Copyright 2005 Gannett Company, Inc.
May 23, 2005, Monday, FIRST EDITION
New York — To see how nasty things are getting between phone and cable companies, consider the street fight raging in New Jersey.
Verizon wants a statewide franchise deal to sell TV service across the state. Comcast, which provides cable TV to large swaths of New Jersey, is resisting. It insists Verizon must sign franchise pacts with each locality — all 526 of them.
Comcast is also accusing Verizon of “redlining” — taking its high-speed networks to affluent areas while neglecting others. Verizon denies it. Meantime, Verizon is leveraging its weight as one of New Jersey’s biggest employers to get political support for a statewide franchise.
So it goes in the tit-for-tat world of phone and cable companies, which are using any tool they can — regulatory or political — to gain an edge on the other guy.
At stake: the future of the Living Room, which has come to symbolize the long-anticipated convergence of phone, TV and high-speed Internet. The Bells’ embrace of video is good news for consumers, says Dominic Endicott, a consultant with Booz Allen Hamilton.
“As the Bells keep putting pressure on the TV side, that will raise the pressure for cable companies to respond” with more innovation, Endicott says. “Vanilla offerings will lose their flavor.”
Rep. Christopher Cox, R-Calif., says government should take care not to put up any roadblocks. More broadband competition, he says, is better for consumers and better for America.
“It will make us all more productive at work and give us a better quality of life at home,” says Cox, co-author of the Internet Tax Freedom Act, which imposed a moratorium on Internet-access taxes.
The biggest Bells are banking on it. SBC, which plans to buy AT&T, and Verizon, which has a deal to buy MCI, are furiously building fiber-optic networks. Once they’re done, SBC and Verizon say, they’ll be able to deliver a circus of voice, high-speed data and hyper-advanced video products directly to homes.
The Bells won’t start launching new TV services until later this year. Even then, the rollout will be on a market-by-market basis. Neither carrier is saying much about its pricing plans. But there are hints: SBC’s CEO suggested earlier this year that he thinks $100 for a package of voice, data and video services is reasonable. (That doesn’t include wireless.) Verizon has vowed to be competitive.
Initially, the Bells’ video packages will largely replicate those of cable-TV operators: ESPN, TBS, Discovery and the like. But within 18 months or so, the Bells plan to distinguish their packages. On the way: video-on-demand, high-definition TV, a la carte programming and customized local content. Also look for them to integrate their services — voice, data, video and wireless — in ways that serve the TiVo culture.
“Integration across the platforms will be big,” says Randall Stephenson, SBC’s chief operating officer.
An example: wireless photos. Customers of Cingular, which is co-owned by SBC, transmit about 68 billion photos annually via cellphones, Stephenson notes.
“Think about having that integrated so you could see that same picture on your PC, TV and wireless handset,” he says. “This is not sci-fi. This is where we’re headed.”
The Bells’ desperation
Why are the Bells so intent on storming the video business? In a word: desperation. Revenue from local phone service is falling. They need to move quickly to offset those losses.
Video, a hand-in-glove fit with fiber-optic technology, is seen as the perfect strategic fix. Unlike with voice products, which are limited mostly to point-to-point calling, the range of potential video products is all but infinite.
The Bells, for example, will probably wind up developing interactive and customized video offerings — and charge separately for each one.
“There is not a telco on the planet today that doesn’t have a video strategy or offer on the books,” notes Ford Cavallari of Adventis, a Boston-based consultancy.
Cavallari, among others, thinks cable companies are vulnerable. In a survey by Adventis, 85% of consumers said they were at least “somewhat” dissatisfied with the “appointment TV” model that cable operators have long embraced. (The survey, done in late 2004, involved several thousand consumers.)
Appointment TV is based on the idea that people will tune in at the same time every week, like clockwork, to watch favorite shows. But the TiVo generation demands “anytime” TV, Cavallari notes. Digital video recorders, easier and more efficient than VCRs, have made that a cinch.
According to Cavallari, whenever a household gets a TiVo or other DVR, about 75% immediately dump appointment TV. His conclusion: “TiVo is addictive. And the more people get exposed to it, the more they don’t like conventional broadcast” TV.
TiVo helps the Bells
America’s love affair with TiVo plays to the Bells’ advantage. Given the architecture of their new high-speed video networks, SBC and Verizon can duplicate — or even enhance — the TiVo experience.
How? Direct connections. Unlike cable networks, whose IP (Internet Protocol) networks are shared by several households, the telcos are building direct connections to customers’ homes. The goal: a speedier, more reliable video product.
Cable companies are fighting back. Most are scurrying to add Internet-based phone service. They’re also announcing their own video-on-demand TV service. And they’re trying to use regulation to block the Bells. One of their chief weapons: franchising.
The law requires cable companies to forge franchise agreements with localities. Cable operators pay about $3 billion a year in fees to municipalities. They want the telcos to have to pay, as well. So do the municipalities.
The problem? In the USA, there are thousands of franchising bodies. Each has its own process, rules and fees. It could take the telcos years to win approval from all those localities. That would slow their deployment of TV services.
That’s precisely what the cable-TV industry hopes, says Gene Kimmelman, director of Consumers Union in Washington. “This is a battle of two industries, and each wants to cut corners to get an advantage,” he says. “Cable is leveraging in a self-interested way and claiming the telcos have to do everything they have to do. It’s designed to block competition.”
Dorothy Attwood, senior vice president of planning and policy for SBC, agrees. “The cable guys are acting and behaving like those that don’t want to lose market share,” she says. “It’s obvious that they are attempting to use regulation to keep their competitors at bay.”
Yet, SBC itself has been using regulation to strangle its rivals for years, complains Mark Cooper, director of the Consumer Federation of America. So have the other Bells. Cooper notes that SBC and the other Bells are seeking to bar municipalities from building broadband networks that might compete with their own.
In many cases, he says, the Bells are making these arguments in the same states — Texas, for example — where they’re seeking to evade cable-franchise rules.
“My heart doesn’t bleed for them,” Cooper says of the Bells and their complaints about franchising rules. “They don’t have a public-interest bone in their body.”
Cooper says SBC reinforced that idea last fall when it unveiled plans for “Lightspeed,” its broadband project. SBC plans to spend $4 billion over four years to reach 18 million households, and ramp up from there.
During a slide show for analysts, SBC said it planned to focus almost exclusively on affluent neighborhoods. SBC broke out its deployment plans by customer spending levels: It boasted that Lightspeed would be available to 90% of its “high-value” customers — those who spend $160 to $200 a month on telecom and entertainment services — and 70% of its “medium-value” customers, who spend $110 to $160 a month.
SBC noted that less than 5% of Lightspeed’s deployment would be in “low-value” neighborhoods — places where people spend less than $110 a month. SBC’s message: It would focus on high-income neighborhoods, at least initially, to turn a profit faster.
Some policymakers, though, said they were appalled. “It was one of the worst self-inflicted wounds in the public policy arena that I have ever seen,” says Blair Levin, who served as an adviser to former FCC chairman Reed Hundt.
At a recent congressional hearing, Rep. Edward Markey, D-Mass., accused SBC of offering Lightspeed “for the well-off and ‘Snailspeed’ for everybody else.” Cable operators also piled on. Brian Roberts, Comcast’s CEO, dubbed SBC’s FTTH (Fiber to the Home) project “FTTR” — Fiber to the Rich.
SBC’s Stephenson bristles at the notion that his company is biased against lower-income areas: “We are not redlining.” As proof, he points out that SBC already offers satellite TV, in a deal with EchoStar, “to anybody who wants it and is able to pay for it.”
“We may not build Lightspeed everywhere,” Stephenson adds. “But we will offer video to every single segment,” including low-income areas.
Tom Tauke, an executive vice president at Verizon, suggests that SBC’s stance might hurt the Bells in Washington. If regulators are concerned enough, they could impose conditions on the proposed mergers. “Let’s just say it wasn’t helpful,” Tauke says.
He insists that Verizon doesn’t redline. To make sure Verizon’s network is deployed equitably, the company compares demographics — age, income and more — with its overall network deployment plan and adjusts it accordingly. The goal, Tauke says, is “to make sure we have something that is defensible” to policymakers.
The National Cable & Telecommunications Association says the telcos should have to abide by franchise rules, partly to ensure they don’t engage in redlining.
Kyle McSlarrow, NCTA’s CEO, insists cable operators aren’t trying to slow-roll rivals.
He says they just want to make sure everyone’s treated fairly. He says he expects the Bells to “comply with the law.” Translation: The Bells should have to go through the franchising process, just as the cable operators have for decades.
Adam Thierer, a senior fellow at the Progress & Freedom Foundation, says such high-minded ideals no longer serve community needs.
Franchising rules, he notes, date to a time when cable was needed for clearer TV reception and when “exclusivity” in a market truly meant something. The rise of wireless, Internet and satellite-TV technology has changed everything, he says. The rules “are an historical anachronism,” Thierer says. “They make no sense in our new telecom-media landscape.”
Jim Harper of the Cato Institute in Washington goes a step further. He thinks franchising rules deter competition and hurt consumers.
Why? The taxes and fees that municipalities impose on cable operators are passed on to consumers, he says. If those fees were dropped or reduced, Harper says, cable bills would fall.
Municipalities are loath to give up their $3 billion in annual franchise fees, or even see them reduced.
But Rep. Cox suggests they might have no choice. “If the cost of keeping government happy is that the marketplace can’t change — ever — then we have to revisit the way we finance our government,” Cox says.
Verizon and SBC are hardly backing down from the cable-TV lobby. “This thing is going to explode,” SBC’s Stephenson says of the Bells’ push into video.
John McCormac, New Jersey’s state treasurer, says he backs Verizon’s bid for a statewide franchise and is talking with localities about the idea. “We are interested in anything that gives New Jersey consumers more choice and lower costs,” McCormac says.
But there’s a catch: In exchange for getting a franchising deal, Verizon must pledge to bring even more jobs to New Jersey. “This only happens if Verizon brings jobs here,” McCormac says flatly.