Overbuilders Press Case on 'Predators'

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Broadband service providers are pressing federal officials for the identity of the incumbent cable operator under investigation for alleged predatory pricing, and to convince federal officials to broaden that investigation to include several MSOs.

Charles James, the chief of the antitrust division of the Department of Justice, testified recently before a Senate sub-committee that the activities of an unnamed operator were under scrutiny.

Competitors want a written response from James detailing the time frame and specific activities contained in complaints made by members of the Broadband Service Providers Association. The BSPA is the trade group that represents 15 bundled service vendors including WideOpenWest LLC, Knology Inc., Altrio Communications, RCN Corp. and Grande Communications.

"When [incumbents] got into below-cost discounting, that met the definition of predatory pricing," executive director of the BSPA John Goodman said.

The group will fight to get federal officials to also focus on other incumbents, including Time Warner Cable, Comcast Corp., AT&T Broadband and Charter Communications Inc.

According to the complaints, incumbents offer secret, unpublished discounts to potential or current customers who indicate they were willing to switch providers — often so deep they are below cost.

The BSPA has also raised the issue before state utility regulators and even local franchising authorities.

Altrio's L.A. claims

For instance, Altrio, which has filed a complaint before the Federal Communications Commission about rates charged in its communities by Adelphia Communications Corp., has brought that company's rates to the attention of elected officials in Los Angeles.

City officials are angry over a recent rate hike that added $2 to $6 to Adelphia consumers' bills. Altrio suggested that Adelphia raised the rates to subsidize 50 percent rate discounts and $200 incentives it was offering in the suburbs of Monrovia and Arcadia, where Altrio operates.

Altrio has a franchise pending in one of the Los Angeles operating areas.

Incumbent operators say they welcome competition but their business practices belie that statement, competitors said.

"Their noses grow when they say they welcome competition," said attorney James Baller, a consultant to the overbuilders. "If they did welcome competition, it would run contrary to the benefit of their shareholders."

Competitors want regulators to rule against what some call the "secret word" offer. That's the deep discount that's offered whenever a customer utters the name of the competitor.

Other markets

Other complaints filed to federal agencies detail some of the marketing scenarios described by competitors in the following markets:

  • Kansas City, Kan., where Everest Connections Corp. competes against Kansas City Partners, owned by AT&T Broadband and Time Warner Entertainment. Consumers get $200 to come back to the incumbent, more if they agree to write a testimonial. Prior to Everest's launch, customers were guaranteed rates discounted 50 percent if they signed up for a year.
  • Monrovia and Arcadia, Calif., where Adelphia offers a lump-sum payment to keep customers from switching to Altrio and a loyalty bonus of every third month free.
  • Austin, Texas, where another AT&T Broadband/TWE partnership offers discounts of $16 to $28 to keep subs from jumping to Grande Communications.
  • In Southeast Michigan, Comcast Corp. will cut bills by 33 percent to 50 percent to keep customers away from WOW. Other perks include free pay-per-view movies, free digital upgrades and other service.

'Competitive responses'

Operators declined to discuss marketing strategies, but did note that, other than the regulated basic service tier, businesses have the freedom to alter their offers at will.

But Comcast did comment on predatory pricing in some of its federal filings in support of its purchase of AT&T Broadband.

Attorneys wrote: "Claims about secret and discriminatory pricing by cable paint an ominous portrait, while the facts suggest precisely the kinds of competitive responses that policy makers should expect and desire in a competitive market for unregulated services.

"Comcast is aware of no evidence that a single cable operator has priced its service below its average or marginal costs. If BSPA is aware of any such evidence, it has had ample opportunity to produce it, and its failure to do so speaks volumes. Given that Comcast — and, as far as it knows, other cable operators — typically meets rather than beats overbuilders' prices, it is improbable that any such evidence exists," the statement concluded.

But competitors claim the short-term pricing benefits will lead to soaring costs long-term when the broadband service providers are driven out of business and the incumbents hike rates to recover their losses.

MDUs are targets

Predatory pricing isn't the only issue that the overbuilders want under the federal microscope. Access to multiple dwelling units and exclusive vendor relationships also need regulatory attention, the trade association said in its pleadings.

For instance, the stalled Carolina Broadband Inc. argues it was doomed in Raleigh and Charlotte, N.C., when it discovered Time Warner Cable had tied up 90 percent of the MDUs in the communities with 10- to 15-year exclusive contracts.

In Kansas City, Everest claims that it can't compete effectively because incumbents monopolize terrestrially delivered programming. It also complained that Kansas City Partners won't sell the local regional sports network, which it owns, to Everest.

That pressure extends to hardware and labor suppliers. RCN asserts Comcast exerts "competitive control" over contractors, adding the incumbent tried to curb work between 15 installer and contractor companies and RCN in Philadelphia.

According to BSPA documents, Comcast went so far as to take pictures of contractors at RCN offices and job sites and use the evidence to threaten contractors.

As a result of the pressure, contractors ask higher prices of competitors to compensate for anticipated loss of work from incumbents, the BSPA said.

That scenario also is playing out where the two companies compete in Washington, D.C.

Set-tops and interactivity hardware are also pawns. Overbuilders said that Time Warner Cable has a digital set-top exclusivity agreement with Scientific-Atlanta Inc., locking up that hardware in its markets. Non-compete agreements are also in place for video-on-demand hardware from SeaChange International Inc. — in which Time Warner is an investor — and Concurrent Computer Corp.

West Va. stumble

But competitors are beginning to get some responses from regulators. In August, an administrative law judge to the West Virginia Public Service Commission ruled that Charter Communications Inc. engaged in predatory pricing when it offered $200 to buy back customers in Parkersburg from overbuilder Community Antenna Services Inc. and direct-broadcast satellite customers.

Both sides filed exceptions and a vote on the ruling has yet to be scheduled, WVPSC spokesman Bob Teets said.

Charter senior vice president of communications David Andersen questioned the consumer friendliness of the judge's declaration.

"Will trade-ins at car dealerships be next? Predatory satellite offers for free installation, free equipment and free service must not be working," he said. "We're obviously hurting satellite in West Virginia."

The Charter offers have stalled the growth of CAS, a 25-year-old operator with less than 5,000 customers. The operation had been growing steadily and pouring its profits into physical expansion said office manager Lisa Wilkinson. But that stopped in 1999 when Charter bought the other system in town and began offering basic cable for $9.95 a month, or 200 channels for $29.95. CAS charges $39.95 for 60 basic channels.

"We have to stay with our prices," Wilkinson said. CAS asked for a stay of Charter's pricing plans while the dispute is adjudicated but that was not honored.

CAS is happy with the ruling's recommendation but "we need it enforced," she said.

"We're seeing more things giving us cause for pause," said Rodger Johnson, president of Knology Inc. and of the BSPA. "The magnitude of the offers, the dollar amounts, are getting bigger, because our penetration continues to go up."

He added he doesn't know how much intercession is necessary from regulators.

"But the government needs to play a role. We want them to police the rules out there. This is going to get more wind in its sails. We are being heard," he said.

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