Telecommunications and the
Economic Development of Cities

Deregulation of the telecommunications industry, in conjunction with recent technological advances, is transforming the telecommunications infrastructure in the U.S. This chapter examines the implications of the emerging telecommunications infrastructure for cities and metropolitan regions. Three basic issues will be addressed:

1. What is the form of the emerging telecommunications infrastructure in the U.S.?

2. What role will cities play in planning and developing the new information infrastructure?

3. How will the emerging telecommunications infrastructure affect the pattern of urban development in large metropolitan regions?

THE EMERGING TELECOMMUNICATIONS INFRASTRUCTURE

There are three main components to the new telecommunications infrastructure in the U.S.: 1. long-distance or intercity systems; 2. regional or local distribution systems; and 3. intrabuilding or intracomplex communications systems, such as local area networks or "smart building" systems. To date, there has been a great deal of speculation about each component of this infrastructure but relatively little research about the relationship of these communications systems to each other and to the overall pattern of urban development. Far more attention has been given to specific technologies than to the interaction of technology with the fundamental organization of work, time and space in urban society. This intellectual gap is particularly striking, since "the size and importance of a city is determined by the amounts and kinds of information flowing into and out of it, and by the way it is interconnected with other cities in the national information flow network."(1)

Long-Distance Fiber-Optic Systems

At the national level, competition in long-distance service has led to the construction of several fiber-optic networks that will provide high-speed, long-distance communications across the country. These networks are supplementing the existing grid of microwave relay systems, satellites and earth stations currently in use. The major long-haul fiber links are remarkably urban-based; in certain cases, the fiber routes utilize railroad rights-of-way and follow old transportation lines. For example, U.S. Telecom's 23,000-mile fiber system runs parallel to the tracks of six railroads, the Kansas Turnpike and a Wisconsin state bicycle path, while MCI's 18,000-mile route runs partially along Arntrak's right-of-way. The fiber systems planned and in place, including those of AT&T, MCI, United Telecom, Lightnet, LDX Net, Litel and Lasernet, are designed to serve heavy traffic and thus must reach the large metropolitan regions that are the information hubs of modern society.

New York, Atlanta, Miami, Chicago, Kansas City, Dallas-Fort Worth, Cleveland, Pittsburgh, Denver, Washington, DC, San Francisco, Los Angeles, Houston and New Orleans are among the cities that will be served by three or more of these fiber networks. Although many communities will have access to fiber systems, it is clear that the new networks will, as John Goddard has stated, "serve a restricted number of locations, usually the largest cities.... There is little to indicate that developments in telecommunications networks are likely to disadvantage the largest cities relative to small towns and rural areas in any national urban system. The incremental modernization of networks and the logic of density will ensure that the inner parts of large cities will have an initial advantage.(2)

The rush to build fiber-optic systems in the U.S. resembles the rush to build railroads in the 19th century; whoever can build the first integrated network expects to capture much of the long-distance business.(3) Clearly, not all of the proposed fiber systems will be financially viable. In addition to the fiber-optic systems, there are several new long-distance services (such as Equatorial Communications Company's satellite dishes that can send and receive data and thus totally bypass telephone lines) that depend upon a mix of new technologies.(4) Furthermore, several firms are planning to build nationwide paging networks that would allow individuals carrying beepers to receive signals anywhere in the U.S.; at the present time, paging systems are restricted to short distances, usually within metropolitan areas.(5)

Regional Telecommunications Systems

At the metropolitan level, the regional holding companies, created through the divestiture of AT&T, remain the predominant communications carriers and are gradually shifting from twisted pairs of copper wire to fiber optics for intracity communications. New York Telephone has built a fiber-optic network that links twelve major switching centers to telecommunications systems in Manhattan, and has recently launched the Interborough Fiber Network, which will link the counties adjacent to Manhattan. More than one third of all the Bell System's optical fiber has been installed in New York Telephone's service area, a consequence of the demand for advanced communications systems within the largest American city and its surrounding metropolitan area.(6) In southern California, the fiber network built for the 1984 Olympics provides an advanced regional telecommunications infrastructure to serve the intense information flows within the Los Angeles region.

Large firms with extensive and specialized communications needs are facing an increased set of telecommunications alternatives and are often choosing to build their own communications systems, thus "bypassing" the "facilities of the local telephone companies available to the general public."(7) Citicorp has created a metropolitan network called Micronet that links five Manhattan sites in New York City by fiber or microwave with a connection to Citicorp's satellite network. Westinghouse links its plants in the Pittsburgh region with a separate network, and the Boeing Corporation is considering a 70,000-line private network in the Seattle region. Just as companies with large computer systems have found it profitable to sell their technical expertise and excess capacity to other users, we may see a similar pattern in which large users of telecommunications become sellers as well. The traditional boundaries between vendors and users of communications services are becoming blurred and, in some cases, no longer exist. Manley Unwin has noted, "A buyer today may become a seller tomorrow and a rival the day after."(8)

Teleports: Public and Private Initiatives

Perhaps the most innovative example of public-sector involvement in the development of regional telecommunications infrastructure is the Teleport project initiated by the Port Authority of New York and New Jersey. The idea for a teleport was based upon the belief that the public sector should provide a facility, similar to airports, for access to communication satellites. The large volume of electronic communications in New York City led the Port Authority to believe that access to communication satellites would be crucial to maintain the region's economic health. Microwave congestion within New York City reinforced the need for an alternative local distribution system and led to the creation of a fiber-optic network linking the Teleport on Staten Island to the rest of New York City and New Jersey, A 100-acre office park was incorporated into the project, since the Staten Island site offered access to a skilled labor force, low-cost energy sources, plus land for data processing and operations facilities.

Responsibility for the Teleport is divided among the city of New York, which leased the land to the Port Authority, and to the Port Authority, which developed the land and leased the buildings on the site. Merrill Lynch and Western Union were brought in as partners in Teleport Communications, Inc. to manage and market the communications systems, with the city of New York and the Port Authority of New York and New Jersey receiving a percentage of the net profits of Teleport Communications, Inc. (Merrill Lynch initially owned 60% of Teleport Communications, Inc., and Western Union owned 40%; today Merrill Lynch owns 95% and Western Union has a 5% share.)

Teleport is designed to ultimately serve 17 earth stations; 2 are currently operated by Merrill Lynch and 1 by Comsat. Several major firms, including Dow Jones, Bankers Trust and Citicorp, are hooked into Teleport's fiber-optic cable. The provision of local telecommunications service within the New York-New Jersey region has been Teleport's most striking achievement. AT&T intends to use Teleport's fiber system to provide long-distance service to Merrill Lynch, thus "bypassing" New York Telephone's local network. Teleport's fiber cable provides an important telecommunications infrastructure, at low cost, to major users in the city of New York and surrounding region that will probably emerge as the most valuable aspect of the entire project, although the initial logic of the project was based upon the need for access to communications satellites. Whether the public sector should be providing a competitor to the publicly switched telephone network is a policy issue yet to be fully addressed. Teleport's success in the local distribution business could conceivably contribute to lower revenues for New York Telephone and perhaps thereby lead to higher rates for residential and small business users.

The popularity of teleports can be seen in the speed with which other communities have launched efforts to build their own. In the U.S., there are 20 different teleport facilities in 12 different states; 11 of these facilities are operational, 2 are under construction, 7 are planned and I is proposed. With the exception of the New York and Ohio teleports, which are public-private partnerships, all are privately owned projects. It is important to note that the diffusion of teleports is partially a result of the renaming of existing satellite antenna farms equipped with microwave transmission linkages, rather than a result of new initiatives based upon evidence that teleports can stimulate economic development.

A variety of other telecommunications systems, such as microwave, coaxial cable, digital termination systems and cellular mobile radio, are also used at the local or regional level. In New York City, Manhattan Cable Television provides data transmission service for banks and government agencies over its trunk lines; however, such institutional uses of cable are rare in most American cities, since cable television systems are primarily oriented to the residential market and are nonexistent in the central business districts of most large cities. Cellular mobile telephony represents a growing sector of the regional telecommunications infrastructure that extends the office into the car and truck and could generate increased use of roads and highways at off-peak hours by workers and service personnel who report by telephone, rather than in person, to their headquarters.

"Smart Buildings" and Local Area Networks

Within the popular press, there is much talk about "smart" or "intelligent buildings." A smart building has three different meanings: it can refer to: 1. an integrated management system for elevators, energy, security and other building services; 2. an integrated telecommunications network for local, long-distance and enhanced services; or 3. a building that provides integrated telecommunications and building management services. A local area network (LAN) provides a communications link, within a single building or among a number of buildings, for personal and mainframe computers, data storage banks, printers, and other computer and telecommunications equipment. The LAN can be provided by coaxial cable, copper telephone wire, or fiber-optic cable, depending on the particular design and use.

The growth of "shared tenant services" offers a way to provide sophisticated telecommunications services within buildings that offer economies of scale and "one-stop" convenience to small and middle-sized firms. For real estate developers, shared tenant services can provide a service to tenants and a potential source of revenue, and many developers have formed partnerships with telecommunications firms to offer building-based communications services. The pioneer in this evolving industry has been Olympia & York, the largest real estate developer in North America. Olympia & York has formed a joint venture with United Telecommunications, Inc., to create OlympiaNet, a telecommunications network that will offer advanced data, voice and video services to all its tenants. The development of OlympiaNet's teleconferencing network highlights the incremental ways in which new telecommunications services are first offered in major urban markets; the OlympiaNet teleconferencing facilities will be initially available in New York City, Boston, Toronto and Dallas, with other cities to follow.

The smart building reflects growing capital investment in the information worker; in 1977 businesses were investing only half as much in equipment to support white-collar workers as compared with blue-collar workers; by 1982 the size of these two categories had become equal.(9) The growth of smart buildings and LANs builds upon this heightened investment in information technology by facilitating intra- and interoffice communication. Although the extent of the market for shared tenant services is still unknown, it is no longer sufficient to consider buildings solely in terms of their capacity to accommodate people; a building is also a resource for transmitting information as indicated by the increased use of satellite and microwave dishes on the rooftops of office buildings. Access to the roof is now a critical part of all office leases; in many buildings, the rooftop has replaced the ground floor in terms of real estate value.

The Telecommunications Infrastructure Within Cities

The emerging telecommunications infrastructure is an overwhelming urban-based phenomenon. Although most discussions of new communications technologies emphasize the opportunities presented for decentralization, large cities are the hubs of the new telecommunications systems in the United States and are the sites for the most advanced applications of information technology. As Susan R. Brooker-Gross has said, "The technologies are likely to be found first in the largest markets. Advantages in communications already possessed by larger metropolises will be reinforced before the advantages diffuse to smaller places."(10) Although new communications technologies permit geographic dispersal, the economics of the new infrastructure is oriented toward those urban regions that are major information centers.

Moreover, the changing regulatory framework in the United States is substantially altering telecommunications pricing and investment criteria. Until 1984, the principle of "universal service," in which every household was provided with low-cost telephone service, was the guiding philosophy of the Bell System. This was largely accomplished with cross-subsidies from urban to rural users and from business to residential customers. However, competition is leading to a reduction in such cross-subsidies and to user-based telephone rates and investment criteria. Just as airline deregulation has weakened air service in small towns and outlying communities, telecommunications deregulation may lead to a greater disparity in communications service between large metropolitan regions and rural areas. As Roger Noll has noted, "Some investment in rural service probably is uneconomic. Rural residents may be unwilling to pay for telephone service that is priced at its accounting cost. Moreover, copper-wire technology is not the cheapest way to serve rural areas. Instead, recent technical advances probably make over-the-air technologies, such as cellular radio, cheaper in some areas than the book value of a rural NTS [non-traffic-sensitive] plant."(11)

THE ROLE OF BUSINESS AND GOVERNMENT

Contrary to much of the popular folklore, new communications technologies have not led to the decline of cities. Rather, new communications technologies have enhanced cities that serve "the important function of hosting transactional activities.(12) Although many so-called futurists argue that the electronic cottage will replace the office building and that teleconferencing will replace the in-person meeting, such speculation merely demonstrates a poor understanding of urban functions, a willingness to assume that technological feasibility is equivalent to technological acceptability, and a disregard for the incremental and evolutionary process of technological innovation in organizations.

Public policy toward communications in large cities has been predominantly oriented to the regulation of cable television systems and has largely ignored the private sector's role in the design and construction of the new urban telecommunications infrastructure. Most local governments have been consumed with visions of two-way cable television in every household and have focused their attention on cable, thereby ignoring other technologies, such as fiber optics, mobile communications and microwave transmission, that will be far more important in shaping communications patterns in cities. After decades of predictions about the wired city, cable television has yet to arrive in most large American cities.(13) The wired city has arrived, but it is oriented to the office, not the home. Furthermore, it is based upon a diversity of transmission systems, not just coaxial cable, and has been built outside the domain of local regulatory and policy making entities.

The experience in the U.S. highlights the changing roles of government and business in the development of urban telecommunications systems. There are genuine limits to public intervention in a technologically driven industry. Advances in technology are so rapid that it is essential that government not be fixated on a single technology or a single type of communications facility. The public sector has an important stake in assuring that the individuals and firms within a city have access to advanced telecommunications systems; however, unlike other critical components of the urban infrastructure, such as highways and water supply, the private sector has been the primary instrument for the construction of the telecommunications infrastructure in large American cities.

TELECOMMUNICATIONS AND URBAN DEVELOPMENT

The growing use of advanced telecommunications systems has had both centralizing and decentralizing effects on cities. New communications technologies have enabled firms to extend their geographic reach, to create new products and services, and to send, receive and process information from points throughout the world. However, telecommunications has not reduced the value of the face-to-face transactions that occur in large urban centers. In fact, as telecommunications has facilitated the rise of the multinational firm and the increased concentration of headquarters' functions in a handful of cities, one can argue that the few cities that provide the opportunities for interpersonal communication are even more important.

Communications technologies have allowed a small number of cities (such as New York, Los Angeles, London, Tokyo, Singapore and Hong Kong) to emerge as international information and financial capitals. As Table 9.1 indicates. New York City and Los Angeles account for approximately 30% of all overseas telephone messages emanating from the United States.(14) And John Langdale has noted that "financial institutions operating in currency markets on a global basis have offices located in various regions so that the closing of operations in one market overlaps with the opening of the market in the next region."(15) When the Tokyo market closes, Bahrain opens, and when it closes, the New York market opens.

Friedman and Wolff argue that "world cities" are "closely interconnected with each other through communications and finance, [and] these regions constitute a worldwide system of control over market expansion."(16) New York and Los Angeles are clearly the centers for international banking and finance in the U.S. From 1972 to 1982, the number of foreign banks in New York doubled to 336. In California, more than two thirds of the foreign agents of international banks are based in Los Angeles.

Banking and Electronic Funds Transfer

The growth of electronic banking is intricately related to the new telecommunications infrastructure in cities. At the retail level, the "branch bank" has virtually been replaced by the automatic teller machine; telecommunications systems have replaced "bricks and mortar" as the means to reach customers. As Walter Wriston, the former chairman of Citicorp has said, "The most valuable piece of real estate in the world is your desk. Once a bank's terminal is on it, and if the customer is happy with the service, then it becomes very difficult for a competitor to dislodge."(17) The availability of online access to bank funds has revolutionized bank accounts. "In 1970 the turnover of demand deposits of New York City banks [i.e., the ratio of debits to deposits] was 155 times. By 1980 that increased to 814 times, and in 1984 exceeded 1800 times."(18)

The Location of Back Offices

While communications technologies have fostered the increased centralization of headquarters and financial services, there has been a simultaneous shift in the location of information processing functions out of central city locations. The back office functions of banks, insurance companies and retail stores typically involve routine functions that do not require direct client contact. Back office activities have evolved from labor-to technology-intensive operations and have spatial and energy requirements. Data processing systems require large floor areas (typically of 40,000 square feet or more) to accommodate mainframe computers and support personnel. Such facilities also need high energy loads for air conditioning, raised floors for communications ducts and wires and access on a 24-hour basis, conditions that are not easily met in traditional office buildings.

Table 1. Overseas Message Units

Area Code 1982 New York City (212) 22,718,027 Los Angeles (213) 9,310,028 San Francisco (415) 4,535,474 Chicago (312) 4,028,709 Northern New Jersey (201) 4,639,122 Connecticut (203) 2,129,146 Westchester, Putnam, Orange and Rockland Counties (914) 1,897,576 Nassau-Suffolk, Long Island (516) 1,705,740 Total, USA 115,001,763

Source: AT&T Communications

There has been gradual decoupling of front- and back-office operations in most information intensive firms. The back offices, with their specialized spatial requirements, have been moved out of prime central-city real estate to lower-cost locations, either to the periphery of metropolitan areas or to regions that offer comparative advantages in labor, energy, and/or amenities. The locational choice is frequently a product of corporate strategy; some firms want to avoid white-collar unions; other firms want computer operations to be in close proximity to headquarters. In certain cases, decisions about the location of back offices can be used as a bargaining chip to achieve other organizational objectives. Citicorp recently announced plans to establish a back-office facility in an unused industrial plant in Hagerstown, MD, and, as a result, the state of Maryland has granted Citicorp the right to conduct banking in that state.

In New York City, the leading commercial banks have traditionally located their operations centers on Long Island; the leading securities firms have kept their back-office operations in Manhattan, but they are increasingly separate from corporate headquarters. Only 2 of the top 10 securities firms still have their front and back offices in the same building in Manhattan. In the San Francisco Bay area, the large commercial banks have undergone a similar process of dispersing their data processing and computer facilities to outlying portions of the region.

It is important to note that the separation of front and back offices can occur only when there is substantial routization of information processing and a reliance on electronic systems rather than conventional paperwork. Thus, the movement of back offices out of cities has varied within and among different industries. However, just as central business districts were incompatible with mass assembly plants, and as traditional urban ports could not accommodate containerization, information processing activities will continue to move out of expensive, central-city real estate. It is ironic that we know far more about the location of agricultural and industrial activities than about the location of information-based activities.

CONCLUSION

The preceding discussion has presented three fundamental themes:

1. That the new telecommunications infrastructure is predominantly urban-based and is built around existing metropolitan centers

2. That the private sector, rather than government, has been responsible for the design and development of the emerging information infrastructure in American cities

3. That advanced telecommunications systems are strengthening cities that serve as headquarters and financial capitals while also facilitating the spatial dispersion of routine information processing activities

The impact of new information and telecommunications systems on cities "will be mediated and fundamentally modified by economic, social, and cultural processes."(19) The challenge is to determine under what conditions centralizing or decentralizing processes will dominate, the types of cities likely to benefit or be damaged by the deployment of advanced telecommunications systems and public-policy alternatives for cities seeking to harness this technology to their economic growth. In view of the fact that cities are the information centers of advanced industrial society, it is critical that we improve our understanding of how new communications technologies are influencing the structure of services, land use and jobs in metropolitan regions.

NOTES

A version of this paper was presented at the conference of LANDTRONICS, London, England, June 19-21, 1985, sponsored by the Annenberg School of Communications at USC and the Lincoln Institute of Land Policy.

1. Ron Abler, "What Makes Cities Important," Bell Telephone Magazine 49, no. 2(1970): 12.

2. J. B. Goddard, "The Impact of New Information Technology on Urban Structure" (Newcastle upon Tyne, England: University of Newcastle upon Tyne, n.d), 10.

3. William B. Johnston, "The Coming Glut of Phone Lines," Fortune, I (January 1985).

4. J. B. Levine, "Tiny Satellite Dishes are Serving up a Hot New Market (Two-Way Dishes)," Business Week (March II, 1985): 102.

5. "FCC Moves Toward National Paging System," New York Times, August 20,1984): Dl.

6. Ernest S. Liu and Kathryn H. Vaselkiv, NYNEX Corporation, Investment Research (Goldman Sachs, 1984), 4.

7. Federal Communications Commission, Common Carrier Bureau, Bypass of the Public Switched Network (December 19, 1984): 4.

8. Manley R. lrwin, "Markets Without Boundaries," Telecommunications Policy 8, no. 1 (1984): 12.

9. Charles Jonscher, "The Impact of Information Technology on the Economy: Problems of Modeling and Measurement," prepared for Conference on the Impact of Information Technology on the Service Sector, University of Pennsylvania, February 1985,3.

10. Susan R. Brooker-Gross, "Usages of Communication Technology and Urban Growth," Stanley Brunn and James Wheeler, eds., The American Metropolitan System: Present and Future, (New York: John Wiley and Sons, 1980), 157.

11. Roger G. Noll, "'Let Them Make Toll Calls': A State Regulator's Lament," The American Economic Review 75, no. 2 (1985): 53.

12, Jean Gottmann, The Coming of the Transactional City (College Park, MD: University of Maryland, Institute for Urban Studies, 1983).

13. Mitchell L. Moss and Robert Warren, "Public Policy and Community-Oriented Uses of Cable Television," Urban Affairs Quarterly 20, no. 2 (1984): 233-54.

14. Mitchell L. Moss, "New York Is Not Just New York Anymore," Intermedia 12, nos. 4-5 (1984): 10.

15. John Langdale, "Electronic Funds Transfer and the Internationalization of the Banking and Finance Industry," Geoforum 16 (1985): 10.

16. John Friedmann and Goetz Wolff, "World City Formation: An Agenda for Research and Action," International Journal of Urban and Regional Research 6, no. 3 (1982): 319.

17. The Economist, March 24, 1984.

18. Paul M. Horvitz, "Technological Innovation: Implications for Regulation of Financial Institutions," Conference on Technological Innovation, Regulation and the Monetary Economy, Columbia University, New York, March 15, 1985, 12.

19. Manuel Castells, "High Technology, Economic Restructuring, and the Urban-Regional Process in the United States," in Manuel Castells, ed., High Technology, Space and Society (Beverly Hills, Sage Publications, 1985), 15.

 

Originally published in Wired Cities: Shaping the Future of Communications
William H. Dutton, Jay G. Blumler, Kenneth L. Kraemer, eds.
G.K. Hall & Co. 1987