WPRI Report:
The Benefits of Cable Competition in Wisconsin (Cont'd)
By Christian Schneider
AT&T's emergence as a video provider in Wisconsin is forcing cable companies and municipalities to adjust their cable franchising strategies. On December 20th of 2006, the City of Milwaukee sued AT&T, maintaining that the company had to obtain a cable franchise with the City in order to provide their video service. The complaint states that AT&T initially intended to start offering their video service on December 16th of 2006. The City believes they had been misled as to whether video services would be offered when asked to approve zoning variances allowing AT&T to build their network.
Time Warner Cable holds the current franchise with the City of Milwaukee, an arrangement that dates back to 1982. It took Milwaukee a relatively long time to reach a franchise agreement, as offers were made to the City as early as 1970. In 1971, Milwaukee Mayor Henry Maier claimed the issue needed more study when he vetoed a proposed franchise agreement with Time-Life Broadcast, Inc. Wauwatosa was the first Milwaukee area community to receive cable service, in 1980 - six years after they signed their franchise agreement.7
Pursuant to the 1982 agreement, the first cable programming in the City of Milwaukee went live in December of 1984. The franchise with Time Warner was renewed in 1999, and is scheduled to run for 15 years - despite the development of new technologies that the City could have known would render the franchising agreement obsolete within years. Time Warner paid the City of Milwaukee $3.7 million in franchise fees in 2006, with that number expected to increase to $3.8 million in 2007.8
In response to the lawsuit, AT&T claims it is not a cable company as defined by federal law, and therefore is not required to reach a franchise agreement with the city, thus allowing them to provide their service to whomever they want, while avoiding the 5% franchise fee (although they reportedly have offered to pay a fee outside of the franchising arrangement). AT&T states that the U-Verse service will provide competition for Time Warner Cable and keep rates down for subscribers of both services.
In their lawsuit against AT&T, the City of Milwaukee argues that AT&T does, in fact, classify as a cable company. They cite language from the Federal Telecommunications Act of 1984 (47 §U.S.C. 522(6)), which defines "cable service" as:
(A)The one-way transmission to subscribers of:
(i) Video programming, or
(ii) Other programming service, and(B) Subscriber interaction, if any, which is required for the selection or use of such video programming or other programming service.
The City of Milwaukee believes that AT&T's video service falls under this definition, which would force them to obtain a franchise agreement with the City.
While the case is being litigated, AT&T and the City of Milwaukee have negotiated a temporary agreement, which allows AT&T to continue developing their infrastructure in the city in return for paying a fee to the City. According to Milwaukee City Attorney Grant Langley, the temporary agreement "looks a lot like a franchise."9
Other municipalities, not wanting to invalidate their current franchise agreements, are initially opposed to new entry into their video markets. The City of Madison has posted pre-written anti-franchise reform letters on their official city website, urging citizens to print them off and send them to their state and federal legislators.10 The Wisconsin Regional Telecommunications Commission, representing more than 30 other southeastern Wisconsin communities, is seeking to join the City of Milwaukee in their lawsuit against AT&T.11
In October of 2006, Attorney Anita Gallucci produced a memo for the League of Wisconsin Municipalities entitled "When AT&T Comes A-Knocking: Competition at What Price?" The piece essentially serves as a how-to manual for municipalities looking to deny AT&T the ability to provide video service.12
In the memo, Gallucci argues that municipalities that allow AT&T to provide service outside of a franchise agreement might be jeopardizing their current agreements with cable companies. She notes that outside a formal franchise agreement, any fees paid to a municipality could be seen as an income tax (as they were in the Ripon case), and could be deemed invalid.
Gallucci doesn't definitively state that broadband companies are "cable" companies, as the City of Milwaukee maintains in their lawsuit. Instead, she says:
"There is no definitive answer today regarding how AT&T's Project Lightspeed video service is to be classified under federal law. The FCC has not yet addressed the issue through rulemaking or order, and no federal or state court has ruled on the issue. However, experts in this area representing municipal interests have evaluated AT&T's video service in light of current law and have concluded that AT&T is providing "cable service" as a "cable operator" and, therefore, is indeed subject to the federal law requirement of obtaining a local cable television franchise."13
In the League of Wisconsin Municipalities' "Legislative Agenda for the 2007-08 Legislative Session," they vow to oppose any statewide video franchising legislation, unless it:
- Maintains the franchising authority of local governments over cable and video services.
- Requires the payment of franchise fees to municipalities by all video and cable providers operating within the municipality based on a broad definition of gross revenues.
- Requires that Public, Education and Government (PEG) channels be offered and supported by all providers.
- Requires certain reasonable levels of "build out" by new and existing providers within the municipality to guarantee investment, jobs, competition and choice for all neighborhoods.
- Allows an incumbent cable franchisee to opt into a newly created streamlined franchising process only in those franchise areas in which it faces competition from another provider operating under a streamlined franchise.
- Retains the authority of local governments to manage rights-of-way and protect local property taxpayers.14
Wisconsin cable companies are also fighting phone company entry into the marketplace without franchise agreements. Cable companies believe that the cost of their services are in line with what cable programming costs them, with the capital expenditures they've had to make to upgrade their systems, and the increasing demand for cable service.
Naturally, cable companies want to protect their profits by deterring competition. A look at the financial history of both Charter Cable and Time Warner Cable, the two largest cable providers in Wisconsin, show disparate financial situations.
Chart 1 shows the price of Charter Cable's stock over the past seven years. Charter's stock topped out at $26.31 per share in December of 1999, but plummeted to $.78 per share by March of 2003. For the past five years, the stock has remained mired in the sub-$5.00 range. Charter reported a $4.3 billion net loss in 2004, a $970 million net loss in 2005, and a $1.3 billion net loss in 2006.15
CHART 1
Time Warner Cable, on the other hand, is in transition. In July of 2006, Time Warner purchased Adelphia Communications Corporation, as part of Adelphia's Chapter 11 bankruptcy proceeding. As a result, Time Warner Cable picked up 3.3 million of Adelphia's former customers. This allowed Time Warner to spin its cable operation off as a separately traded entity. As a result, Time Warner Cable began trading as a public company on March 1st of 2007. While the stock was initially sluggish, some analysts predict annual revenue growth of up to 42% for 2007, due in large part to their new subscribers.16
Cable representatives dispute new entrants' use of the FCC report that shows cable rates going up 93% in the 10-year period between 1995 and 2005. They argue that the FCC report only compares basic cable rates over that 10-year period. During that period, basic cable packages have grown in the number of channels offered, thus consumers are receiving more for their money. According to the cable industry, viewers are watching more cable, so there is higher demand - as a result, the price per minute of viewing actually has actually gone down over the past decade. Furthermore, the cable industry argues that comparative prices improve when the cost of bundled services like internet and phone service are included in the analysis.
Cable representatives also point out that the FCC report notes that cable rates haven't dropped as a result of competition from satellite, which they view as their true competitor. Satellite companies such as DirecTV and the Dish Network are eligible to provide video services without franchise agreements. Cable companies say that the similar rates between satellite and cable are in large part due to the programming fees demanded by the networks, which drive consumer rates. They argue that DirecTV has to pay the same for ESPN as Charter Cable, so those built-in costs will remain the same regardless of who the carrier is. The FCC study reports that satellite programming currently holds 27.7% of the market, which cable representatives argue is a significant share. Cable companies say that if cable prices truly were artificially high, satellite would be much less expensive.
Cable companies also point to their capital costs as a reason their rates have escalated. In order to meet consumer demand, some cable companies have taken on massive debt to upgrade their systems to provide service, which they argue accounts for rate increases. For instance they point out that Charter Cable has a large amount of debt, as they borrowed millions of dollars to upgrade service to their customers. When the large cable companies bought up all the small companies in Wisconsin decades ago, they generally paid a flat "cost per customer" fee, which included payment for the existing network. Since then, any upgrades to those systems were usually paid for through borrowing, which requires higher rates to retire the debt.
Cable operators are also concerned about the effect new entrants' service will have on the "build out" provisions of their current franchise agreements. They believe that certain telecommunication companies want to be more selective in offering service - in other words, they want to "cherry pick" the right kind of customers. Franchise agreements generally require service to be delivered to a certain percentage of households, which could pose a challenge for broadband video providers. Some cable company representatives believe this is the biggest issue that must be addressed if wire-based competition is allowed into cable markets.
Finally, cable companies point out that both state and federal laws state specifically that franchises don't have to be exclusive. Thus, they argue, competition can exist as long as new entrants are granted franchises by their municipalities. According to the Wisconsin Cable Communications Association, there are 25 communities right now that have competing cable systems (although if a company wants to compete, they have to run all new cables into each home). Often times, smaller entities like co-operatives and electrical companies provide cable services, usually in rural areas. Such is the case in Reedsburg, for example, where the electric company competes with Charter for cable customers.
Telecommunications companies, reeling from the loss of land-based phone lines, are looking to branch out into new services to maintain their profits. AT&T has seen their number of retail wire lines decrease from 79.25 million in 2001 to 61 million in 2006 - a loss of nearly 23 percent.17 The explosion of cell phone use, voice over internet protocol (VOIP) and the introduction of wireline competition (pursuant to the 1996 Telecommunications Act) has left companies like AT&T looking for new revenue generators.
According to AT&T's 2006 Annual Report, voice wireline operating revenues have dropped from 58% of total revenues in 2004 to 54% of revenues in 2006.18 To combat the decline in wire-based phone customers, they have announced plans to invest $4.6 billion nationwide in their video based Project Lightspeed project, in addition to acquiring BellSouth, which gives them control of Cingular.
Locally, broadband companies argue that their video service does not fit the definition of "cable service," and therefore they should not be forced to negotiate franchise agreements.
In a position paper filed with the FCC in September of 2005, SBC (now AT&T) said:
The cable franchise provisions apply specifically to "cable operators" that provide "cable services" over "cable systems." Those three key terms, moreover, are defined very precisely by reference to particular technologies and system architectures used to distribute video programming. Thus, cable service is limited to "one way transmission" of video programming to subscribers, "cable systems" are limited to transmission facilities designed to provide such one-way transmissions, and "cable operators" are narrowly defined as providers of such service using such systems.
IP-enabled video services quite clearly fall outside the legal framework bounded by these distinctly defined terms. Legacy cable systems are inherently one-way closed transmission systems, designed to broadcast all video channels simultaneously to every household and business connected to those systems. In contrast, advanced broadband networks used to deliver IP-enabled video services, such as SBC's Project Lightspeed, are two-way networks that involve regular communication and interaction with customers in the delivery of video services, and are based on a client-server architecture similar to the architecture used by customers to access the Internet. In that architecture, and in contrast to a traditional cable system, a customer's set-top equipment must be in constant communication with the network. Moreover, these switched, point-to-point, IP networks are purposefully designed and ultimately capable of allowing customers to access a wide variety of video and other content on an on-demand basis.
Accordingly, based on the specific terms of the Cable Act, it is a relatively straightforward determination that, as a legal matter, IP-enabled video networks such as Project Lightspeed are not "cable systems" designed to provide "cable services" and are thus not subject to the legacy cable regulations in Title VI that apply to "cable operators."19
Phone companies also point out the inequity in the way the federal law is currently written, pursuant to the Cable Act of 1996. While the act intended to foster competition by allowing phone companies to provide video service, it didn't alter the cable franchising structure. As a result, cable companies are now able to offer phone and broadband service without having to negotiate franchises with local governments, yet phone companies must endure a cumbersome process if they want to compete with cable on their turf.
Telecommunications companies also point to job creation as a significant benefit they will provide to communities. In February of 2007, AT&T announced plans to hire 200 new workers to staff call centers for their new video service. According to the AT&T Wisconsin president, the jobs would be unionized and represented by the Communication Workers of America.20
Several states have recently enacted franchise deregulation, and others are considering such legislation this session. In August of 2005, Texas became the first state to pass franchise reform legislation. Since then, California, Indiana, Kansas, New Jersey, North Carolina, South Carolina and Michigan have passed bills authorizing franchising frameworks at the state, rather than the local, level. Virginia and Arizona enacted a form of franchise reform without a statewide franchising requirement, and Louisiana passed a bill that was vetoed by their governor.
Following enactment of Texas' landmark bill, studies were conducted as to the effect of competition on cable rates. In March 2006, the American Consumer Institute surveyed cable subscribers in three communities where Verizon began offering their FiOS TV service. Their study found that within six months, 22% of those surveyed had switched providers and new competitors had captured nearly 20% of the market. Furthermore, the study revealed that subscribers switching services saved an average $22.30/month and even those who stayed with their original provider saved an average $26.83/month, presumably due to downward pressure on rates as a result of competition.21
Legislation that has passed on a state-by-state level generally shares many of the same features as the Texas legislation. To date, every new law that has passed has set up a statewide franchise fee to be paid by the new entrant, and directs those funds to the local franchising authority. New laws have also required new entrants to carry PEG channels - usually a minimum of three, some with PEG provisions based on population. Each new law has also prohibited municipalities from discriminating between providers by charging higher fees for access to rights of way, and has prohibited using the average income of certain areas as a reason for denying service to those areas.
Very few bills to date have included build-out provisions, and those that do are heavily qualified. For instance, Virginia's recently enacted law requires new entrants to provide service to 65% of a market area within seven years, but allows nine exclusions from this requirement. Exclusions in the Virginia law include provisions that exempt service from low-density areas of less than 30 homes per square mile, and areas where subscriber theft and nonpayment have traditionally been problematic.22
The U.S. Congress has also recently been involved in franchise reform efforts. In 2006, the "Communications Opportunity, Promotion and Enhancement (COPE) Act of 2006" passed the House by a 321-101 vote.
According to a Senate report on the bill, Title III of the bill:
"reforms the process for obtaining a video franchise under current law and makes other changes related to the provision of video services to consumers. Specifically, the bill amends Title VI of the Communications Act to require franchising authorities to issue franchises pursuant to a standard franchise application form that would be drafted by the Federal Communications Commission (FCC) and to require franchise authorities to consider standard franchise applications within 90 days. Under the standard franchise agreement, franchise authorities would be permitted to require payment of up to 5 percent of gross revenues as a franchise fee, require payment for the support of public, educational, and governmental access facilities and institutional networks subject to limits established in this title, and provide certain channel capacity for public educational, and governmental use. In addition to provisions affecting the process of obtaining a video franchise, Title III also makes a number of changes to current law designed to create greater uniformity in the regulation of video service providers to eliminate unnecessary obligations. To address concerns about cherry picking competitive build-out, the bill enhances current red-lining requirements. Finally, the new framework for video franchising would apply not only to new entrants, but would also be available to incumbent cable operators either upon the expiration of their current franchise term or upon the arrival of a new competitive video service provider, whichever is earlier.23
While staunch proponents of competition in the video industry may be underwhelmed by the scope of the federal bill, some see it as the first step in nationwide reform. Other groups, such as the National Council of State Legislatures, oppose federal pre-emption of video franchising laws, arguing that states need to maintain the flexibility to implement the new laws as they see fit.24
The bill died in the Senate, as several democratic senators objected to the lack of inclusion of a so-called "net neutrality" provision in the bill. Such a provision would make it more difficult for internet providers to bundle information and services with their product, and does not have any significant relationship to the franchising issue. Many Democrats believe preventing providers from forming partnerships with software and online applications is necessary to facilitate open discussion on the internet, while Republicans have argued that online regulation stifles development and innovation.
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