Telcos’ Persistence Overcomes Resistance

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This time the telcos mean it. Years ago, phone company leaders promised to invade cable markets with the latest in pay-video technology. Some did, rolling out hybrid fiber coaxial and wireless networks here and there. But those efforts were tentative at best and ultimately collapsed.

Now finding their core voice business under assault, the Baby Bells say they need to get into cable fast and — this time — stay in. The blueprint calls for spending billions to weave fiber-optic lines past millions of homes and create the second ubiquitous video wire that regulators have been craving since the early 1990s.

In exchange for committing those billions, SBC Communications Inc. and Verizon Communications Inc. want to alter the rules of the regulatory game, arguing that the need for local franchising, mandated by current law, should be eliminated to expedite competitive entry. Cable — no surprise here — isn’t offering any assistance.

'BIG CABLE’ BARRIERS

“Big Cable is desperate to keep competitors out of the video market. They understand intimately that the franchising process deters and delays competitive choice for consumers, and, as stated by a representative from Comcast, from the outside it looks simple, but it’s very complex,” SBC spokesman Mike Balmoris said.

Acceding to SBC lobbying, the Texas legislature earlier in the month passed a bill creating a statewide franchise, handing cable forces a stunning political defeat, especially for Time Warner Cable, which has 2 million Lone Star State subscribers.

Cable leaders, wisely, are taking the current Bell threat seriously. A cable-telephone lobbying struggle, played out on Capitol Hill and in the state capitals, could wind up filling the business headlines for many years to come. At this point, it’s safe to say that cable has the advantage, especially if the adage holds that it’s easier to kill a bill than to pass one.

But in the end, the Bells may be too politically potent for cable to stop.

“What’s going to happen is that the Bells will get deregulated and that will be the threat to cable,” said George Reed-Dellinger, TeleMedia analyst with Washington Analysis.

SBC is promising to spend $4 billion over four years to reach 18 million households and Verizon $2.4 billion to pass 3 million homes by the of this year. Verizon, in a move some analysts consider financially risky, intends to pull fiber past the doorbell. SBC, unwilling to take the same risk, will settle for a fiber-to-the curb rollout.

BIGGEST ISSUE FOR CABLE

Bell entry on the scale discussed by SBC and Verizon dwarfs all other issues on cable’s near-term political agenda, according to Reed-Dellinger.

“There will be a lot of noise about, a, a la carte pricing; b, indecency; c, violence; d, ownership ceilings; e, fiber [program access] loophole; f, [dual] must-carry — but none of that is going to happen,” Reed-Dellinger said “The Bells are going to get deregulated. That’s the twist.”

Cable has provoked the Bells. All the big MSOs — led by Time Warner Cable, Cablevision Systems Corp. and Cox Communications Inc.— rolled out voice-over-Internet protocol (VoIP) technology and quickly swiped 1 million phone customers, many if not most from the Bells.

Comcast — the largest cable company, with about 22 million subscribers — expects to have 250,000 VoIP subs by the end of this year and 1.25 million by the end of 2006.

The Bells recognize that because they’ll have a harder time of signing up video customers than cable will have with voice subscribers, they need to remove regulatory hurdles facing new video entrants. Thus the push in Texas, which could end up giving the Bells political momentum in other states.

“The freedom to provide video service in some areas but not others is a significant win for the Bells, whose central office service areas often do not coincide with municipal boundaries,” said Sanford C. Bernstein & Co. cable analyst Craig Moffett, a skeptic of the plans.

Janco Partners cable analyst Matthew Harrigan indicated that the Texas vote might be an anomaly if he’s right that policymakers don’t want the Bells to target just affluent enclaves.

“I think it’s going to be pretty hard for them to get a situation where they can just cream-skim,” Harrigan said. “Cablevision offers the same services in [the] Bronx and Brooklyn that it offers to all the investment bankers living out on Long Island. I think it’s a pretty sympathetic argument there.”

Franchise reform is expected to be included in any effort to overhaul the Telecommunications Act of 1996. If history is any judge, passing a new telecom law could take several years under the most optimistic scenarios.

ENSIGN-McCAIN SALVO

Sen. John Ensign (R-Nev.), along with Sen. John McCain (R-Ariz.), opened the debate with the late July introduction of the Broadband Investment and Consumer Choice Act (S. 1504). As widely expected, the Ensign bill eliminated local franchising and buildout requirements.

In a bone to cable, Ensign proposed abolishing cable price regulations still lingering from the 1992 Cable Act.

Later in the year, Senate Commerce Committee chairman Ted Stevens (R-Alaska) and House Energy and Commerce Committee chairman Joe Barton (R-Texas) are each expected to unveil sweeping telecom proposals. A few months ago, Stevens publicly supported franchise relief for the Bells.

Ensign — entering the so-called net neutrality debate against cable and the Bells — would bar network owners from blocking consumer access to legal broadband content and Internet-based voice services. By including the anti-discrimination language, Ensign would make clear the FCC’s authority to punish bad actors — apparently in response to concerns that the FCC today lacks clear authority over non-telecommunications service providers.

Philip Weiser, associate professor of law at the University of Colorado, said the need for net neutrality legislation might not be so pressing in the wake of the Supreme Court’s Brand X ruling in late June.

In the ruling, the high court affirmed the FCC decision to classify cable modem service as an information service under its so-called Title I authority. A few weeks later, the FCC used the Brand X victory to accord Title I treatment to the Bells’ digital subscriber line services. In addition, the FCC adopted nonbinding principles supporting net neutrality.

“What the FCC is now doing with respect to broadband in the wake of the Brand X decision is a new regulatory model,” Weiser said. “What they are going to do with that Title I authority is essentially develop a new regulatory regime.”

CONGRESS MIGHT GO SLOW

Congress, he added, might decide to give the FCC a few years to shape broadband policy before trying to enact a new law.

“Ultimately, the world is going to be very different,” Weiser said. “My experience has been that these things often tend to take longer than people like to imagine.”

Analyst Reed-Dellinger doesn’t believe the net neutrality issue is going to haunt cable.

“If that’s the biggest issue facing cable, then that confirms my belief that there is not a big issue out there,” Reed-Dellinger said. “Show me somebody that’s had a bad financial quarter because of network non-neutrality. You can’t.”

But the Bell fight and the net neutrality debate can’t be all-consuming for cable, because other challenges abound, including municipal entry into the broadband access market.

“As broadband becomes more and more important to the economy, it becomes more and more central to any mayor’s or city council’s deliberations,” said Cheryl Leanza, principal telecommunications legislative counsel for the National League of Cities.

Leanza noted that Dell Computer Corp. and Intel Corp. have supported governmental efforts to build wireless systems.

“The high-tech community has been pretty supportive,” Leanza said. “The more broadband that’s out there, the more electronics get sold.”

FALL 2008 HOT SPOT

One cable analyst, who asked not to be identified, predicted that the fall 2008 retransmission-consent election cycle would represent the moment when local TV stations make their an all-out drive for cash for carriage. In three years time, the analyst added, personal video records will be draining enough ad revenue from stations that stations can no longer make due without a second revenue stream.

Another regulatory battle could involve cable’s interest in building a mobile broadband business. Although cable companies may settle for alliances with wireless carriers, they may, in the end, want their own wireless networks.

The big opportunity to go it alone would arrive when TV broadcasters return their analog spectrum following the transition to digital-only transmission at some point after Dec. 31, 2006. The FCC is expected to auction 60 MHz in every market and raise billions of dollars for the U.S. Treasury.

But regulators could have a problem with cable and phone company participation in the auction, especially if the broadband-access market continues to exhibit duopoly characteristics.

“Incumbent cable and phone companies shouldn’t be allowed to acquire the spectrum available in any kind of DTV auction,” said Kenneth DeGraff, a policy analyst with Consumers Union. “Any DTV spectrum auction should be used for new competitors and new entrants, not for more of the same.”

Other analysts noted that by excluding cable and phone companies, the FCC might end up forfeiting billion of dollars in auction revenue.

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