Cable vs. Telco: What Happens
When Competition Outpaces Washington Rules
By Bill McConnell -- Broadcasting & Cable, 5/8/2005 8:00:00 PM
With a barrage of ads running on broadcast stations across Texas, local phone company SBC informs viewers that the state's laws are “outdated” and “preventing consumers from making their own telecommunications decisions.” Cable companies face “less competition, and they like it that way,” says another ad.
|Cable operators and phone companies are stealing each other's customers|
|Estimated growth in cable-telephone subscribers|
|Source: Kagan Research|
|Estimated growth in SBC, Verizon video subscribers|
|Source: UBS Investment Research|
These spots and others like them are part of a massive campaign by phone giants SBC and Verizon to persuade Texas citizens—read: legislators—to make it easier to sell TV service in the state.
In equally strong counterattacks in newspaper and TV ads, cable operators Time Warner, Comcast and Cox warn that phone companies have hired “hordes of influence peddlers” to push legislation. The accompanying spot shows a fatcat blowing smoke from a cigar.
As the cable-vs.-telco war to capture subscribers for bundled TV, phone and Internet services begins in earnest, the battles have spread beyond Texas. Across the country, the major phone companies have committed more than $20 billion to launch subscription-TV services that will eat into cable's customer base. But their biggest obstacle isn't the money; it's Washington and thousands of local governments hanging on to decades-old rules written when the phone business was a government-protected monopoly.
Phone companies say that competition will sputter unless Congress and regulators catch up with changing technology. Verizon plans to begin offering a 100-channel package for $40 a month in late 2005 or early 2006, but it can't start building subscriber lists yet. First, it must obtain franchises from thousands of local communities—a process that could delay TV service for years. To dodge that roadblock, Verizon is asking Washington to streamline the rollout by writing Internet-TV rules that would apply nationwide.
House Commerce Committee Chairman Joe Barton (R-Texas) is preparing to do just that. “We need a federal policy with federal rules,” he said at a recent hearing on Internet video. “We cannot expect new entrants to succeed if they have to comply with 52 different jurisdictions, not to mention if they have to comply with rules set by thousands of franchising authorities.” Barton has said he wants the House to approve relief for the Bells as a component of telecommunications-overhaul legislation to be sent to the Senate before Aug. 1.
Leaps in technology
Because of the leaps in digital technology that only a few years ago were unimaginable, Congress and regulators have struggled to update the rules fast enough. Because of that, a revolution in new services and competition is being held back, telephone-industry officials say. “Technology has just passed by our telecommunications laws,” says Lincoln Hoewing, chief of Internet and TV policy for Verizon. “Nobody expected broadband Internet to grow as fast as it has.”
The telephone companies are in a more precarious spot than cable operators because the video business they are trying to enter is highly regulated by more than 2,000 local governments. As for the cable industry's foray into Internet-based services—phone and data—the FCC has taken a hands-off approach, which has allowed operators to offer high-speed Internet service with virtually no hurdles, at least for now.
The lengthy negotiations with city councils and cable-franchise boards that telephone companies now encounter were no threat in the early days of slow growth and few competitors. “We're facing a very complex and delayed process to get into video,” complains Hoewing. “We need a national policy that will encourage deployment of new technology as rapidly as possible.”
Today, the telephone companies—which have been regulated primarily under federal and state rules—are trying to get into video almost overnight. The business must be developed quickly to offset losses in their core landline phone business to cable-industry and other Internet carriers.
The phone companies face thousands of local governments determined to write a new set of ground rules governing franchise fees, public-access channels and construction of new plant.
Unless Washington frees the Bells from the obligation to obtain local franchise permits the way cable companies do, the telcos say, their rollouts could be slowed by years and tens of millions of dollars added to the cost. The cable industry hopes the current telecommunication laws remain intact—and in their favor.
The phone companies are so desperate for relief that they're begging local broadcasters to take up their cause. At the National Association of Broadcasters convention in Las Vegas last month, Verizon Chairman Ivan Seidenberg offered to carry digital multicast channels that TV stations can offer. His overture came only weeks after the cable industry persuaded the FCC to reject mandatory cable carriage for multicasting.
No quick remedy
Leaders in Congress and the FCC are sympathetic to the Bells' dilemma and are considering measures to give them relief. But cable operators are likely to make deep inroads into the local-telephone business before the Bells' video-franchising obligations are spelled out.
Cable operators plan to press for the status quo. “We want everybody to follow rules that are already on the books,” says Kyle McSlarrow, president of the National Cable and Telecommunications Association. More pressure is expected from local governments and consumer groups, which would prefer not to weaken municipalities' rights to grant pay-TV franchises.
Despite Washington's desire to bring new competitors to TV and telephone services, the regulatory morass isn't about to be cleared up quickly. Last week, the FCC turned down SBC's request for blanket exemption from “common-carrier,” or telephone-style, rules that govern a wide range of broadband services, including video. SBC plans to spend $7 billion over the next three years to upgrade its network called Project Lightspeed.
Congress isn't likely to act on such a controversial issue this year. The Supreme Court, however, is expected to rule as soon as next month on how much flexibility the FCC has in setting rules for Internet service. With direction from the court, the commission would probably need another year to decide whether to exempt Internet-delivered communications from most local regulation.
“The timing is just bad for the phone companies,” says Laura Phillips, a telecom lawyer with Washington firm Drinker Biddle & Reath. “I don't see any momentum this year.”
SBC and Verizon are taking different approaches to local regulation. Resigned to the possibility that it may never be relieved of heavy local oversight, Verizon has negotiations under way with more than 100 franchise authorities on launching TV service in their markets. It has also asked the California, Virginia and Texas legislatures to grant statewide franchises.
Verizon, which recently cleared the way to buy rival MCI Inc., isn't waiting for franchise approvals to begin constructing the $15 billion fiber-optic network necessary for TV. The company argues that, because the network can also be used for standard Internet service phone companies can already offer, additional franchise authority is unnecessary until TV packages are actually being sold.
In the meantime, Verizon is lining up programming. Last week, the company proudly trumpeted a deal to carry the NFL Network. The company has also signed up NBC Universal Cable, Starz, Showtime, A&E and Discovery, and more deals are in the works. Verizon's buildout has angered the cable industry. The state cable association in New York managed to win a temporary work stoppage against the phone company, but work continued once local regulators verified that the proper construction permits had been obtained.
In Texas, the issue-advertising war has been raging over the state legislature's consideration of a bill to set up a statewide franchise plan that would eliminate the need to haggle with hundreds of local governments for local franchises. SBC and cable operator Time Warner have charged each other with harming consumers' interests. The phone company also has complained that cable operators won't run TV ads giving the Bells' point of view.
Cities demand oversight
SBC argues that current law already gives telephone companies the right to deliver Internet-based TV, and it has no plans to apply for new franchise rights. Instead, the company is waiting for the FCC to formally declare a video franchise unnecessary before moving forward. “We don't think franchise rules apply to Internet video,” says SBC spokesman Michael Balmoris. “Policymakers are in the business of promoting competition. We need clarification from regulators.”
The companies claim they aren't trying to escape obligations to serve poor neighborhoods or other local obligations, as critics allege. Says Verizon's Hoewing, “We're willing to pay franchise fees; we've got capacity to carry public-access channels. We're just trying to move the process forward while still serving concerns local governments have. Local franchising is an outmoded process that cable regulators developed over decades when companies had time to build out without worrying about competition.”
Not surprisingly, industry analysts have generally endorsed the phone companies' view that they must be freed from oversight by thousands of local governments. “Competitive entry into the video market will be delayed if the Bells do not get relief,” says UBS Investment Research's John Hodulik in a new report.
But local officials say obtaining franchise rights is relatively simple as long as the phone companies sign on to roughly the same terms as local cable incumbents. Verizon's and SBC's real aim is to enter the market with lower franchise fees and diminished obligations, says Ken Fellman, mayor of Arvada, Colo., and chairman of the National League of Cities' telecommunications committee, which lobbies for city governments in Washington.
“I have a hard time buying that corporations the size of Verizon or SBC don't have the wherewithal to get the job done,” he says. “They would just prefer not to incur the expense.”
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