN: Convergence?
PEPPER: Convergence, telecommunications. I don’t mean that in the sense of specific legal meaning of title 2 of the Communications Act versus title 6, but just in terms of an industry that’s providing video, voice, data, Internet access, high-speed access and telephony. That’s where I think the industry is going and I think it’s going to be difficult to distinguish in the future between cable companies, phone companies and it’s going to be service companies that want me as their customer. It will be an interesting sort of one web. One of the things we didn’t talk about earlier was that between Iowa City and here…
YUTKIN: I wanted to get to Annenberg.
PEPPER: Oh, before Annenberg!
YUTKIN: Harvard?
PEPPER: Yeah. I took a leave of absence, actually it was a sabbatical with a research grant at the Program for Information Resources Policy, Tony Angers program up at Harvard – a wonderful guy – and took about a year working with him up there before coming to Washington and what I worked on actually, this was 1982, it was relatively early in this process. It was a research project and paper on cable telephony. Sort of a) predicting it and b) talking about the policy and regulatory structures needed to promote it and foster it because I…
YUTKIN: Was this before the AT&T breakup?
PEPPER: No, it was actually interesting, it was the year of the breakup. The breakup was actually announced – I remember this vividly because I was driving cross country from Iowa City to Cambridge on January 8th in snowstorms and I was listening to the radio and from the stage of the press club here in Washington was, I guess it was Baxter, who was the head of the anti-trust division, and the chairman of AT&T announcing the breakup of AT&T. It took two years to implement. So it was an interesting time. It was January 1st of ’84, but it was an interesting time in ’82. I was up at Harvard and working on this paper talking about the competition in telecoms and so on and how cable could contribute to that and then coming to Washington at the end of ’82 and then ’82, ’83, working at that point at the National Telecommunications Information Administration, which was part of the Department of Commerce.
YUTKIN: And still is.
PEPPER: And still is. And we were involved in, from the administration side, at the time of course it was the Reagan Administration that broke up AT&T, working on policies having to do with the breakup and working with the FCC, which was implementing those policies. The FCC, of course, being the independent regulatory agency, the NTIA is part of the administration, and so working on the implementation of divestiture from that perspective but one of the things I’d been doing earlier that year, for the first three quarters or whatever of ’82, was looking at cable’s entry into the telecomm business and how cable could provide competition in telecomm and begin to introduce competition to the phone monopolies and that’s one of the things that is to me, now, 18 years later, the most exciting thing about the cable industry, that in fact it is beginning to really live up to this potential in making these investments and we’re beginning to see the fruits of that and I think that that is fabulous.
YUTKIN: So you think that the divestiture has been successful?
PEPPER: Oh, there’s no question about it.
YUTKIN: Because there are a lot of people who say, “Oh, I wish we could go back to AT&T when they used to have…”
PEPPER: You used to have black rotary dial phones.
YUTKIN: But you had almost a benevolent company. The service was…
PEPPER: Prices have declined dramatically. The services that you have available to you, the range of services, is far, far greater. The kinds of competition that we’re now seeing in the local markets with companies leasing the loops of the phone companies, the covads and northpoints of rhythm is doing the DSL. The kind of interconnection that companies like Cox, struggling, but they can get to provide competing telephone service. Remember, 1976, AT&T went to Congress and proposed a bill that was called the Consumer Communications Act of 1986. They just as easily could have called it 1984 because what it did was it codified the Bell System monopoly in the name of consumers. They said this is a natural monopoly and if you add competition it’s going to destroy the system, it won’t work. And in fact, in those days you weren’t even allowed to plug your own phone in. Well, fortunately, Congress was too smart to buy that but that started a 20 year process of hearings and ended up with the Telecomm Act of 1996.
YUTKIN: But with that, hasn’t there been a decline in certain kinds of service? I was driving in Oregon a couple of years ago and I found a telephone booth that wasn’t an AT&T telephone booth and I couldn’t get any service and it took my money and it was very frustrating and a lot of little things like that and I think that people are aware of the kind of customer service – sometimes we have an outage and I had one and they said, “Well, we’ll get it on no later than tomorrow at 6:00.” But of course they had it on 6 hours later. Is that a trade-off? But overall it’s better now?
PEPPER: Overall there’s no question that it’s better. They can’t ignore you, especially, by the way, if you’re a business. As a business, you have someplace to go and in terms of the economy and the benefits to the economy of competition and telecomm have been enormous. If you didn’t have the ability to plug your own phone into the phone network, there never would have been a modem, there never would have been an Internet, because you wouldn’t have been able to plug your computer into the phone network under the old Bell System rules that said, no, you can’t plug something in, it’s going to destroy the network. That’s crazy. Now, are there issues with consumer protection? Yes. In fact, one of the things at the FCC that we’ve recognized is that as we’re moving to a world in which telecoms become more competitive and it looks like other industries, and you move away from the benevolent monopolist, what we do shifts. We don’t have to worry about retail telephone pricing. Prices aren’t going up, they’re going down. Long distance they’re going down.
YUTKIN: Long distance, yes. Local service?
PEPPER: Local service? In some places it’s going up and actually if you take a look at it inflation adjusted, it’s not going up and those prices largely are regulated by the states. If you look at other things, however, as we get more competition, we have to move from regulating prices or protecting against a monopolist to more general consumer protection and enforcement of rules, and that’s one of the tricks. So, for example, we get, I think it’s something like 20,000 complaints a year on slamming. Slamming is when your long distance company is switched without your permission. That is a very big problem. Well, when you had a monopoly you never got switched, right?
YUTKIN: That’s true.
PEPPER: But your prices were a lot higher.
YUTKIN: Especially for what you got.
PEPPER: Especially for what you got, and then you remember – it’s a long distance call, come quick! Don’t talk too long.
YUTKIN: Sure.
PEPPER: And now you open up the paper…
YUTKIN: You couldn’t even do direct dial. When I was a kid you had to dial 211 to get a long distance operator.
PEPPER: Yes, and then they would connect you. But even when you could do direct dial, it was very expensive, a dollar a minute. You can buy buckets of 5 cents a minute. So there’s no question that there’s a benefit. Now, are there unscrupulous people in the business like every other business? Unfortunately, yes. Unfortunately not everybody plays by the rules. So one of the things that we’ve done is we’ve reorganized to put all of the enforcement people from across the agency. We used to have enforcement in mass media, enforcement people in common carrier, enforcement people in different places. We have a new enforcement bureau and we have a new consumer information bureau. We used it for markets to where consumers have to be informed so that they can make reasonable decisions in the market and we have to have an enforcement bureau that enforces both rules of competitors, but also rules as they apply to consumers. If people get slammed, we go after the slammer and we’re going to fine them. So what we do at the FCC is changing, and changing quite dramatically as a result of the competition. To me there is no question that we’re better off and the proof of the pudding is that our economy today is the envy, literally, the envy of the world because of what’s happening on our information technology side, which the base of that is the competitive telecomm market. So, now you have to choose your long distance company, but you know, I like that. Maybe you don’t.
YUTKIN: Oh, no, no, no. I’m not saying that. It’s just pros and cons as there were in the franchising days.
PEPPER: Oh sure, but I think here it’s a common no-brainer in terms of the pros. You can quantify it economically – it’s night and day.
YUTKIN: Thank you very much. This has been very interesting. I think we could probably go on and on.
PEPPER: We could go on for days, but these guys can’t.
YUTKIN: They’ve got to go home now.
PEPPER: Yeah, “I’ve got to go back to work!”
YUTKIN: I appreciate you taking the time.
PEPPER: Thanks. This has been a lot of fun.
YUTKIN: It’s been a lot of fun.
PEPPER: I’ve remember things I haven’t thought about in years.
YUTKIN: Well, that’s one of the purposes of the Hauser Foundation’s grant to The Cable Center.
PEPPER: Gus is a great guy. He’s terrific.
YUTKIN: We appreciate that. We appreciate you making facilities available to us and it was so nice to see you again.
PEPPER: Great to see you. Thanks!
