The Cable Wars

Phone companies are battling cable providers in local markets. Cities and viewers are the likely losers.

Consumers may soon have a new choice for cable television. Thanks to technological advances, phone companies are starting to move into the lucrative cable market, which they say will lead to better service and lower prices. But in the process, the industry has launched a multipronged legal and legislative effort that its municipal overseers worry could let phone companies discriminate on the basis of income; jeopardize city revenues and telecommunications infrastructure; and threaten programming dedicated to education, government, and public access.

Already, the mere possibility of changes in the state’s cable franchise process has frozen local negotiations in California, as cable companies try to avoid being locked into multiyear agreements that their competitors may never need to sign.

Franchise agreements compensate cities for the profit cable providers make from laying their cables beneath public rights of way. Ripping up the asphalt or concrete on just a single city block not only disrupts traffic for weeks or more, it’s using public property for commercial gain. According to the National Cable and Telecommunications Association, the cable industry will pay cities about $2.4 billion this year.

Ten years ago, Congress sought to ease the entry of new competitors into the marketplace. But phone companies say it’s taken a decade to get to this point because of the long and expensive process of upgrading their networks with fiber optics. So far, only two cities in California — San Ramon and Anaheim — have signed agreements with AT&T for cable service, while Verizon, which serves Southern California, has signed five agreements in two years. AT&T hopes to offer cable-like services to nineteen million homes by 2008.

While both phone companies pursue agreements with other cities, they complain the process is too slow. “We provide service to more than four hundred cities,” AT&T spokesman Gordon Diamond says. “If we got one agreement a week it would take us eight years. We’re looking for a streamlined process.” Verizon spokesman Jon Davies says it has taken his company a little less than a year to negotiate each agreement.

So the phone industry is hoping to streamline the process through legislation that would shift the entire negotiation from cities to the state. When cable companies are forced to strike deals with individual cities, local officials have far more negotiating power. Moving the playing field to the state level would tip the scale in favor of the phone companies, whose lobbying usually triumphs in legislative battles.

California Assembly Bill 2987, authored by Assembly Speaker Fabian Nuñez and Assembly Member Lloyd Levine, would allow companies wanting to provide cable services in California to simply submit an application with the Department of Consumer Affairs. Phone companies are lobbying intensely for the bill, which is likely to pass, according to Dennis Mangers, president of the California Cable & Telecommunications Association, a lobbying group representing Comcast, which dominates the East Bay cable market.

“They’ve hired every contract lobbyist and PR firm in Sacramento,” says Mangers, who says he is “lobbying all day and every day” to amend the bill. “It’s a juggernaut.” In early May, AT&T sponsored a Democratic Party fund-raiser, headlined by Nuñez, which raised nearly $1.7 million at Pebble Beach Resorts. Mangers says AT&T and Verizon have spent more than $30 million since January on advertisements proclaiming their entry will bring competition and lower prices to the cable market. The bill was passed unanimously by the Assembly last week, and now heads to the Senate.

With so many angles and so much money being spent on trying to enter the video market, it seems like only a matter of time before phone companies get their way. “Telephone companies have invested an enormous amount of money and resources to push forward their agenda,” says Jeannine Kenny, a senior policy analyst with Consumer Reports. “It’s difficult for consumers to compete with that extreme lobbying effort. If they invested the same amount of resources in negotiating franchise agreements, you might see more video competition in the marketplace now than currently exists.”

Proponents argue that the bill would keep intact all the benefits that local franchise agreements provide to cities. But Patrick Whitnell, assistant general counsel for the California League of Cities, which does not oppose a statewide process, said the bill in its current form includes loopholes that would threaten benefits such as universal service and public access programming. Nuñez has pledged to address these issues in a later version of the bill.

Even the bill’s legality is at issue, according to Paul Valle-Riestra, senior assistant city attorney for Walnut Creek and author of Telecommunications: The Governmental Role in Managing the Connected Community. “It’s one thing to own the city streets, it’s another thing for the state to impose a fee for something it doesn’t own,” Valle-Riestra says. “There’s concern it could invalidate the [franchise] fee completely and then we’d lose it.”

To those municipal employees who are paying attention, all of this smells like an impending disaster. “The reality isn’t really about whether there should be competition or quick entry,” Valle-Riestra says. “They’re trying to do away with community benefits … and do away with consumer protection requirements.”

The benefits negotiated in franchise agreements mean a lot for cities such as Walnut Creek. Annually, it makes about $700,000 through its franchise fees with the two cable companies that provide service there, Astound Broadband and Comcast. Comcast also records city council meetings and provides a studio for community access programming, while Astound offers a digital phone and high-speed Internet network that connects city facilities. Walnut Creek also requires both companies to provide service without regard to customer income. Valle-Riestra says that since Comcast and Astound have to follow these rules and invest money to do so, it would be unfair to allow AT&T to do otherwise.

In fact, AT&T, then SBC, wanted to upgrade its network in Walnut Creek last year. The city approved the upgrade, but said that since it would be used to offer cable television services, SBC would have to sign a franchise agreement. SBC sued the city, claiming the upgrade was unrelated to cable service and that state and federal laws allow it to make such upgrades. A federal judge ruled against the phone giant in late April, and AT&T is now taking its case to state court.

“We welcome the competition, we want them to come into town,” says Valle-Riestra, who negotiates the city’s cable franchise agreements. “We’ve given them the existing cable franchise and said we’ll get it approved right away. They’ve refused to do that.”

Some cities are letting phone companies offer cable without a franchise agreement. In March, the city of San Ramon, home to AT&T’s 10,000-employee California headquarters, signed a five-year “public benefits agreement” with AT&T to provide digital television. San Ramon City Attorney Byron Athan, who helped negotiate the agreement, says the city didn’t need a franchise agreement as long as it still received the same benefits. Under its deal, San Ramon will get revenues of up to 5 percent of AT&T’s gross revenues from local cable service, a one-time capital grant of $200,000 that will provide facilities for education and government channels, and fifty cents per subscriber. Anaheim is the only other California city that has also signed an agreement with AT&T, but it did not ask for any benefits.

Valle-Riestra says that while the San Ramon deal looks like a franchise agreement on the surface, it benefits AT&T more than a normal agreement would. For example, while most agreements stipulate that all residents must have equal access to the fastest technology, San Ramon’s agreement allows AT&T to provide two levels of service quality. The lower-quality offering satellite television — also puts more money into AT&T’s pockets since satellite services are not subject to city franchise fees. Athan says San Ramon was not very concerned about income discrimination because the city doesn’t have any low-income areas.

Such discrimination is a very real likelihood, however. In a briefing with Wall Street investors two years ago, SBC executives said they would provide coverage for 90 percent of their “high value” customers that spend between $160 and $200 a month on telecom services — but only 5 percent of “low value” customers — those spending less than $110 per month. In May, the newly renamed AT&T changed its tune and said it will deliver cable to 5.5 million low-income people within three years. “I’ve asked them, will you show us the plan?” Valle-Riestra says. “The answer is, ‘No, we can’t do that.'”

The requirement that cable companies make services equally available to high- and low-income neighborhoods ensures that all residents have equal access to free cable programming and high-speed Internet service. Cable companies worry that if telephone companies were allowed to just cater to the high-dollar customers, it would allow the phone companies to undercut their prices.

While it’s safe to say the cable industry doesn’t want the phone companies infringing on their market, cable firms would be happy to eliminate or reform the lengthy and costly local franchise-agreement process. “If they level the playing field, we don’t object to a state-level franchise process,” Mangers says. But, he adds, “we didn’t ask for this bill. We would have continued to live with local governments as we have for decades.” In Texas, where AT&T is based and where the first statewide franchise bill passed, the cable industry has filed two lawsuits saying that the law discriminates against it. New Jersey and Indiana have also passed similar legislation.

At the same time the phone industry is pushing for state franchise agreements, it also is lobbying for a federal bill, HR 5252, that would allow phone companies to sign a national franchise agreement. The bill is currently awaiting a floor vote. And the phone companies aren’t stopping there. “They’re making additional arguments [to the Federal Communications Commission] that the type of service they’re providing doesn’t fall under any existing regulatory categories and they should be completely deregulated,” says Valle-Riestra. If AT&T wins its lawsuit with Walnut Creek, it could wiggle out of any franchise agreement requirement entirely. “They’re hedging their bets and seeing where they can get the good deal.”

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