[opendtv] Cable vs. Telco: What Happens When Competition Outpaces Washington Rules

  • From: Craig Birkmaier <craig@xxxxxxxxx>
  • To: OpenDTV Mail List <opendtv@xxxxxxxxxxxxx>
  • Date: Thu, 12 May 2005 07:30:29 -0400

Recently I have discussed the problems that the Telcos face in 
entering the video business. And we have had extensive discussions 
about the correct use of the term IPTV, as it relates to the walled 
gardens that the Telcos are building versus the  Internet TV model, 
where anyone can deliver video to anyone via a generic broadband 

As if this linguistic battle is all not tortured enough, the Telcos 
are now running ads in some areas seeking changes in laws and 
regulations that will lower their barriers to entry, claiming that 
"Internet TV should not be regulated in the same way as  cable TV, 
which has spent decades enriching the coffers of local governments.

The following analysis of the situation makes for interesting 
reading. And one more area to include in the NEXT re-write of the 
telecommunications act.


P.S. The morning paper includes the news that Cox Cable will begin 
selling telephone service in Gainesville this August.


Cable vs. Telco: What Happens
When Competition Outpaces Washington Rules
By Bill McConnell -- Broadcasting & Cable, 5/9/2005

With a barrage of ads running on broadcast stations across Texas, 
local  phone company SBC informs viewers that the state's laws are 
"outdated"  and "preventing consumers from making their own 
telecommunications  decisions." Cable companies face "less 
competition, and they like it that  way," says another ad.

These spots and others like them are part of a massive campaign by 
phone  giants SBC and Verizon to persuade Texas citizens-read: 
legislators-to make  it easier to sell TV service in the state.

In equally strong counterattacks in newspaper and TV ads, cable 
operators Time Warner, Comcast and Cox warn that phone companies have 
hired  "hordes of influence peddlers" to push legislation. The 
accompanying spot  shows a fatcat blowing smoke from a cigar.

As the cable-vs.-telco war to capture subscribers for bundled TV, 
phone  and Internet services begins in earnest, the battles have 
spread beyond Texas.  Across the country, the major phone companies 
have committed more than $20  billion to launch subscription-TV 
services that will eat into cable's  customer base. But their biggest 
obstacle isn't the money; it's Washington  and thousands of local 
governments hanging on to decades-old rules written when  the phone 
business was a government-protected monopoly.

Phone companies say that competition will sputter unless Congress and 
regulators catch up with changing technology. Verizon plans to begin 
offering a  100-channel package for $40 a month in late 2005 or early 
2006, but it can't  start building subscriber lists yet. First, it 
must obtain franchises from  thousands of local communities-a process 
that could delay TV service for  years. To dodge that roadblock, 
Verizon is asking Washington to streamline the  rollout by writing 
Internet-TV rules that would apply nationwide.

House Commerce Committee Chairman Joe Barton (R-Texas) is preparing 
to  do just that. "We need a federal policy with federal rules," he 
said at a  recent hearing on Internet video. "We cannot expect new 
entrants to succeed  if they have to comply with 52 different 
jurisdictions, not to mention if they  have to comply with rules set 
by thousands of franchising authorities."  Barton has said he wants 
the House to approve relief for the Bells as a  component of 
telecommunications-overhaul legislation to be sent to the Senate 
before Aug. 1.
Leaps in technology

Because of the leaps in digital technology that only a few years ago 
were unimaginable, Congress and regulators have struggled to update 
the rules  fast enough. Because of that, a revolution in new services 
and competition is  being held back, telephone-industry officials 
say. "Technology has just  passed by our telecommunications laws," 
says Lincoln Hoewing, chief of  Internet and TV policy for Verizon. 
"Nobody expected broadband Internet to  grow as fast as it has."

The telephone companies are in a more precarious spot than cable 
operators because the video business they are trying to enter is 
highly  regulated by more than 2,000 local governments. As for the 
cable industry's  foray into Internet-based services-phone and 
data-the FCC has taken a  hands-off approach, which has allowed 
operators to offer high-speed Internet  service with virtually no 
hurdles, at least for now.

The lengthy negotiations with city councils and cable-franchise 
boards  that telephone companies now encounter were no threat in the 
early days of slow  growth and few competitors. "We're facing a very 
complex and delayed  process to get into video," complains Hoewing. 
"We need a national policy  that will encourage deployment of new 
technology as rapidly as possible."

Today, the telephone companies-which have been regulated primarily 
under federal and state rules-are trying to get into video almost 
overnight.  The business must be developed quickly to offset losses 
in their core landline  phone business to cable-industry and other 
Internet carriers.

The phone companies face thousands of local governments determined to 
write a new set of ground rules governing franchise fees, 
public-access  channels and construction of new plant.

Unless Washington frees the Bells from the obligation to obtain local 
franchise permits the way cable companies do, the telcos say, their 
rollouts  could be slowed by years and tens of millions of dollars 
added to the cost. The  cable industry hopes the current 
telecommunication laws remain intact-and in  their favor .

The phone companies are so desperate for relief that they're begging 
local broadcasters to take up their cause. At the National 
Association of  Broadcasters convention in Las Vegas last month, 
Verizon Chairman Ivan  Seidenberg offered to carry digital multicast 
channels that TV stations can  offer. His overture came only weeks 
after the cable industry persuaded the FCC  to reject mandatory cable 
carriage for multicasting.
No quick remedy

Leaders in Congress and the FCC are sympathetic to the Bells' dilemma 
and are considering measures to give them relief. But cable operators 
are  likely to make deep inroads into the local-telephone business 
before the  Bells' video-franchising obligations are spelled out.

Cable operators plan to press for the status quo. "We want everybody 
to follow rules that are already on the books," says Kyle McSlarrow, 
president of the National Cable and Telecommunications Association. 
More  pressure is expected from local governments and consumer 
groups, which would  prefer not to weaken municipalities' rights to 
grant pay-TV franchises.

Despite Washington's desire to bring new competitors to TV and 
telephone services, the regulatory morass isn't about to be cleared 
up  quickly. Last week, the FCC turned down SBC's request for blanket 
exemption  from "common-carrier," or telephone-style, rules that 
govern a wide range  of broadband services, including video. SBC 
plans to spend $7 billion over the  next three years to upgrade its 
network called Project Lightspeed.

Congress isn't likely to act on such a controversial issue this year. 
The Supreme Court, however, is expected to rule as soon as next month 
on how  much flexibility the FCC has in setting rules for Internet 
service. With  direction from the court, the commission would 
probably need another year to  decide whether to exempt 
Internet-delivered communications from most local  regulation.

"The timing is just bad for the phone companies," says Laura 
Phillips, a telecom lawyer with Washington firm Drinker Biddle & 
Reath.  "I don't see any momentum this year."

SBC and Verizon are taking different approaches to local regulation. 
Resigned to the possibility that it may never be relieved of heavy 
local  oversight, Verizon has negotiations under way with more than 
100 franchise  authorities on launching TV service in their markets. 
It has also asked the  California, Virginia and Texas legislatures to 
grant statewide franchises.

Verizon, which recently cleared the way to buy rival MCI Inc., isn't 
waiting for franchise approvals to begin constructing the $15 billion 
fiber-optic network necessary for TV. The company argues that, 
because the  network can also be used for standard Internet service 
phone companies can  already offer, additional franchise authority is 
unnecessary until TV packages  are actually being sold.

In the meantime, Verizon is lining up programming. Last week, the 
company proudly trumpeted a deal to carry the NFL Network. The 
company has also  signed up NBC Universal Cable, Starz, Showtime, A&E 
and Discovery, and more deals are in the works. Verizon's buildout 
has angered the cable industry.  The state cable association in New 
York managed to win a temporary work  stoppage against the phone 
company, but work continued once local regulators verified that the 
proper construction permits had been obtained.

In Texas, the issue-advertising war has been raging over the state 
legislature's consideration of a bill to set up a statewide franchise 
plan  that would eliminate the need to haggle with hundreds of local 
governments for  local franchises. SBC and cable operator Time Warner 
have charged each other  with harming consumers' interests. The phone 
company also has complained that  cable operators won't run TV ads 
giving the Bells' point of view.
Cities demand oversight

SBC argues that current law already gives telephone companies the 
right  to deliver Internet-based TV, and it has no plans to apply for 
new franchise  rights. Instead, the company is waiting for the FCC to 
formally declare a video franchise unnecessary before moving forward. 
"We don't think franchise  rules apply to Internet video," says SBC 
spokesman Michael Balmoris.  "Policymakers are in the business of 
promoting competition. We need  clarification from regulators."

The companies claim they aren't trying to escape obligations to serve 
poor neighborhoods or other local obligations, as critics allege. 
Says  Verizon's Hoewing, "We're willing to pay franchise fees; we've 
got  capacity to carry public-access channels. We're just trying to 
move the  process forward while still serving concerns local 
governments have. Local franchising is an outmoded process that cable 
regulators developed over decades  when companies had time to build 
out without worrying about competition."

Not surprisingly, industry analysts have generally endorsed the phone 
companies' view that they must be freed from oversight by thousands 
of local  governments. "Competitive entry into the video market will 
be delayed if the  Bells do not get relief," says UBS Investment 
Research's John Hodulik in a  new report.

But local officials say obtaining franchise rights is relatively 
simple  as long as the phone companies sign on to roughly the same 
terms as local cable  incumbents. Verizon's and SBC's real aim is to 
enter the market with lower  franchise fees and diminished 
obligations, says Ken Fellman, mayor of Arvada,  Colo., and chairman 
of the National League of Cities' telecommunications  committee, 
which lobbies for city governments in Washington.

"I have a hard time buying that corporations the size of Verizon or 
SBC don't have the wherewithal to get the job done," he says. "They 
would  just prefer not to incur the expense."
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