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from: Lafayette Pro Fiber

Sunday, March 11, 2007

AT&T & Cox should reconsider state video franchising

Tis spring and the legislative season is opening in these United States. Our Louisiana silly season won't begin 'til April but many state legislatures are already in session. An article in the Jackson, TN newspaper reminds us that phone companies are still up to their old tricks. Last year the telephone companies launched a nation-wide push in state legislatures to take control of local rights-of-way away from the cities and counties that own them and create state-level privileges for phone companies who wanted to get int the cable TV business.

Background
Most important of these privileges was state permission to avoid the build-out requirements of towns and cities-local governments that have, for pretty obvious reasons, consistently insisted that if a business wanted to use local property to make a profit off its citizens then offering service to all the citizens was a non-negotiable starting point. "All of us or none" was the stalwart principle. In various places the phone companies have conceded to every other demand from monetary rewards to PEG channels. But they are not willing to give up the competitive advantage over the cable companies of skimming off the cream of the local market. They want to take the most profitable customers and move on with no assurance that their "competition" will ever reach most of the community.

Our legislature fell for it and only the governor's veto pen kept the state from writing into law a bill that would have solidified the digital divide between poor and rich as well as between rural and urban for at least a generation. (In fairness to individual legislators, it should be said that there was a truly inspirational confrontation on the floor of the Senate. Friends of the people went down kicking.)

On the evidence of what is going on elsewhere this season in places like Tennesse, Wisconson, and it seems likely that Louisiana will again see an attempt by AT&T to ram through a state-wide video law that favors its interests. While AT&T (then BS) found tough sledding early in last season's attempt to pass such a law after partnering up with Cox and the cablecos they managed to pass a law fairly easily. The new, cableco-approved version would have allowed cable companies to break their contracts with local communities in order to use the same advantages offered the phone companies. The cable companies apparently thought that, on the balance, the new advantages over communities was a decent trade-off for the benefits the bill gave the phone companies in their competition with cable. (Did that dark alliance clue in the legislative majority? No.)

So I expect the AT&T-BS/Cable coalition to be back at the trough this year. With the FCC rule that gave the phone companies most of what they failed to get from the last congress now in jepordy from a resurgent Congress there is no reason to think that the incumbents won't continue to try and get what they want from the local yokels they've taken before.

But whoa up a moment: is that really wise?
Things change. That article from the Tennessee paper contains a suggestive paragraph:

One advantage of the state legislation, however, is that Jackson Energy Authority [JEA] would be able to expand its cable and Internet services outside of its present designated service area, Farmer said.

JEA is Jackson's equivalent of LUS--the fiber-laying, incumbent-slaying upstart. Incumbents take heed: Lafayette's own muni fiber optic network is now assured. EATel, the locally owned rural phone company, is building its own fiber network on line between New Orleans and Baton Rouge and has made clear its ambitions for expansion from the beginning. St. Charles parish is contemplating building its own network and looks to Lafayette. Rumors about New Orleans Fiber In The Sewers (FITS) continues to make the incumbents slumber fitful. It's beginning to look like a trend.

Any and all of these entities could take advantage of the same (still unfair) privileges that for which AT&T/BS has been angling.

That's not what BellSouth intended. When that law was originally proposed NOBODY that could compete with BellSouth would have benefited. The late inclusion of the cable companies didn't really change the competitive landscape much. They are already built out as much as they think profitable, new challenges from them were unlikely.

AT&T/BS might want to rethink its position in Louisiana. They'll be enabling folks who might (gasp!) actually decide to compete with them--and compete at their own game with superior technologies. If the phone company succeeds legislatively what is to keep EATel from deciding to serve, with real fiber, the new mushroom ring around New Orleans--but only the wealthier new suburbs, the local cream, and doing to AT&T what it plans to do to the cable companies: cherry-pick the most profitable areas and leave the rest for the incumbent providers. What's to keep St. Charles from doing its own network with support from Lafayette's backend facilities--right down to using LUS' billing and branding systems? What's to keep LUS from aggressively moving into every non-incorporated new subdivision in the parish using its now-pervasive fiber backbone that feeds the schools? What's to keep LUS from being invited into cities as full competitors in places that like what they see happening in Lafayette? With a state-wide franchise: Nothing, Nothing, Nothing, and Nothing.

No doubt LUS, as a municipal entity itself, will not be willing to move into a city without negotiating with the local authorities and sharing income. But that might be a big advantage in the long run. If AT&T really manages to come in, cherry pick the cream, and stiff the cities on income and services it will be a painful, ugly thing as cities take the hit in franchise income. (The cable franchise is usually 3-5% of gross revenues--a critical component of local discretionary revenues.) LUS (and similar entities its example may spawn) wouldn't have to extract nearly the profit the incumbent desire and could afford to be generous with services and profit-sharing. That could prove very attractive to places abused by the incumbents inevitable move to squeeze the municipalities once the cities are stripped of bargaining power by state or federal takings.

Maybe AT&T will still think the advantages it gains over cable are worth the competition it courts by promoting a law that will give every small public or private entity in the state a license to compete in every corner of the state on an ad hoc basis. Maybe. But a year later it is clear that the decision is no longer a no-brainer with nothing but upside for the company. As the old saying goes: Be careful what you wish for.

Cox's (and the other cableco's) rationale for backing AT&T's law this time around is even less clear than it was last year. The emerging pattern of AT&T predatory build out policies in other states (predicted here at LPF) is now obvious: they take the best and leave the rest for the cable companies who have already built their networks to serve the entire community and have to carry that extra overhead.

Cox Baton Rouge, which now includes Acadiana, is particularly vulnerable: On the south it faces EATel, a local phone company which makes no bones about it desire to bring its FTTH-based cable competition to rapidly growing--and lucrative arc of outer suburbs developing south and east of Baton Rouge. That ambition was spoken before the storms devastated New Orleans and made those areas the new home to much of the population of that metropolis. Should EATel secure that arc it'd be posed to eat into the densely populated segments of the city--but not with AT&T's barely capable DSL-based offerings but with full throated fiber to the home. On the Western verge of that territory it is now certain that Cox's largest profit center in Acadiana, Lafayette, will be a profit center no longer. Inevitably LUS' expansion will come out of Cox's established base; with few exceptions every cable customer LUS gets will mean a lost subscriber for Cox. That nightmare is visible on the horizon. In short order Lafayette will be one of the least profitable networks in its system, supported by a subscriber base that is a fraction of what headquarters has grown to expect.

No, Cox does not need to add to its troubles by supporting a law written by its deadliest enemy.

Cox has allied with the wrong side. Here's what would be much smarter: Ally with the Louisiana Municipal Association and the parishes. Join them in suggesting a pre-emptive law that protects local rights and keeps AT&T/BellSouth from securing unfair competitive advantages.

The outlines of such a law aren't hard to see and could be based on a law suggested by local governments last year. That law offered to put a 90 day "stop clock" on any negotiation with a new competitor, assuring that no one could be unreasonably delayed in entering a new market. If an agreement couldn't be reached quickly all the competitor had to do was agree to sign on to the same contract the incumbent cable company already had. Easy, fast, efficient, and transparently fair. It was, of course, rejected out of hand by the phone company. Their interest lay in securing advantage, not a level playing field.

This year's version could look like this, for starters:

* It should be based on the current local franchise; preserving local control of local resources.
* It could lay out a reasonable timeline for a full build-out to match the current cable footprint. Small communities could expect to be served by a full competitor in three years and larger cities in, say, seven. That would remove the most anti-competitive aspect of the law, and the one that puts the established incumbent at a permanent disadvantage.
* It could include a time clock (the cities are willing to agree to 90 days) after which the default "established contract" goes into effect--that would mean no long delays of the sort the phone companies claim to be worried about.
* The default contract could include certain standard modifications such as: a "revenue neutral" clause for the city; meaning that the extras, like PEG monies, channels, service networks and the like would only have to be provided once...not twice. This could include a clause allowing the new entrant to pay the current provider for providing their pro-rata-by-subscriber share of these services or allow them to take over a portion of the responsibility directly as they expand and acquire the capacity.
* Also standard could be clauses that provide real, automatic, penalties for not meeting contract requirements like one mandating buildout. To make sure that both cities and competitors are motivated to insist on contract adherence the default contract could have escalator clauses built into the monies paid the city and the incumbent if they failed to meet their promise to compete fully and fairly.

It would make a lot of sense for Cox and the state cable association to get together with the municipal and parish organizations and promote a bill that protects their rights and competitive interests while giving the phone company the quick and easy route to competition that they claimed they wanted last year.