Fed Chairman Ben Bernanke's remarks yesterday that inflation is at the outer limits of Fed tolerance, even as the economy slows, raises the spector of 70's “Stagflation”. The existence of both inflation and economic stagnation is not one they teach you in Economics 101, and in both the 70's and our current crisis it is due to the outsized influence of oil prices on all sectors of the economy. It was only a matter of time before plastics manufacturer and industrial agriculture had to raise prices because oil prices were a major input to their products. As St. Louis Fed President William Poole, one of our country's the most prescient economists, pointed out yesterday once the public starts to expect inflation it becomes a self-fulfilling prophecy.
However, as I pointed out in an earlier post there is a major section of the economy that does not have the possibility of built in inflation expectations and that is the Digital Economy. Think of your personal expectations of buying a new computer. You expect it to be cheaper (or at least more powerful for the same price) than your last computer. The cost of bandwidth, broadband service, server memory and all the other components of the Digital Economy continue to drop. There is only one part of this ecosystem that resists Moore's Law and that is Digital Television service, whether delivered by cable or satellite. Speaking yesterday in Chicago, FCC Chairman Martin noted that while other communications services, such as broadband, cellular and long distance phone services, have dropped in price over the past 10 years, cable rates have actually increased 80 percent.
As we move into an increasingly On Demand television universe it seems critical that we need more competition in the Digital Television service market and for that reason it is critical that AT&T, Verizon, Bell South and Qwest be given a simplified regulatory path to new market entry. It is actually quite reasonable for AT&T to state that they don't need a local franchise whatsoever, as they are delivering an IPTV service from remote servers. As long as the new entrants respect the existing local franchise tax of 5% on basic services and provide adequate local public service access to bandwidth, they should be able to enter any market without the bureaucratic nightmare of the local franchise bidding process. And local authorities should not hold the cable companies hostage to this process either. Only when we get robust competition in the interactive TV market will consumers finally get to take advantage of Moore's Law in the Digital TV market.