INDUSTRY NEWS

Phone firms' cable TV plans hit local obstacle

Source: USA Today

By Paul Davidson, USA TODAY (12/08/2004)

The phone companies, forging ahead with bold plans to jump into the cable TV business, are hitting a speed bump: local governments.

Most cities say the regional Bells must obtain local franchises. Those franchises typically require cable TV providers to wire an entire community . not just the wealthiest areas, with the most lucrative customers . and pay a 5% fee on revenue.

But SBC Communications and Verizon want to install fiber-optic networks in the public areas they already cover. They insist they shouldn't have to negotiate franchise agreements to offer pay TV services to consumers. Their offerings, they say, are fundamentally different from traditional cable services that must strike franchise deals.

The battle is pivotal. Franchise requirements could delay or add huge costs to the phone companies' plans. And franchise fees are typically passed on to subscribers. "It creates a number of problems for the business case," Legg Mason analyst Blair Levin says.

Franchise agreements can take months to negotiate. That could slow the phone companies in their race against cable providers to offer packages of voice, video and data services.

SBC has said it plans to spend about $6 billion to offer cable TV, voice and broadband to 18 million homes it serves in the West and Midwest by the end of 2007. Verizon, which serves much of the East Coast, has announced plans to connect 1 million homes this year, 2 million next year and about 9 million by 2009.

Verizon's goal is to run fiber directly to homes; SBC plans to string fiber to neighborhood hubs, using copper wire from there to the homes. BellSouth has said it, too, will upgrade its network for video.

Federal law generally requires phone companies to obtain franchises for video services that use the public right-of-way. SBC and Verizon say their existing arrangements with local governments for their phone networks should suffice.

Most of those agreements, though, do not impose franchise fees, says Marilyn Mohrman-Gillis of the National League of Cities.

The phone companies also note that, unlike the cable companies, they're not the first pay-TV entrants in their markets, so their revenue is more uncertain.

Verizon is lobbying to change the law. Meanwhile, it's negotiating with about two dozen cities to strike franchise deals. "We're going to follow whatever the law requires," says spokesman Eric Rabe.

SBC is taking a more aggressive stance that is based largely on the fact that its video services will be transmitted as data packets over an Internet-based network.

The Federal Communications Commission recently ruled that Internet-based phone services, such as Vonage, should not be subject to state regulation because they are technologically similar to e-mail. SBC argues that the FCC ruling suggests the same logic should apply to video services.

"What we're really talking about isn't a whole lot different than what Vonage faced," says SBC Senior Vice President Dorothy Atwood. SBC's Internet-based TV offering will be different from cable, she says, letting subscribers choose camera angles of a sports event or click to see player statistics.

Similarly, she says, cable companies' Voice over Internet Protocol (VoIP) services escape the regulation that burdens the Bells' traditional phone services.

The FCC ruling does not free Internet-based video services from franchise obligations. But the agency could issue such a decision in the future, says FCC spokesman Mark Wigfield.

Yet some city officials say a pay-TV service is a pay-TV service. "There's nothing magical about putting something in Internet protocol," Mohrman-Gillis says. "If you use the right-of-way, you need to compensate cities for rent."

Many cash-strapped cities are hunting for new revenue sources. "Franchise fees are significant sources of revenue," says Steven Stovall, city councilman in Plano, Texas.

Cable TV companies say it would be unfair to let the phone companies off the hook. "We should have the same playing field," says Brian Dietz of the National Cable & Telecommunications Association.

The stakes are especially high for SBC, which doesn't want to have to wire entire towns. It plans to target 90% of high-spending customers, 70% of "middle-value" subscribers and 5% of "low-value" consumers.

"The last time I looked, that was called red-lining," says Mohrman-Gillis, complaining that it denies lower-income residents the benefits of new communications services.

Atwood counters that SBC's small phone rivals for years have cherry-picked only its most-profitable customers. "We're engaged in a strategy of 'build to success,' because this is a risky investment," she says.

SBC's projected 15% return on investment would fall to 10% if it had to blanket entire towns, Levin says.

Not all cities are adamant about the need for franchises.

Little Rock would rather SBC serve at least part of its town than abandon it altogether. "We need to foster an environment that allows competition to occur," says Michael Keck of the Little Rock board of directors.