Annual Convention News Releases Area Codes Job Board About the MTA Events Publications Committees MTA Membership Safety / Training Annual Reports Contact Us Member Resources HOME PAGE |
MINNESOTA TELEPHONE ASSOCIATION Telecommunications Guide September 2002
Competing with cable TV Recognizing the convergence of communications and information technologies, the 1996 Telecommunications Act encouraged different industries to compete for local telephone, long distance, cable TV, wireless and Internet services. Competition may have come more slowly than many expected or wanted, but it is coming. The cable TV landscape, for example, where telcos have started to compete against incumbent cable franchise-holders, has a different look these days, one that regulations have not entirely kept pace with. To encourage competition, the ’96 federal law gave the Federal Communications Commission authority to allow local phone companies to use open video systems, or OVS, to compete against cable companies. With OVS certification from the FCC, local telcos were to be exempt from some regulations cable operators face. However, municipalities and cable franchise-holders objected and a court ruled that the FCC couldn’t preempt local control of video services. That meant cities could still ask for right-of-way and franchises fees and capital grants to fund the local public access channels. The courts will probably also be asked to decide whether another FCC decision will stand. It says that the Internet is not subject to municipal regulation or fees, which eliminated income that municipalities had been collecting from cable franchisees who also provided Internet services, as well as fees municipalities hoped to collect from cable competitors. Because state regulations no longer adequately cover the current situation, and because there’s sometimes a clash between what municipalities, cable franchisees, telcos and the FCC want, a host of questions have been raised, including: • Does it make sense for two (or more) companies offering video services in an area to provide exactly the same thing? Must services, coverage areas and other factors be duplicated? • Now that cable franchise exclusivity is starting to disappear, the value of franchises is obviously lessened. What does this mean for incumbents and their competition? Should incumbents be “compensated” in some way for their original investment? Should they have fees lowered, for example, or be allowed to reduce services or public service programming? • Local telcos want to offer cable where they have infrastructure, which often does not match municipal or cable commission boundaries. Should government entities continue to have the option to require telcos to offer video services in the identical geographic area covered by incumbent cable franchisees? • Is it fair for municipalities to charge telcos for legal fees governments incur in considering application? • Franchise fees were only supposed to cover regulation costs, but now contribute to municipalities’ general funds. Should this be changed? • How should Minnesota’s legislation be rewritten to reflect the reality of what’s happening in today’s marketplace? Learning by example Though not intended to answer these questions (Legislatures and courts will ultimately do that), the following examples help shed light on the issues in this complex matter by asking a different question: What happens now when a company wants to compete against an incumbent cable TV provider? Here are the experiences of three local phone companies in Minnesota: Paul Bunyan Telephone, with 11 exchanges and 10,000 access lines circling Bemidji, wanted to offer digital video over phone lines in the city because the company already offered local phone service there as a CLEC (competitive local exchange carrier). When the company asked Bemidji in February 2001 what it had to do get into video, the co-op was handed the incumbent cable provider’s franchise agreement and told to “mirror” it. This was not “cavalier” on the city’s part because state law does, in fact, require municipalities to treat competitors equally. For Paul Bunyan, the franchise agreement had two “deal-breakers.” The franchise expired in 2.5 years and included a 5 percent charge for Internet services even though the current franchisee didn’t offer any. “We weren’t comfortable beginning a new business and then renegotiating conditions two and a half years later,” said Paul Freude, the co-op’s general manager. “We also had been providing Internet for many years and paying 5 percent of the revenues we received from 5,000 to 6,000 Internet customers was a significant amount of money for us.” Paul Bunyan decided to enter the field with OVS certification from the FCC. That proved acceptable to all but one of the 100 or so government bodies in the company’s service territory. The city of Bemidji insisted on a franchise agreement, which it was legally entitled to do. The co-op decided the only way to get a franchise it could live with was to take its case to the public. Paul Bunyan generated enough support that the Bemidji city council reversed course, giving the co-op a 15-year franchise and eliminating Internet service fees for all providers. The co-op began offering its video service May 1. Hutchinson Telephone Company provides digital video in Litchfield and Hutchinson. In Litchfield, the company was granted authority to use the right-of-way to bury cable facilities as a CLEC, then requested a video franchise. An attorney hired by the city recommended that the company pay fees on its Internet service and put up an additional $500,000 construction bond, which would have meant the company had to post two such bonds to install the same wire. Walter S. Clay, the company’s chairman, president and CEO argued before Litchfield’s city council that his franchise agreement was different from the incumbent’s and “unworkable.” “I explained that we were constructing a building in town and spending millions of dollars to offer video and enhanced services,” said Clay. The council voted against the recommendations of the attorney it hired. Hutchinson Telephone did not have to pay an additional construction bond, received a franchise that mirrors its competitor’s and will not pay fees on Internet services. The company faced a similar situation in Hutchinson, where it has provided local phone service for over 100 years, except that facilities were already in place and right-of-way issues decided. The Hutchinson city council voted against its attorney’s recommendations and granted the same franchise as the incumbent and removed Internet fees from a video franchise agreement. The company did have to pay the city’s legal fees in both cities. Lakedale Telephone Company, in partnership with the Wright-Hennepin Electric Cooperative Association, applied to the Northwest Suburban Cable Commission to provide video services where Lakedale had infrastructure in Maple Grove and Plymouth. The commission’s executive committee wanted the partnership – called W.H. Link – to do what the incumbent cable franchisee did: provide video to all nine cities covered by the commission. The partnership had OVS certification from the FCC, which says companies don’t have to build infrastructure out to all customers, but government units can still require it. So W.H. Link withdrew its application. “There was no way to roll video out to every household in nine cities when the business plan only allowed for two cities,” said Gene South, Lakedale’s CEO and general manager. “It would have cost millions of dollars and there was no customer base to offset those costs.” “OVS regulations were set up to level the playing field and remove barriers for entry into video by telcos,” Freude said. “The courts and some local governments have frustrated the law’s intent. There’s been a lot of attention paid to cable companies getting into the phone business, but not much about telcos competing for video. Short of legislation, we won’t have a level playing field.” Clay agrees. “You have to know your business plan and the existing franchise agreement because if a city’s franchise isn’t something you can work with, you better not do business there,” said Clay.
More information about the Minnesota Telephone Association can be found online at www.mnta.org.
(c) 2002 Minnesota Telephone Association
Published by the Minnesota Telephone
Association (MTA) |