Drive along any rural highway in West Virginia, Vermont, or Colorado, and they dot the landscape like high-tech mushrooms. In Connecticut and New York suburbs, their shells interrupt the zoning enforced conformity. Even in such places as Philadelphia they can be seen atop inner city row houses. A million and a half homes in the United States now sport satellite dishes or, as they are known to an industry addicted to acronyms, HTVROs (Home TV Receive-Only earth stations).

Until the satellite dish came along, communications technologies had always spread from population centers outward. But the dish revolution has advanced, like some Third World guerrilla army, from the country to the cities. And now it promises a change in the landscape of communications all across the United States. For, although the various players in the industry don't fully realize it yet, satellite TV could erode, perhaps even wipe out, the monopolistic foundations on which the cable-TV industry was built.

Monopolists vs. Mushrooms

To rural viewers long accustomed to enduring the fewest broadcast channels and the worst TV reception around, the satellite dish was the ultimate revenge. Introduced into TV distribution in 1975, dishes quickly evolved from huge $100,000 items restricted to government, TV stations, and cable systems to widespread consumer products now priced at about $2,000.

The programs carried by your local cable system-say United Cable in Denver or Group W in Los Angeles-are the same satellite signals pulled down by backyard dishes. So until recently, rural TV buffs who invested a few thousand dollars to buy and install a dish could scoop up for free the best that television had to offer: pay cable services like HBO and the Disney Channel, syndicated programming, network feeds to local affiliates, superstations like Ted Turner's WTBS, and numerous "backhaul feeds"-transmissions of news reports and sports events from the field to network headquarters.

It was a good deal-too good to last. In January 1986, Home Box Office ended the free lunch by scrambling its HBO and Cinemax transmissions. Other programmers soon followed, and by the end of the year half of all satellite programming was encrypted and therefore gibberish to anyone without a $400 decoder and a subscription costing $10 or more a month per service.

At first, satellite dishes were used only by consumers unserved by cable or broadcasters. But in 1984 and 1985, cable operators began to notice an alarming number of electronic mushrooms sprouting up in their backyards. More than a half milliondishes were purchased in 1985 alone, and a growing proportion of them-about a third-were in cabled areas, according to Home Satellite Newsletter. A 1985 study commissioned by the National Cable Television Association (NCTA), the cable operators' trade group, projected that dishes would cost cable franchises $400 million in lost revenue over the next five years.

Scrambling, cable companies seemed to think, might stop the attack of the giant mushrooms. "Cable operators are in the pay-TV business," says Steve Tuttle, public relations director of NCTA. "Let's remember that. Now, it gets awfully hard to be in the pay-television business when the product is being given away across the street from you."

For several months before and after HBO's move to scrambling, confusion, anger, and fear prevailed in the dish business. Existing dish owners wondered whether they had invested thousands of dollars in useless pieces of junk. Sales of new dishes slowed to a trickle. RCA and Goldstar, two big consumer-electronics manufacturers that had been poised to enter the dish business, pulled out.

The dish industry's scrappy trade group, the Society for Private and Commercial Earth Stations (SPACE), filed retaliatory suits and petitions against everyone connected with scrambling. The Justice Department began an investigation, still underway, of the possibility that the companies that operate local cable franchises had pressured some programmers into scrambling. Several bills to regulate or delay scrambling were aired in rancorous hearings before the House telecommunications subcommittee.

The hysteria reached an appropriate peak on April 27, when a video pirate calling himself "Captain Midnight" overpowered HBO's satellite link for about five minutes to broadcast a protest against hbo's dish subscription prices to millions of surprised viewers. Captain Midnight, known to his friends as John R. MacDougall, owner of a Florida dish dealership, later pleaded guilty to illegally interfering with HBO's transmissions.

The scrambling controversy, however, is not really about scrambling anymore. No one publicly disputes the right of pay television services to protect their signals. The game is changed, and the stakes are actually higher now. What is going on today is a turf battle between the dish and the cable-pay-TV technologies that can both complement and compete with each other.

Pay-TV programmers like HBO and Showtime have traditionally sold their services through local cable operators. These middlemen, companies like Group W and Cox Cable, install and control the cable "pipeline" through which cable customers receive their TV services. If you want to order HBO in Los Angeles, you don't call Home Box Office, you call Group W.

Even if you don't like your local cable company, you still have to deal with it. Cable operators are almost always given monopoly franchises by city governments. The cable company gets protection from competition and permission to tear up the street; the city gets regulatory control, free telecommunications services, and a cut of the revenue.

For many years, the cable industry has been playing a coy game with its franchised monopoly status. When First Amendment rights and rate regulation are discussed, cable operators abhor any comparison with public utilities and claim that theirs is an open business "just like print." But when municipal franchises are handed out, most (though not all) of the industry starts talking about "economies of scale" and "natural monopoly." But satellite television lays the monopoly myth to rest once and for all.

Contrary to the initial fears of many people, the programmers who scrambled their programs have reached out to dish owners, seeing in them a new market. "They're not saying, okay, now that we've scrambled, backyard dish owners can't get the programs, which is what a lot of people feared," says Thomas Rogers, counsel to the House telecommunications subcommittee. Rather, "they're establishing marketing programs to sell their scrambled signals." The issue now is whether programmers will allow businesses other than local cable monopolies to sell decoders and subscriptions. At stake is the future of cable.

Torn Between Two Lovers

Back when it was just a few rural dish owners pulling down whatever they wanted for free, the dish seemed to pose little fundamental threat to the structure of the cable industry. But "VideoCipher II," the encryption system developed for HBO by M/A-Com Inc., changed all that. Programmers quickly adopted it as an industry standard so that dish owners wouldn't have to purchase separate decoders for each service. This standardization happened without some long, drawn-out Federal Communications Commission proceeding and without a single consumer purchasing a decoder only to find it soon obsolete.

Such a quick and painless consensus is nothing to be sneezed at. It made it possible for anyone with good programming and space on a satellite to get into the pay-TV business on a national scale, completely bypassing the cable monopolies. It also made it possible for third parties with distribution agreements to act as middlemen, opening up another way to bypass cable.

Combine satellite dishes and standardized descramblers, and you get, in effect, a nationwide cable-TV system-without the cable. It is now technically possible for anyone with a dish to pick up a telephone and order Showtime, the Disney Channel, or what-have-you from any authorized distributor in the country. The M/A-Com center near San Diego merges subscriber information from each programmer into a single data stream and beams it up to a satellite. The satellite then rebroadcasts signals containing hundreds of thousands of individual subscriber "addresses" that unlock the audio of whichever services a subscriber has ordered.

Programmers have set up 800 numbers-1-800-HBO-DISH, for example-that allow dish customers to order their service directly. But one can also subscribe through a cable operator-in theory, through anyone within reach of a telephone who has a valid distribution agreement with a programmer. Bye-bye, territorial monopolies.

Now the programmers find themselves in something of a dilemma. As good business people, they aren't about to ignore the new market provided by dish owners. On the other hand, they depend on local cable operators to reach the bulk of their subscribers and therefore are loath to threaten local cable monopolies by readily authorizing independent distributors. Thus, programmers' subscription-price and marketing policies have been carefully designed to minimize competition between the dish and the cable. And that is what all the shouting is about.

"HBO and the other programmers have refused to deal with any entities outside of cable TV," charges Joe Boyle, the executive director of SPACE. Roger Carroll, an aide to scrambling critic Rep. Judd Gregg (R-N.H.), puts it a bit more colorfully: "The cable industry has pressured the programmers...to sleep with them."

Says Carroll, "We don't want to see the rural dish owner in New Hampshire, Pennsylvania, Minnesota, or California thrust back into the dark ages of television viewing. Nobody's disputing the fact that the programmers should be paid for their services. But we don't feel those services should be priced out of the market, either."

SPACE and its allies argue that the prices charged for satellite-broadcast subscriptions are artificially high, that cable-industry pressure forced many programmers to scramble involuntarily, and that cable companies and satellite programmers are trying to thwart competition by refusing to authorize independent (read: noncable) programming distributors. (SPACE has at least one very specific independent distributor in mind-Viewers First National, a venture organized by the trade group's counsel, Rick Brown.)

Steve Tuttle, of the cable industry's ncta, scoffs at such charges. "The scrambling technology has been set up so that anyone can get into the business," he says. If no independent distributors have been authorized yet, it's purely a "business decision." Adds Tola Murphy-Baran, Showtime's public relations director, "I really don't think the customer cares how the programming gets to his house as long as it gets there."

Friendly or Free?

SPACE and other dish advocates think prices may be deliberately skewed in an attempt to protect cable franchises from the new technology on the block. Their argument runs something like this:

A local cable system gets its programming from the same satellite signals as dish owners; the cable company pays the programmers a "wholesale" rate of $4 or $5 per subscriber. So programmers like HBO or The Movie Channel could make an additional profit by selling directly to dish owners for $7 or $8 a month, compared to the $12 or so that cable operators charge. For that matter, an independent distributor who bought satellite programming wholesale and marketed it nationally could also make a hefty profit. So could a cable franchise in literally any locality.

Such a cable company, in fact, would be in a good position to "package" several channels together and sell them at a discount rate, because it would already have distribution agreements and established business relationships with the programmers. Satellite scrambling, then, has created three potential sources of competition for local cable franchises: the programmers themselves, other cable companies, and independent distributors. To put it bluntly, satellite television should be blowing the idea of cable as a local "natural monopoly" sky high.

Instead, programmers are charging dish owners more than cable viewers pay. And the only distributors they have authorized are local cable operators-and only within the cable operators' own franchise areas. This policy prompted Kaultronics, a small cable franchise in rural Wisconsin, to send letters to 100 townships in its area asking them to grant it paper "cable franchises" so programmers would allow it to sell their services to local dish owners.

Critics of the current arrangement say third-party distributors would cut prices and give cable operators more incentive to reach out to dish owners. They see the programmers' refusal to deal with independents as a deliberate attempt to limit competition. "We want HBO, Showtime, Disney, Playboy to make the service available to outside distributors and let competition dictate the price," says Stephen Glass, owner of Heavens Above, a dish-equipment store in Worcester, Massachusetts.

Glass knows how far the programmers are willing to go to enforce their "cable friendly" distribution policy. From February until the end of April, he offered discount HBO-Cinemax subscriptions to customers who purchased the M/A-Com decoder. While Home Box Office was billing dish owners $19.95 for the pair, Heavens Above charged only $11.95. The store signed up customers through SPS, a small cable company in Boise, Idaho, that buys HBO service wholesale. Glass phoned in customer information to SPS, which forwarded it to HBO for VideoCipher authorizations.

"We were passing through the $11.95 that SPS charges us right to the customer," Glass says, "to kind of give the industry a kick in the behind" after scrambling was implemented. The promotion also helped generate business during what Glass terms "the slowest period we've had since we began the business six years ago." News of Glass's bargain price spread through satellite-dish dealerships like wildfire. His store received inquiries from over 40 states. By the end of April, Heavens Above and SPS had sent about 1,100 subscriptions to HBO.

Consider: just one distributor in Boise, selling at a discounted rate through a small store in Massachusetts, signed up 25 percent of the 6,000 dish subscriptions HBO had received by April 25. Yet on that date, HBO informed SPS that it would no longer take its orders for the activation of VideoCiphers because they were dealing outside their franchise area. "They don't want a free market," fumes Glass. "They want a controlled market."

The Sweet Ring of Money

Cable operators and programmers see the dish as an extension of the traditional cable business and therefore part of their turf, not an alternative or a competitor. "You know the old debate about what business are you in, railroads or transportation?" asks Tola Murphy-Baran of Showtime. "That applies here. You are either in the cable-TV business or you are in the business of delivering entertainment to people's homes." HBO's Alan Levi used identical language to make the same point, suggesting that the idea has currency among the cable powers that be.

The more savvy cable operators, say Murphy-Baran and Levi, recognize that the dish offers them a new business opportunity and are beginning to pursue it by marketing programming to dish owners. But these programmers' spokespersons firmly believe that dishes will be significant only in areas where it is uneconomical to lay cable. "Cable is still the best deal in town," affirms Steve Schulte, Showtime's man in charge of directbroadcast development. "If it wasn't for dealers promising freebies within franchise areas, these dishes never would have appeared in cabled areas."

The programmers are being cautious and conservative. For 10 years they have worked hand-in-hand with cable operators to promote pay TV in general and their products in particular. From this standpoint, it makes sense to adhere pretty closely to the traditional practices: authorize a single distributor in a territory and minimize the potential for satellites to unleash competitive, nationwide distribution.

"We decided to enter business in the most cost-effective way," says Levi of HBO, "and that was to utilize the distribution mechanism that we already had in place, which was working through the cable operators." In the programmers' view, cable operators build "brand awareness" for programs. The cable business, says Levi, "is not simply a matter of laying down wires. It's knocking on doors, making telephones ring, placing print ads to build the business." Levi thinks it is premature to talk about independent distributors. "That may very well come about as more services scramble and more dishes are sold. But at this point where we have a total of 7,000 subscribers, it's hard to cost-justify developing a brand new nationwide marketing system for a potential of 1.5 million subscribers."

The programmers are at best suspicious and at worst openly scornful of the ability of independent distributors to sell their wares. "I'm not ready to trust my product to any newcomers on the block," says Steve Schulte of Showtime. "You have to make a big distinction between taking orders and selling programming. Lots of people want to take orders. They can pick up the telephone and call an 800 number just as easily as the customer can. But when you ask them to describe in 25 words or less the difference between HBO and Showtime, they hem and haw." Schulte says he doubts that the would be third-party distributors will be interested in listening to complaints or in disconnecting the service when asked to.

Meanwhile, SPACE and its allies are trying to use the government td force programmers to authorize third-party distributors. In September, Senators A1 Gore (D-Tenn.), Wendell Ford (D-Ky.), and Dale Bumpers (D-Ark.) introduced a SPACE backed bill requiring any programmers who scramble to give distribution rights to any noncable company that meets certain criteria or to allow cable operators to sell scrambled signals to dish owners outside their franchise boundaries. The bill would also require all scrambled networks to use the same encryption technology-something that is already happening without government interference-and would increase the penalties for satellite jamming like Captain Midnight's stunt.

Such legislation is probably beside the point. Market pressures are already undermining the cable franchises' control over programming sales to dish owners. The potential market is just too big for programmers to ignore.

In May, HBO's Levi was musing about the possibility of a "kind of Publisher's Clearinghouse concept. Perhaps there is a mechanism similar to that, not by mail but by phone, so that the dish owner can quickly and easily order multiple services at a discount." Meanwhile, as the cable and dish interests have squabbled before Congress, M/A-Com has gone ahead and produced 100,000 descramblers, and close to 8,000 people have purchased them. Two other electronics firms, Anixter and Channel Master, are selling them under a licensing agreement. Future satellite-dish designs will include the descrambling circuitry, eliminating the $400 expense for the decoder.

Dish dealers and programmers are already forging important links. For example, Viacom, the parent company of Showtime and The Movie Channel, is offering dish dealers a $10 rebate for each new Showtime subscriber they sign up by passing out promotional materials with decoder purchases. Such joint marketing efforts will no doubt spread.

The basic ingredients of a healthy market are in place, and sooner or later competition will set in. Yes, the big programmers' anticompetitive distribution policy was a setback for consumers, but only in the short run. Other programmers-perhaps including movie studios without corporate ties to cable-will enter, and as they do, excessively "cable-friendly" attitudes will become too expensive to maintain. If the existing rates are really unreasonable, then all the mechanisms to bring them down are present. HBO's Levi sounds believable enough when he says, "If our cash register isn't ringing, if our phones aren't ringing, then we're going to take a hard look at what we're charging." In fact, HBO has already responded once by cutting its dish subscription rate by 17 percent.

It is easy to lose sight of the fact that the whole direct-satellite pay-TV business is only a few months old. Only about 10 programmers are fully scrambled. It's absurd for scrambling critics to say that the market is "uncompetitive" or "failing" when it has hardly begun to operate. The true shape of that market will only be known once the majority of pay services scramble, consumer confidence returns, and the programmers begin to compete with each other.

It's a safe bet that cable's attempt to subordinate the dish won't succeed for long. Consider an interesting historical precedent: In 1878, Western Union, the largest and most powerful corporation in the United States, entered the telephone business to preempt the upstart Bell telephone company. The telegraph giant's executives had what now appears to be a peculiar attitude toward the telephone: they thought it was a great way to send in orders for telegraphs. In fact, the telephone and the telegraph did enjoy a synergistic relationship for many years, but eventually the telephone business swallowed up its technological forefather.

Like Western Union in 1878, the established cable interests want to incorporate the dish into their business without letting it disrupt the status quo. We'll see.

Milton Mueller received his M.A. in communications from the University of Pennsylvania in 1985 and is currently working on a Ph.D. dissertation on the history of AT&T. He is coauthor, with Edwin Diamond, of Telecommunications in Crisis (Cato Institute, 1983).