'Open Video Systems’ A Turn Off

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Washington— A decade ago, Congress set up new rules for so-called open-video system providers, allowing phone companies to plunge into cable markets without local franchises and without territorial buildout requirements.

So why are AT&T Inc. and Verizon Communications Inc. asking Congress to pass a new law that would confer precisely the same benefits?

The short answer is that the phone companies think the courts have gutted the franchise exemption created by those rules, and they believe they might have to lease up to two-thirds of their channels to independent programmers at regulated rates.

“The uncertainty created by those rules does not incent us — it deters us from investing — on that basis,” said Robert Quinn, AT&T’s senior vice president of federal regulation.

<p>A Primer on Open Video Systems</p>

The basics:

FCC action within 10 days

No local franchise required

No buildout requirements

Programmers lease channels

To date:

96 open-video certifications approved

2 Denied

2 Withdrawn

Source:Multichannel News research

<p>Chronology</p>

February 1996: Newly passed Telecommunications Act creates open-video system option for phone companies, highlighted by the elimination of the local franchising requirement. Federal Communications Commission has to act on open-video applications within 10 days.

January 1999: U.S. Court of Appeals for the 5th Circuit rules that all Congress did in 1996 was eliminate the federal requirement that an open-video provider obtain a franchise. That step, the court asserted, falls short of stripping local governments of their authority to demand franchises from open-video operators.

May 1999: 5th Circuit rejects FCC’s appeal. FCC does not seek Supreme Court review.

Nov. 1999: FCC issues order acknowledging 5th Circuit holding.

Source:MCN Research

TELCOS WANT FREEDOM

AT&T and Verizon have announced plans to spend billions of dollars to construct fiber networks reaching millions of homes with cutting edge voice, video and data services in a direct assault on cable incumbents.

To justify the risk to their shareholders, the phone giants want Congress to give them maximum freedom to battle cable where and when they want. Cable titans, such as Comcast Corp. and Time Warner Cable, insist that incumbents and new entrants should play by the same rules.

AT&T and Verizon have refused to build video networks under the Federal Communications Commission’s open-video rules. A creature of the Telecommunications Act, the open-video system was designed to be a regulatory hybrid that combined regulatory features applicable to cable and phone companies.

At bottom, Congress promised OVS operators rapid entry in exchange for providing virtually automatic network access to unaffiliated programmers on economically reasonable terms.

On Capitol Hill, lawmakers are likely to vote in March on bills that might include a national cable franchise and permission for phone companies to deploy fiber facilities as they see fit.

OVS NOT IN THE DEBATE

During House and Senate hearings last year and in recent months, there has been little, if any, discussion about whether open video is, or has ever been, a viable option for AT&T and Verizon.

Some think that AT&T and Verizon, by overemphasizing the risks associated with current open-video rules, have missed a golden opportunity to invade cable markets quickly.

“[Open video] is the fastest way to enter the market and it is basically at the federal level. … The fact is that OVS does not have the same buildout requirements” as cable, said Richard Ramlall, senior vice president of strategic and external affairs of RCN Corp., an open-video system operator in nine cities, including Boston, New York and Washington, D.C.

The open-video rules were designed to promote wireline competition to incumbent cable operators, the same motive driving telecom legislation on Capitol Hill today.

In the 1996 law, Congress clearly stated that open-video operators were exempt from the cable-franchise requirement.

But in a surprise 1999 ruling, a three-judge panel of the 5th U.S. Circuit Court of Appeals held in City of Dallas v. FCC that all Congress did was eliminate the federal franchise requirement.

Section 621(b)(1) of the Cable Communications Policy Act of 1984 states that “a cable operator may not provide cable service without a franchise.” Removing the federal requirement, the court declared, fell far short of blocking local governments from demanding franchises of open-video system operators. The case was not appealed to the U.S. Supreme Court.

'DALLAS’ CASE A SETBACK

The City of Dallas case was a setback because it flouted Congressional intent. Rachel Reiber, vice president of regulatory affairs for Everest Connections, a cable overbuilder in Kansas City, Mo., noted that City of Dallas applies only in the 5th Circuit, which includes Texas, Louisiana and Mississippi. Since Texas has a new state law calling for expedited cable franchising, City of Dallas really has force in just Louisiana and Mississippi.

In November 1999, the FCC issued an order acknowledging the 5th Circuit decision; in a footnote, the FCC made clear that despite the franchise ruling, the agency did not believe phone companies needed open-video franchises to provide video programming directly to their telephone customers.

“Nothing in the court’s decision requires new franchises for entities that already have the requisite authorization to use public rights of way,” the FCC said. “Thus, for example, an [open-video system] operator that already has a franchise as a telephone company would not necessarily require another franchise.”

AT&T’s Quinn was not persuaded that cites in 47 states wouldn’t seek to impose open-video franchises.

“I think there is some uncertainty created by the City of Dallas [case] on the residual right of the city to demand a franchise,” Quinn said.

Under OVS statutes, the FCC must accept or reject a certification within 10 days, consistent with the idea that Congress wanted to promote rapid entry.

Since 1996, the agency has approved 96 open-video system certifications and denied two. Two were withdrawn, according to FCC records.

The FCC does not have data on open-video subscriber totals or the number of homes passed by open-video operators.

No major phone company, before or after City of Dallas, has emerged as a significant open-video operator.

The vast majority of open-video operators are small companies, some with special circumstances. Everest Connections converted a small cable system in Kansas City, Mo. to an open system because it did not have the money to meet its cable franchise buildout requirements. The open video option saved Everest money and shielded the city from cable operator law suits that might have resulted if the city had allowed Everest to escape buildout obligations.

“We were looking for a way out,” Everest’s Reiber said.

The big phone companies have argued that the alternative is less than ideal because of potential network sharing mandates. Open-video statutes require that if demand for channel capacity exceeded capacity, open system operators must cede two-thirds of capacity to third-party programmers.

SET-ASIDE NO ISSUE

But the notion that programmers paying for carriage would represent a capacity threat to the operators is odd, because the cable market today is based on cable distributors paying billions of dollars to programmers. So is the two-thirds set-aside a realistic concern?

RCN’s Ramlall said that no programmer has ever approached his company asking to pay for carriage. “No one has ever taken us up and requested it,” he said.

John Goodman, executive director of the Broadband Service Providers Association, a Washington, D.C., trade group that represents Everest and other cable overbuilders, said programmers would probably show interest in paying for carriage on large regional phone networks.

“My assumption for overbuilders is that they never offered enough mass of penetration on their networks that was economically reasonable or opportunistic for somebody to exercise that option,” Goodman said.

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