Heavyweights on TV

Cable and telecom companies are slugging it out over franchises. Some localities may get hurt.
by | April 2006

home from a Richmond law office at 1:30 in the morning a few months ago, two rival sets of lobbyists must have had the same thought: This is not how a bill becomes a law. Yet there they were, the bleary-eyed envoys of two powerhouse industries, cable and telecommunications, trying to settle their policy disputes not in a legislative chamber--not even in a Capitol back room--but in professional mediation.

The idea to pursue mediation--highly unusual in any state--had come from four Virginia legislators, two allied with cable and two with Verizon, the state's dominant telecommunications company. The lawmakers had grown frustrated by the two industries' inability to settle their differences in 2005, when the dispute over video franchising originally came up. "It was like divorce court," says Mark Flynn, a lobbyist for the Virginia Municipal League. "The two sides could barely sit in the same room together. They just kept calling each other names."

So they took a spin with lawyer Mark Rubin, a professional mediator. At first, the approach seemed promising. Just before the legislature convened this past January, the hostile parties managed to sit across from each other for about five hours in a boardroom. Then, when the really tough issues bubbled out, Rubin split them up into separate rooms. Deep into the night, he bounced back and forth, talking to each industry's people. The technique is supposed to aid reconciliation.

There were a few small breakthroughs, but in the end, no resolution. If anything, the effort only crystallized the stark differences between Verizon and the handful of cable companies in Virginia. The crux of the matter was that Verizon was on the verge of getting into the pay-television business. And the company didn't want to negotiate individual franchise agreements with every city and county in Virginia, as cable has always had to. Instead, Verizon wanted one set of statewide rules to follow. Verizon's lobbyists argued that hastening competition in this manner would be good for consumers. Cable's lobbyists complained that what Verizon really wanted was an unfair regulatory advantage.

After mediation failed, the four key legislative "patrons" managed to hammer out a compromise bill. It pleased neither industry, but it did satisfy enough key demands on both sides for each group to grudgingly sign off on it. Verizon won a 45-day time limit on local franchise negotiations, assuring quicker entry into new markets that it wanted. And cable got its wish to play by the same rules. The legislature passed the bill in March, and Governor Tim Kaine signed it.

Virginia is only one battleground in the escalating fight over TV franchises. Last year, Texas passed the nation's first statewide franchise law. Telecom giant SBC (now AT&T) wanted that legislation so badly that it hired 120 lobbyists to make its case. This year, telcos are advancing similar bills in Florida, Indiana, New Jersey and South Carolina, among other places. And big telecom's push doesn't stop with the states. The industry is simultaneously taking the franchise fight to Washington. It's asking Congress and the Federal Communications Commission--whichever can do it first--to circumvent local governments entirely by creating one set of franchising rules for the whole country.

At the state level, the franchise issue is a struggle with an intensity that comes around only once in a while. Local governments are trying not to get too banged up in the crossfire. Municipal lobbyist Flynn recalls what it felt like to testify on franchises at a hearing last fall. "There's this scene in "The Ten Commandments" where they're building the pyramids, they're rolling big blocks of stone. The widow trips and falls, and the Pharaoh says, 'Keep going, smash her!' That's the way I felt. I've got the head of Verizon on one side of me, the head of Comcast on the other. And here I am, in between."

Local governments have a lot at stake in this debate. During cable's monopoly days, cities and counties were able to negotiate in-kind goodies in exchange for franchises--such things as public access channels, money for TV studios, even data networks for schools and government buildings. They collect franchise fees from cable revenues, a sort of rental payment for use of public rights of way. Local governments are also charged with watching out for the public interest on customer service issues and making sure that companies don't discriminate in whom they serve.

The question for these governments now is what authority they will keep under a radically different licensing system--and what they will have to give up. Meanwhile, it's up to the states to sort out the messy question of how industry archrivals will compete in the video market. That is, unless the feds do it first.


Cable TV franchises are a hot potato mostly because telecommunications technologies are converging. Cable companies don't just sell TV anymore. They also sell high-speed Internet and, over that broadband connection, they sell phone service as well. Telephone companies, in addition to their traditional phone business, sell DSL Internet over their old copper wires. What they're missing, if they want to compete with cable, is pay-TV.

To move in on the TV market, the big telcos are taking different paths within their respective territories. BellSouth and AT&T (which plan to merge) are beefing up their old copper networks with more robust fiber-optic lines, although they're not stringing fiber all the way into individual homes. Verizon is going with fiber to the home, essentially building a new ultra-fast network from scratch in 16 states. That won't come cheap. Verizon plans to spend billions trenching fiber into neighborhoods and stringing it up on utility poles. Verizon says that its network "passes" more than three million homes, set to increase to 20 million by 2010.

Before any of these companies can flip the "on" switch in a given jurisdiction, however, they must obtain local franchises. That's because in 1984, Congress placed authority over cable regulation with local governments. Of all the telcos, Verizon has been the most aggressive at seeking local franchises. As of February, the company had completed 50 agreements and begun marketing its FiOS video service in a small number of towns in California, Florida, Massachusetts, New York, Texas and Virginia. Verizon complains, however, that it consistently takes between six and 18 months to win one local franchise. Verizon claims that even if the company picked up one franchise a day, it would still take 40 years before it could offer video to all its customers.

The telcos argue that franchising on a statewide basis, or even better a national one, would speed this up. They have huge investments on the line, and their Wall Street financiers want to see paying customers quickly. That's not what the companies tell legislators, though. The argument the telcos make to them is that the franchise issue is about customer choice. Video competition, they say, will give customers better service at lower prices.

John Knapp, Verizon's chief lobbyist in Virginia and a participant in this year's unsuccessful mediation sessions, argues that the existing system of local franchises is a musty legacy of cable's monopoly days. "Local governments were giving away the ability to have a cable TV monopoly and wanted to do best by their citizens," Knapp says. "That was appropriate for the time. It's when you apply the same thing in a competitive environment to a new entrant that the process becomes onerous and fails to bring competition as quickly as it should."

Ray LaMura has a very different take. LaMura is the head of Virginia's cable association and also a mediation participant. He contends that the telephone companies are interested only in competing for wealthy customers. Cable companies have always been required by their local franchises to serve almost all customers in a community, but LaMura says that Verizon resisted such "build-out" provisions. "Verizon wanted two classes of cable providers," LaMura says. "How are you going to provide consumers with choice if you don't build out? Unless you're going to cherry pick."

This argument is taking place right now--or is about to begin--in states all over the country. Local governments don't like being portrayed as franchise foot-draggers and say that local franchises aren't as big a barrier to entry as the telcos are making them out to be. "We'd love to have competition," says Howard Duvall, head of the Municipal Association of South Carolina. "But it's unnecessary to do this with a sledgehammer at the state legislature. BellSouth has the manpower and the political clout to get a franchise in any city it wants. If they put as much energy into negotiating these contracts at the local level, they'd already be franchised in all their cities."

Nevertheless, Big Telecom's argument about competition is gaining traction with legislators. Cities and counties are starting to adopt the view that franchise reform is going to happen one way or another, and they'd better take a lead in shaping it. In an unusual twist, Ken Fellman, the mayor of Arvada, Colorado, and a local government spokesman on telecom issues, suggests that national rules might not be so bad for communities such as his. "We usually don't lobby Congress for preemption of any kind," Fellman recently told a roomful of mayors in Washington. "But if we find a solution in federal legislation that preserves our revenue streams and preserves the public interest obligations, it may very well be that federal legislation can protect us from intrusions on a state-by-state basis."

One thing local governments want to avoid is the sort of problem that befell San Antonio. That city's existing franchise with Time Warner, its cable provider, expired on December 31. The old franchise required Time Warner to provide studio space, video equipment and staff to run the public, education and government channels. Under the new Texas law, however, Time Warner had applied for a state franchise that contained none of those obligations. In January, San Antonio's public access channel went black, taking down the home-spun programs that used to air on it. In February, the city made an emergency appropriation of about $300,000 to keep city council hearings on the air, and to regain the ability to do public-access programming.

Frank Sturzl, director of the Texas Municipal League, calls San Antonio's experience rare. Generally speaking, Sturzl says, local governments made out all right under the Texas franchise bill. In some cases, cities are getting a revenue boost. Some of them were charging their cable providers franchise fees equal to three percent of gross revenues, and under the statewide law, they are entitled to five percent. "I think most cities will end up in good shape," Sturzl says.


Virginia can't do what Texas did. At least not technically. In Virginia, the right of local governments to act as franchise authorities is written into the state constitution. But the bill that passed this spring, after mediation efforts failed, found a creative way around that problem. New entrants in the TV business--that is, Verizon for the most part--still have to approach local governments for a franchise. But the local officials and the company must come to an agreement within 45 days, a timeframe that some, in a basketball analogy, call "the shot clock." After 45 days, Verizon can fall back on a standardized agreement, something that the Virginia law calls an "ordinance franchise."

Under the fallback provision, Verizon does have to meet certain build-out requirements. Verizon can select its service area for a little while, but within seven years, it must build out to 65 percent of the community in question. After that, the local government can request a further build-out to 80 percent. In an important win for the cable side, cable companies have the right to demand new local franchises that more or less match the same terms Verizon gets.

Local governments aren't happy with that provision. Some of them argue that existing franchises with cable companies are binding contracts that can't be broken. Others complain that the 45-day shot clock is unrealistic. Liz Bahrns, who negotiates franchises for Prince William County, is one of them. "Unless you have time to devote to negotiating as a full-time job, I don't see it happening in a much shorter timeframe," Bahrns says.

Yet, cities and counties in Virginia also got a lot of what they wanted. They'll continue to have as many as seven TV channels for public, educational or governmental use. They'll still collect franchise fees at the standard rate of five percent. And they will keep control over rights of way. Plus, four localities that had already negotiated franchises with Verizon--Herndon, Fairfax County, Fairfax City and Falls Church--were allowed to grandfather their agreements. "It has provisions bad enough that everybody hates it," says Mark Flynn, the municipal lobbyist. "That's supposed to be one of the hallmarks of successful legislation--if nobody likes it, it must be good."

"I don't subscribe to that," Flynn continues. "We're not going to be killed with it, I suppose. But it's not as good as what we've had."


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