Time Warner Cuts Rates to Fight Overbuild

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Ohio marketing executives with Time Warner Cable are
working overtime these days.

The MSO is fighting back against a municipal overbuild in
Lebanon, Ohio, by slashing rates, offering new programming and preparing to launch
Internet service in a city that has signed 3,100 cable customers in just four months.

However, the state's dominant operator may be caught
between the proverbial rock and a hard place, as a bid to remain competitive in Lebanon
has apparently goaded area communities to consider building a countywide cable network.

Faced with a successful competitor in Lebanon, Time Warner
slashed the cost of expanded basic to $14.99 per month July 1, a reduction of 27 percent,
or $5.44.

The cost of basic lifeline cable was reduced by $1.75, from
$7.44 per month to $5.99.

At the same time, Lebanon is the first of Time Warner's
systems in southern Ohio to offer a digital-cable package, Cincinnati division vice
president of public affairs Jennifer Mooney said.

The base package will include basic and expanded basic, 15
new digital channels and a six-channel "Family Value Tier" featuring The History
Channel, Disney Channel, Turner Classic Movies, The Golf Channel, Food Network and Encore.

Overall, consumers will receive a total of 113 video
channels, 40 digital-music channels, a set-top box, the navigator and a remote control for
$23.98 per month.

Other digital packages, featuring between one and five
multiplexed-premium services, are selling for between $29.97 and $58.94.

"We've said from the beginning that we wanted to be
competitive," Mooney said. "We've upgraded the system in Lebanon, launched
digital and, yes, now we're competing on price."

The company will give itself a competitive leg up next
month when it begins rolling out its Road Runner high-speed Internet service -- an
offering Lebanon has not introduced yet.

Meanwhile, city officials said they were not surprised by
Time Warner's price reduction, but they called it too little, too late.

"I'm surprised it took this long," Lebanon deputy
director of telecommunications Jim Baldwin said, noting that the city has activated 800
customers and amassed a waiting list of 2,300 since going online earlier this year.

Baldwin estimated that 80 percent of that total are Time
Warner customers who have rejected the company's attempts to protect its 4,000
subscribers.

"I think the whole thing has backfired on them,"
he said. "People are asking themselves, 'Where have they been the past 18
years?'"

Lebanon is the second Ohio community where Time Warner has
reduced prices because of municipal competition. It previously cut the price of its
complete package in Wadsworth from $56.75 per month to $23.95, or 20 cents below the
city's offering. Wadsworth is the only other Ohio city with its own cable network.

Mooney insisted that Time Warner is not so much responding
to the Lebanon overbuild as it is to "our customers' needs, and to ensure that they
get the kinds of services they expect from us."

Baldwin said Time Warner is employing other tactics, as
well.

Each time a subscriber calls in to disconnect their
service, the MSO reportedly dispatches a two-person team to that subscriber's home to try
to persuade the customer to stay with Time Warner.

"From what we've heard, most of the time, their job is
to tell people how bad we are," Baldwin said.

When all else fails, Time Warner representatives have been
empowered to offer the subscriber months of free or deeply discounted services, he added.

"We haven't had many customers go back to Time
Warner," he said, "maybe 10 since we began offering service. But those who have
told us that it was because they were offered free movie channels. We told them, 'Go
ahead: I'd do the same thing.' But we also tell them that the reason why they're getting
free service or discounts is because we're here."

Meanwhile, sources speculated that the price cuts may
indicate that Time Warner sees little hope of pushing legislation through the Ohio General
Assembly this year that would slow possible municipal competition elsewhere in the state.

State lawmakers have been reviewing the "Fair
Competition in Cable Act" -- legislation sponsored by the Ohio Cable
Telecommunications Association that would impose the same financial and legal requirements
on municipal governments entering the cable business as on existing operators.

The bill mandates that local governments obtain franchises
from the Public Utilities Commission of Ohio and pay the same taxes and franchise fees as
private operators.

It also requires cities to incorporate their systems as
either for-profit or nonprofit entities; that feasibility studies be conducted, followed
by public hearings to decide whether to build networks; and that hearings be held when
city-owned networks seek additional funding from local governments.

The industry's position was laid out during recent hearings
before the Senate Finance Committee, where University of Denver professor of finance Ron
Rizzuto said the Wadsworth municipal network was cross-subsidizing by allocating
everything but the cost of its headend to its municipal electric utility.

Mooney said the legislation is necessary to prevent local
governments with their own cable systems from sabotaging the incumbents in order to
promote their own networks. In the case of Lebanon, for example, the city tripled Time
Warner's pole-attachment rates shortly after renewing its franchise, she said.

Baldwin said he expects lawmakers to eventually pass some
version of the bill.

"But we've been told that whatever is passed, local
governments' ability to do these overbuilds will be kept intact," he said.
"Every day that this goes on, that consumers benefit from competition, it makes it
politically more difficult to vote against it."

Meanwhile, competing on price in Lebanon may have already
backfired on Time Warner.

Shortly after the company announced its latest price
reductions, the Warren County Municipal League, which represents some 15 cities or
villages, voted 57-0 to appoint a five-member committee to study whether to join Lebanon's
system or to build a separate system that could reach an estimated 200,000 area residents.

WCML executive director Carl Boltz said the membership was
irked by Time Warner's price reductions and services in Lebanon, which will not be offered
elsewhere.

"That doesn't go over too well," said Boltz, a
former mayor of Englewood, Ohio. "Do you have to intimidate them, threaten them or
compete with them in order to get quality service?"

Moreover, Boltz added, league officials worried that Time
Warner was either earning excess profits in Lebanon or that it planned to have surrounding
communities subsidize its lower rates.

"I'm a business guy, and I cannot see what other
option there is," he said. "If you can chop your prices, either you had excess
income or you expect somebody else to make it up. I don't know where else it would come
from."

Baldwin agreed: "[Time Warner] have shown themselves
to be liars. How come when they get competition, they can afford to cut their prices in
half?"

Mooney -- who said prices in Lebanon will not affect cable
costs elsewhere -- pointed out that the economics are working against many other cities in
Warren County. Most will have a hard time launching municipal overbuilds, since many don't
have locally owned electrical utilities or own their own poles, she said.

If the WCML discovers that a countywide network is not
economically viable, it would again consider connecting its network with Lebanon's system,
Boltz said.

"Who knows what our study is going to find?" he
added. "But we think it's worth looking into."

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