Telcos Cable Sales Could Crimp MSOs

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Washington-Were GTE Corp. and SBC Communications Inc.to sell their cable systems, they would also be dumping a regulatory problem in the lap of many other operators.

Since 1996, several cable systems-including ones owned by Time Warner Inc., Comcast Corp. and AT & T Corp.-have been freed from federal and local regulation in markets where GTE and SBC (which now owns Ameritech Corp.'s cable systems) began signing up cable subscribers.

But if GTE and SBC, which are exploring the sale of their cable systems, follow through and sell them, MSO-owned cable systems in those markets would become price-reregulated at the local level-especially if the buyer is not another telco.

GTE is thinking about selling a few systems in Florida, Hawaii and California with about 123,000 subscribers. But SBC has dozens of systems in Ohio, Michigan and other parts of Ameritech's old five-state Midwest territory, with some 300,000 subscribers.

GTE said it has hired investment banker Goldman, Sachs & Co. to explore the sale of its cable properties.

SBC has been conducting an internal review on a possible sale, and it has said no decisions have been made. "We're still taking a look. It basically has been an ongoing examination and, ultimately, it will lead to a decision." SBC spokesman Kevin Belgrade said.

For those cable operators that were overbuilt, deregulation occurred regardless of the number of subscribers the telco had signed up. All that mattered, under standards in the Telecommunications Act of 1996, was whether the new cable-market entrant was a local phone company.

On that basis, the Federal Communications Commission granted numerous petitions for effective competition filed by cable operators, barring local governments from regulating the price of the broadcast-basic tier.

Deregulation also lifted the uniform-rate requirement and the ban on a tier buy-through before the purchase of premium networks.

The problem for cable operators is that they could lose deregulated status if GTE and SBC sell out to companies that do not also provide local phone service.

While the telcos have not signed cable subscribers up on a large scale, the incumbent cable operators have many more customers in those markets.

"With GTE, it's not that much. For SBC-Ameritech, it could be close to 1 million [MSO subscribers]," an FCC source said.

The source said cable operators would not be required to inform the FCC that they no longer face video competition from a cable company affiliated with phone company. "It's up to [local governments] to refile their certifications to regulate," the source added. "At that point in time, the operator could file a response."

One difficulty that could arise is if GTE and SBC decide to sell to what some view as the most logical buyer: RCN Corp., which bundles voice, video and Internet access separately and in packages.

In some markets, RCN is reselling local phone service until it can deploy its own phone facilities. Would a reseller be classified as a local phone company for the purpose of determining effective competition?

"Those are some questions I don't think we have even answered before," the FCC source said.

Another possibility exists for cable operators to escape local-government regulation if GTE or SBC sells out. Under provisions in the 1992 Cable Act, if all multichannel-video competitors in a market serve more than 15 percent of local households, the incumbent cable operator is deemed subject to effective competition.

Should a local government move to reregulate, the incumbent could rely on the 15 percent penetration test as a defense.

When the law was written eight years ago, the 15 percent test was hard, if not impossible, to meet. But with the booming growth of the direct-broadcast satellite industry, some cable markets are likely to qualify.

For example, Adelphia Communications Corp. is unregulated in large swaths of Vermont, where DBS serves 37 percent of the state's TV households.

In portions of Connecticut, Cablevision Systems Corp. attained deregulation from the FCC based on cable competition from Southern New England Telecommunications Corp., a unit of SBC.

If SBC were to decide to sell that 30,000-subscriber system-and statewide cable franchise-to a nontelco, Cablevision would have to rely on the 15 percent test to maintain regulatory freedom.

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