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from: Chicago Tribune

Naperville's AT&T video deal collapses
Communications firm rejects plan city OKd

By Andrew L. Wang and Jennifer Taylor, Chicago Tribune. Andrew L. Wang is a Tribune staff reporter. Jennifer Taylor is a freelance reporter

August 18, 2006

Naperville officials say AT&T may have deliberately soured a video services deal with the city as part of a strategy to show federal lawmakers that it's not feasible to sign agreements with each locality, as cable companies must do.

At a meeting Tuesday night, the Naperville City Council unanimously authorized a deal with AT&T for its Internet protocol television service that included a so-called "build-out" provision, which would have mandated that every city residence be able to receive the service.

But Mike Tye, AT&T's Midwest vice president of legislative affairs, called the stipulation a "deal-killer" for AT&T because it would be too expensive in today's competitive climate.

"We will not sign the agreement," Tye said. "Nowhere in this country has AT&T agreed to a build-out requirement."

For about five months, AT&T and Naperville have been negotiating a deal that would have provided hundreds of channels of television content, video-on-demand and other digital extras via high-speed Internet networks. Until this week, it appeared the deal was moving toward completion.

But now the company argues that it never committed to a build-out requirement.

Naperville officials said they welcomed competition in television services but contended a deal including the build-out clause is the "most responsible" option for the city because it would allow all residents to choose between AT&T's service and the cable-television services already offered in Naperville.

AT&T has aggressively been trying--with mixed results--to break into the paid-television market in the Chicago suburbs, where cable companies have long dominated.

The company has sued seven suburbs--Wheaton, Roselle, North Aurora, Geneva, Wood Dale, Itasca and Carpentersville--for the right to upgrade its network to handle video traffic. It argues that state law allows it to offer television service without franchise agreements with local communities because they are not cable companies.

The municipalities imposed moratoriums on the upgrades because they have concerns about the effect that the new equipment--housed in 5-foot-tall control cabinets--would have on the appearance and safety of public land.

The cities, like Naperville, also worry that AT&T would not promise service to all residents. Critics say that would allow the company to cherry-pick more affluent customers.

That could potentially violate the cities' franchise agreements with cable companies and state law that requires cable companies to provide services to all residents of a city, said Naperville City Manager Peter Burchard.

AT&T has signed a deal with only one city in Illinois, north suburban North Chicago. The deal, signed in June, includes a commitment to provide video services to all residents of the city within 18 months but does not specify the technology to be used.

AT&T made a similar "technology-neutral" offer to Naperville, but in a memo to Burchard, city attorneys countered that the proposed deal was so vague that it didn't require the company to serve any part of the city with Internet-based video.

Still, Tye said the company would not agree to the build-out requirement for Internet-based video services because it would dull its edge against the cable companies already in Naperville, Comcast and WOW.

"We have an economic incentive to make the service as widely available as possible," Tye continued. "What we're not willing to do is make a commitment [to provide the service to all residents] in `x' number of months."

On Tuesday, before the council meeting, AT&T presented a letter to city officials stating the proposals on which they would vote didn't reflect the terms the parties had negotiated.

City Council members were visibly agitated when Burchard showed them the letter but still voted unanimously to authorize the deal with the build-out provision.

Burchard surmised in a statement released Wednesday that AT&T's strategy was to demonstrate the difficulty the company is having in hammering out local franchise agreements.

"We have some intellectual dishonesty taking place," Councilman James Boyajian said.

AT&T is pushing for a federal law that would allow phone and cable companies to provide video services to consumers after signing a national franchise agreement with the Federal Communications Commission.

A bill including the provision passed the U.S. House in June. The issue is now before the Senate but is unlikely to pass before the anticipated end of the legislative session at the end of September, said Jeannine Kenney, a senior policy analyst for Consumers Union, a non-profit consumers advocacy group.

Tye called the city manager's allegation "the wrong conclusion" and said the company would explore "North Chicago-type agreements" with other municipalities.

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alwang@tribune.com