Telecom: The Fiber-Optic Quagmire

The Baby Bells want to enter cable's market -- without paying the same fees

The Baby Bells have been making headlines lately with bold plans to take on the cable industry. SBC Communications Inc. (SBC ) aims to spend as much as $6 billion by 2007 to build a state-of-the-art fiber system connecting 18 million homes to TV programs, as well as voice and Internet data. Verizon Communications Inc. (VZ ) has an even more technologically ambitious goal: spending $2.4 billion by the end of 2005 to provide video and other services to some 3 million homes. BellSouth Corp. (BLS ) has big plans, too.

It's heady stuff. The promise of new and exciting video services delivered via ultrafast fiber-optic cable would seem to offer nothing but benefits to consumers. Yet the Bells are running into a roadblock from an unexpected quarter. From Florida to California, a host of cities and towns across the country are threatening to slow the Bells' rollout by demanding multibillion-dollar franchising fees even as they insist that the Bells provide their high-end video service to every household in their communities.

Underneath the fracas a huge policy debate looms as local governments grapple with an unsettling question: Is it better to speed technological progress by letting the Bells offer service to proven big spenders who live in upscale neighborhoods, as the Bells insist they must to make a return on their massive investments? Or should cities require the Bells to provide universal access, as they already do for cable operators as well as phone-service providers and other utilities?

Policy isn't the only concern. At stake is a huge pot of money and the future control of lucrative markets. The controversy has pitted the telcos against the cable companies, with local governments caught in the middle. Under provisions of current telecommunications law, the cable industry pays about $2.4 billion a year to local communities to secure franchises that give them the right to run their cable lines under streets, sidewalks, and other public space. The cable industry is fighting to force the Bells to pay the same fees they pay. Any other arrangement, they argue, would give the Bells an unfair advantage.


The telcos insist they shouldn't be subject to the same rules as the cable companies because they are new entrants to the market: They will deliver the competition that will drive down prices. What's more, executives argue, the Bells have coughed up billions of dollars in local dues for decades via their regulated phone business. "A franchise obligation is right for the first provider," says Dorothy Atwood, senior vice-president of regulatory policy at SBC. "But when you're talking about competitive alternatives, you want to encourage that investment."

It's a tough call for communities. But if the Bells have their way, it won't be up to city officials to decide. SBC is partly resting its case on a recent Federal Communications Commission ruling exempting voice-over-the-Internet telephony service from local regulations. SBC claims the ruling also applies to its Internet-based video technology.

The FCC has said it may have the authority to preempt franchising obligations. Meantime, Verizon has been lobbying California state legislators to eliminate franchising rules even as it pushes Congress for a rewrite of telecommunications law. But success at those efforts is far from certain. "The regulatory angle has turned into much more of a quagmire than the Bells expected," says Scott Cleland, telecom analyst at Precursor Group, a telecom-research firm in Washington, D.C.

Even so, many local communities welcome the new competition that the Bells would bring. Cities such as Beaumont, Calif., and Tulsa have moved swiftly to sign up Baby Bell video service. "It was very smooth," says Alan Kapanicas, city manager in Beaumont.

Yet many financially strapped cities are eager for new sources of revenue. Typically, cities charge companies for the right to lay cables and wires underneath the streets. And current telecom laws support those levies. "The Baby Bells would like to be in our rights-of-way free of charge," says Libby Beaty, executive director of the National Association of Telecommunications Officers & Advisors, which represents 1,100 cities. "If they violate the [Telecommunications] Act, they are going to land in court."

What makes the issue particularly thorny for the telcos is that unless the FCC weighs in on the issue in their favor, they must deal individually with hundreds, perhaps thousands, of separate communities. Dearborn, Mich., typifies the troubles SBC and Verizon face. If SBC's video rollout reaches this suburb of Detroit, it will run into Mayor Michael A. Guido. The local chief, who also heads the U.S. Conference of Mayors' task force on telecommunications, expects SBC to secure a local franchise, pay fees, and offer service to all Dearborn residents, regardless of their spending habits. Those were the terms for the current cable providers, he says, and they won't be different for SBC. "We'll say welcome," says Guido, "but we will tell them they have to follow the same rules."

Absent a fast rewrite of federal law, the crazy quilt of local franchises is likely to muffle the Baby Bells' video plans and keep them fighting with city officials for some time to come.

By Brian Grow in Atlanta and Roger O. Crockett in Chicago, with Cathy Yang in Washington, D.C.

— With assistance by Catherine Yang

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