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Phone companies poised to enter cable TV market
Telephone companies are coiling up in anticipation of taking on your cable television company.
By Steve Alexander,
Minneapolis Star Tribune
Wednesday, December 20, 2006

After years of tentatively testing the cable television waters, telephone companies are poised to invade the market with their own service.

But first, the phone companies, including dominant local player Qwest Communications, are pushing hard to change the federal rules governing cable competition.  They want to reduce their costs of becoming cable providers by reducing obligations to each city government.  They argue that easing rules would spur competition.

New rules being issued today in Washington by the Federal Communications Commission (FCC) are likely to give them some of what they want, reducing barriers to entry for new cable providers.

Today in the Twin Cities, the only alternative to cable is satellite TV, but the telephone companies want to build wired systems like cable companies have.

While consumers fed up with the cable company might welcome a competitor who could help keep prices down -- federal statistics show a 15 percent reduction in monthly cable rates where there's competition -- there may be a downside to the more unregulated cable competition the phone companies are pushing for.

For example, the telephone company might compete only for the wealthiest customers and ignore the rest.  That's because the FCC's new rules may eliminate existing requirements that cable companies serve everyone in a community.

Qwest, in documents filed with the FCC, said it has "walked away" from cities where it was required to provide cable TV to everyone.  Qwest said it faces a higher hurdle in attracting customers than the existing cable company and should not have to offer universal service.

In addition, consumers might have to pay higher property taxes to offset reduced cable franchise fees.  Under the new rules expected today, it's possible that neither cable nor telephone companies would have to provide the perks that cities have been getting under their franchise agreements with cable companies, such as free police and fire communications, public-access TV production studios and cable TV for schools.

"This could be a huge hit to Minnesota cities and to cities all over the country," said Brian Grogan, an attorney with Moss & Barnett in Minneapolis who represents several city governments in the Twin Cities area.  "It will certainly cost cities hundreds of millions of dollars nationwide."

While the expected FCC rules apply to new cable TV competitors, it might serve to change the rules for existing cable TV companies as well, allowing them to back out of existing franchise agreements.

"Most of the incumbent cable TV companies have level-playing-field provisions built into their agreements," Grogan said.  "If Qwest comes in with cable TV and serves only one-third of the city ... there will be some communities where the incumbent cable operator may be able to terminate the cable TV franchise and try to get the same terms."

In most of the United States, cable TV systems are controlled by city governments under franchise agreements.  But dissatisfaction with this system has led about 10 states to pass laws creating statewide cable franchising agencies that allow new cable TV competitors to avoid having to deal with multiple local governments.  However, the FCC's new rules would supersede any state laws.

Qwest, the cable company

Telephone company Qwest hasn't applied for any video franchises in Minnesota yet, but it already runs cable systems serving 60,000 subscribers in Arizona, Colorado, Utah and Nebraska.

"Qwest intends to deploy TV services as broadly as possible," said Andrew Schriner, the firm's director of government relations for Minnesota.  "But the telecom world has changed dramatically over the last 30 years, and it's time to update the cable laws.  We believe that expanding consumer choice and competitive price options, whether under state or federal rules, is in the consumer's best interest."

FCC spokeswoman Rebecca Fisher declined to comment on the controversy surrounding the FCC's pending action.

Officials of Comcast, the cable company serving most of the Twin Cities, referred questions to the National Cable & Telecommunications Association, a Washington-based trade organization.  Its CEO, Kyle McSlarrow, said Tuesday that he was not privy to the details of the FCC's pending order but that "based on what we hear, it's not a level playing field" and "has to be dramatically pared back."

Cities would lose perks

Cable companies aren't the only ones who are worried.  Cities fear their budgets could be seriously damaged if the FCC cuts back on the financial responsibility of cable TV providers.

Their concern lies not with the 5 percent franchise fee that cable firms pay cities, which would not be changed by the new rules.  Those fees generate substantial revenue for a city.  In Lakeville, where the population is 53,000 and 62 percent of homes subscribe to cable TV, franchise fees generate $400,000 a year for the city, said Jeff Lueders, cable coordinator for Lakeville.

Instead, the new rules threaten the extra communications gear and services that cable companies provide in addition to franchise fees.  For example, when seven St. Paul suburbs renewed a 15-year franchise agreement with Comcast in 2000, the cities got the standard franchise fee plus funding for public, education and government cable channels.  As part of that, the cities got TV trucks, equipment and studios.  And they got an institutional communications network serving local governments and schools.

Those things could go away under the new FCC rules, which would limit cities to collecting only the franchise fee, said Jodie Miller, executive director of the Northern Dakota County Cable Commission, which negotiated the franchise terms for the seven cities.  While that rule would apply to new cable service from phone companies or others, Miller believes Comcast could legally demand equal treatment.

That would leave the seven cities holding the bill for $260,000 a year worth of public TV channels and gear, $29,000 worth of cable service used by local schools and city buildings and a city government communications network that would cost about $2 million to replace, Miller said.

"It's just really scary for us," Miller said.  "The cities will either have to pay for that out of their own pockets or reduce services.  "The real fundamental issue here is continued local authority to handle this cable TV franchising process," said Ann Higgins, intergovernmental relations representative of the League of Minnesota Cities in St. Paul.  "We strongly support that local control, particularly because of the use the community can make of the facilities a cable TV company provides."

Steve Alexander 612-673-4553