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Phone and Cable Companies Engage in a High Wire Struggle

Posted on: Wednesday, 14 December 2005, 06:00 CST

By A. Barton Hinkle

If you think programming your remote control is confusing, wait a few weeks. In less than a month the General Assembly will convene and -- in between discussions about roads, schools, health care, and other minor details -- perhaps try to resolve a dispute between two of Virginia's bigfoot industries: cable and phone.

The picture from an altitude of 40,000 feet is simple: Verizon wants to enter the lucrative cable-television market. Land-line phone service is, in the words of one venture-capital analyst, "an ice cube melting in the sun" -- partly the consequence of cable attacking Verizon's core business. So Verizon is shelling out big bucks (nation wide, $22 billion in the next five years) to run fiber- optic cables that can carry huge amounts of data -- enough to provide multiple phone lines, hundreds of TV channels, and Internet connection six times as fast as cable. Cable companies that have enjoyed a monopoly for years -- and that more recently have been poaching phone customers -- are not thrilled by the prospect of having to defend their core business.

The closer one gets to the ground, however, the more complex the issue becomes. Cable companies enjoy franchises from localities, but those franchises come with strings attached, such as the requirement known as "build-out": the obligation to provide service to everyone within a geographic area. Verizon would like to enter cable markets without having to meet the build-out requirement. This would require a change in the law, which at present stipulates that the terms applying to competing parties cannot be more favorable to one side or the other. The cable industry portrays Verizon as wanting to change the rules to create an uneven playing field -- allowing Verizon to cherry-pick dense, rich neighborhoods and reap huge profits while cable companies remain stuck having to serve everyone.

What's more (says cable), the cable companies are locked into franchise contracts requiring them to provide channels for government access and educational programming that have small audiences and little advertising. If Verizon wants to enter the cable market, then let it seek local franchises as well -- as it has done, successfully, in Herndon and the city of Fairfax.

VERIZON, in turn, argues that it faced similar build-out requirements for phone service that the cable interlopers do not face. Therefore, it simply is asking to enjoy the same privilege as it enters the television market that cable companies enjoyed when they entered the deregulating phone market. (To this Reply Churlish, cable offers the Reproof Valiant that when it entered the phone market, it did not go to the legislature seeking a change in the rules. To that, the phone company's Counter-cheque Quarrelsome responds that cable did not have to do so because of a finding by the Federal Communications Commission (FCC) that requiring cable companies to meet build-out requirements in telephone service would be anti-competitive.)

All clear?

The General Assembly took up the issue last session and dropped it like a hot poker. Lawmakers told Verizon and the cable industry to go work things out and come back in 2006. The approach exhibits an admirable degree of efficiency but a less admirable degree of leadership.

Should legislators actually take more than a passing interest in this question, they should bear in mind a few points (besides the $375,000 Verizon and the state cable association have made in campaign contributions this year).

FIRST, competition is not only right but good. It lowers prices - - nearly 16 percent, according to one analysis by the FCC. Competition increases consumer choice and improves service. For instance: In Keller, Texas, one resident who switched from cable to Verizon fiber-optic service says the technician "jumped through hoops'" during the installation: "'I didn't feel he was going to leave me hanging like the cable guys." Fifty bucks says Charter Communications, the local cable company in Keller, will be giving its customers white-glove treatment soon as well.

Second, cable companies have enjoyed a sweet deal since 1984, when federal law deregulated rates. In the following several years cable rates rose two to three times faster than inflation. Congress re-regulated rates in 1992, then de-regulated again in 1996. For the past two decades cable companies have held government-granted monopoly power largely without government restrictions on what they can charge. Since cable is a luxury good, there's nothing particularly horrific about that. But neither is it ideal.

Third, the shift to a competitive market should be as thorough as possible. Cable companies ought to be able to renegotiate the franchise contracts with localities that were drafted when cable was a monopoly. Unlike the Texas legislature, Virginia's General Assembly can't write such a stipulation into state law for constitutional reasons. It can, however, make its preference known.

The best solution is to let Verizon and cable providers go head- to-head under the least restrictive requirements possible for both. Doing so might even encourage faster development of content packages that some consumers want, such as "family-friendly" programming. Then the only remaining challenge will be figuring out how to program the remote.

Source: Richmond Times - Dispatch

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