Verizon Turns to the Umpire

In the latest battle between telecom and cable, the outfit is complaining to the FCC about Cablevision's negotiating tactics

Alexis Johnson is a frustrated foot soldier in an escalating broadband war. Johnson is a director of TV programming at Verizon Communications (VZ), and it's his job to line up content for the network his company is building to bring TV programming to phone customers across the country. Just over a year ago, Johnson began negotiating with Rainbow Media Holdings to get access to Rainbow's three regional sports networks, including Fox Sports New York.

It was a critical deal. Rainbow is a subsidiary of Cablevision Systems (CVC), which owns and operates the Fox Sports New York and MSG Network and maintains a 50% stake of Fox Sports New England. These networks own the rights to produce and broadcast many of the New York region's top sports teams, including the New York Rangers, the New York Knicks, the New Jersey Devils, and MetroStars, among other teams. Verizon is spending billions of dollars on a fiber-optic network that covers most of the northeastern U.S. seaboard and wants to make sure its customers can choose from a full array of channels.

Johnson strove to clinch an agreement, exchanging calls with Julian Tompkins, a director at Rainbow, over a several-month period starting in February, 2005, according to a Verizon filing with the Federal Communications Commission. But Tompkins never offered Verizon a specific deal, Verizon says.


  After being told abruptly that Tompkins "was no longer empowered to continue conversations," Johnson began negotiations with Bob Broussard, a senior Rainbow executive, the filing says. Again, despite nine months of haggling, an offer was not forthcoming. Meantime, Verizon launched its new TV service in several towns in New York and Massachusetts -- without being able to offer Fox Sports or MSG.

So Verizon brought in bigger guns. On Mar. 20, the telecom carrier filed a complaint with the FCC, asking the government to force Cablevision's hand. Verizon wants Cablevision to license the sports programming under reasonable and nondiscriminatory terms. "This is a refusal to deal with us at all," says Verizon associate general counsel Edward Shakin. "It harms our ability to compete and it harms the viewers' ability to get the benefits of that competition."

The skirmish indicates how the battle between phone companies and cable-TV operators -- already contentious -- is getting nastier still. The two companies have been duking it out in local communities, where Verizon says Cablevision is trying to thwart its efforts to enter the TV market (see BW Online, 11/23/05, "A Digital Dodge City"). Now the clash is increasingly extending to Washington policymakers. The battle reflects a sea change in the communications landscape, with cable companies trying to grab phone customers and phone companies jumping into the cable-TV business.


  Cablevision has not filed a response to Verizon's complaint, but claims in a statement that it has, in fact, been negotiating. "It would be more productive for Verizon to negotiate with us than file complaints and issue press releases," says Whit Clay, a Rainbow Media spokesman. Verizon maintains that Cablevision has never entered into substantive talks. "That's something that time doesn't cure," says Shakin. "If you haven't started, you can't finish."

Verizon isn't wasting any time lining up other content. So far, it has reached agreements with hundreds of providers, including ESPN, MTV, and CNN. On Mar. 21, Verizon said it signed a deal with CBS (CBS) for the right to carry its TV stations.

But regional sports programming is an area where it has faced challenges. Verizon is in negotiations with the YES Network, which broadcasts the New York Yankees, and Comcast SportsNet, which broadcasts the Philadelphia Phillies, Sixers, and Flyers in Pennsylvania and New Jersey markets. It has yet to reach a deal with either for those markets.


  Verizon hit paydirt, though, on Mar. 22, saying it signed its first deal in the New York region for sports programming with the newly formed SportsNet New York (SNY) network. SNY -- a joint venture between Sterling Entertainment Enterprises, a media company formed by the owners of the New York Mets, Time Warner Cable (TWX), and Comcast (CCZ) -- owns the rights to broadcast the New York Mets.

The lack of sports programming in a sports-crazed region, analysts say, will hurt Verizon's chances of winning new TV subscribers. "The most valuable regional programming is sports programming," says Blair Levin, a managing director with Stifel Nicolaus.

Some scholars and analysts say Verizon may get satisfaction from the FCC. The reason? The 1992 Cable Television Consumer Protection and Competition Act includes "program access rules" requiring cable operators to make their programming available to all takers at comparable prices. Congress wrote the law amid concern that cable operators would try to stifle competition by denying access to new rivals such as satellite operators.


  "Within six months or sooner, Cablevision will be playing ball with Verizon," predicts Paul Levinson, chairman of the communications and media studies department at Fordham University. Verizon attorney Shakin says the law "was designed for just this type of situation."

Moreover, political winds seem to be blowing in Verizon's direction. FCC Chairman Kevin Martin has said that he wants to speed competition in the cable market. "The FCC on pretty much every issue looks to help the Bells to enter the market against cable," says Levin, who was chief of staff to the FCC chairman from 1993 through 1997. "There's no question they have to offer the programming."

Not so fast, says another former FCC official. Kevin Werbach, former counsel for new technology policy at the FCC, says the commission has largely let satellite operators have exclusive content relationships in hopes the arrangements will help satellite players enter the cable market. DirecTV, for instance, has an exclusive deal with the National Football League to broadcast all NFL games on Sunday. And, says Werbach, the FCC has allowed cable operators to strike exclusive content deals because it provides them with an incentive to invest in their networks. Comcast SportsNet is not available to subscribers of DirecTV or DISH Network.


  "It's hard for me to see how Cablevision's actions would be prohibited," says Werbach, an assistant professor of legal studies at the University of Pennsylvania's Wharton School. "Everyone wants to see a battle royale in which everyone competes in every market. The question, though, is how to accomplish that."

That question will take a few months to answer. And FCC spokeswoman Rebecca Fisher say Cablevision will have 15 to 30 days to file its response. Verizon then will be offered a chance to respond. After that, the FCC will review the filings and make a ruling. Meanwhile, Verizon's Johnson continues to wait.

The telecom giant is hoping the issue will be resolved within five months or less. "The law allows us to seek damages but we are not seeking damages," says attorney Shakin. "We could have done that. It really is about trying to bring them to the table." With the New York Yankees' season just around the corner, bringing Cablevision to the table couldn't happen too soon.

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