Technology

Regulation Machinations

2/20/2005 7:00 PM Eastern

The gauntlet has been thrown: Telephone giants Verizon Communications Inc. and SBC Communications Inc. have declared their intent to duel it out with incumbent cable providers for the hearts of video subscribers.

In January, SBC chairman and CEO Edward Whitacre Jr. said his company will invest $5 billion in its plant over the next three years in order to deliver a package of bundled services, dubbed U-verse, to consumers. That bundle, delivered over fiber-to-the-node architecture, will include video services delivered via compression technology.

Verizon has already begun its plant upgrade and this year will install fiber-to-the-home infrastructure in 12 states. The improved plant passes just under 1 million homes, and the company expects to more than double that by the end of 2005.

WRESTLING OVER REGS

But before the fencing over video subscribers can actually begin, a bigger and potentially more important squabble is being fought over the very rules of engagement.

In a recent press briefing, Verizon executive vice president of public affairs and communications Tom Tauke said local-franchising negotiations take six to 18 months to complete. He described the process as “tedious” and a “barrier to entry.” Cable franchising is an anachronism, as video services are just an “added application” to an approved network that’s already in place, he argues.

“IP-based networks are not subject to traditional franchising. The traditional rules don’t fit,” adds SBC spokesman Kevin Belgrade.

Industry analysts acknowledge the challenge faced by the telcos. The current franchising structure is costing telcos precious time to market, says Craig Moffett, senior cable and satellite industry analyst with Sanford C. Bernstein & Co.

Local franchise fees will also cut into the “already marginal returns” projected for video. But the worst impact would be the “more democratic build-out” that cities would demand, rather than those proposed by telcos, which want the ability to decide when and where to build. Specifically, they’d like to limit their build to their current telephone-service boundaries.

Title VI of the federal Telecommunications Act of 1996 defines a cable operation as a closed-video system delivering content over a wire, with no exceptions as to technology, Moffett adds. “Seems to me what [telephone companies are] proposing to offer walks like a duck and quacks like a duck. It’s probably a duck,” he says.

The potential new competitors absolutely need franchises, says National Association of Telecommunications Officers and Advisors executive director Libby Beaty.

“[The telcos are] mischaracterizing the difficulty,” she says. “Franchise documents are public; they know what they [need] to offer. The process is not time consuming if the agreement [proposed by the telco] is honestly similar in nature to the one held by the incumbent.”

The 1996 Cable Act stripped cities of much of their authority, but local governments still serve an important role enforcing customer-service standards — including the need to serve an entire franchise area, rather than choice neighborhoods.

Beaty notes that one key example of how important government enforcement can be occurred in Hillsborough County, Fla. An incident came to a head last November after crews building Verizon’s FTTP network reportedly hit county sewer and water pipes 200 times during the preceding months, culminating with an incident where a leak created a sinkhole that swallowed a car. Verizon voluntarily stopped the build in advance of an official county stop-work order, but resumed within a month following negotiations with the county, according to Verizon.

LOCAL PREROGATIVES

City officials support greater competition but want to retain local-enforcement authority. When consumers have billing and service problems, “they call us,” Beaty said on behalf of her members.

Added municipal consultant Barry Orton: “[Telephone companies] have been trying to slip through the IP crack for many years. It hasn’t worked so well.”

But tactics are changing. Tauke says his company should work for a congressional change on franchising policy.

The telcos are also attacking their problem at a state level. In Virginia, Verizon floated a bill that would have given them authority to offer video by virtue of their telephone-operating authority. It has been tabled, but Verizon vows it will resurface in 2006. A bill assuring that Verizon will only be required to offer cable services within its phone network is expected to resurface in California, and officials might suggest franchise changes during a telecommunications policy rewrite in Texas.

Some city officials fear cable and telephone companies will reach an accord and share their political clout to end all franchising. But there’s no sign of a love match right now. Verizon has earned five cable franchises (Beaumont, Calif.; and Keller, Sachse, Westlake and Wylie, Texas), and each time the incumbent cable operator has protested.

In letters to the local governments in Texas, Charter Communications Inc. and Comcast Corp. put the franchisors on notice that operators will apply for diminished contractual obligations, or could even file lawsuits over the Verizon agreements.

The hot-button issues include a lack of universal-service requirements in the telco franchise agreements, along with stipulations that cities have no authority over the telco’s plant — language which makes the agreements unenforceable, cable officials argue.

Incumbents also criticize language that they believe could allow Verizon to walk away from their franchise obligations in three years. Loose definitions of non-cable revenue could also help the telco escape franchise-fee obligations on such growing video categories as on-demand content, cable attorneys argue.

But in spite of the conflicts, the telcos march on to the field of the competitive battle.

“We hope local leaders see the benefit of a competitive alternative,” says SBC’s Belgrade.