Thinking Globally, Stuck Locally

Weary of going town to town to get into the TV biz, the Bells want Washington's help

Last summer, phone companies turned Indiana into ground zero in their war with cable and satellite providers. Armies of lobbyists for Verizon Communications Inc. (VZ ) and AT&T Inc. (T ) descended upon Indianapolis and kvetched about the state of cable television. Having invested billions of dollars to upgrade their communications networks so they were capable of offering TV service, the phone giants wanted a law making it easier to actually offer it.

Their entry into the market has been as slow as a dial-up connection because U.S. law requires them to negotiate so-called franchise agreements with thousands of municipalities, town by town by town, across the U.S. That process can drag on for years. So phone companies are pushing states such as Indiana to let them speed up the process.


In January, after the Indiana legislature introduced a statewide franchising bill, the fight turned nasty. Attack ads funded by the cable industry rained down like hailstones. One, featuring a blonde-haired girl in a field of wildflowers, claimed the bill would "raise our taxes by millions of dollars" and allow the "phone companies to provide video services to only the wealthiest neighborhoods."

The negative blitz didn't work, though. On Feb. 28, the General Assembly passed the bill by a vote of 78 to 18. Governor Mitchell E. Daniels Jr. signed it into law on Mar. 14, boasting that the bill would spark big investments in the state. "In politics, momentum is everything," says AT&T Senior Vice-President James W. Cicconi. "And right now there is incredible momentum behind reforming the franchise."

For all the talk about broadband technology and video-content agreements, the biggest hurdle to phone companies sending TV into homes has been getting local government approval. Of the 301 franchise negotiations that Verizon is working, 107 have been dragging on for more than a year, according to a letter it filed on Mar. 8 with the Federal Communications Commission.

But after months of spinning their wheels, the phone giants are suddenly getting traction in their push to change the franchise laws. Texas and Virginia also have passed laws, and similar bills are pending in close to 10 other states, including Florida, New Jersey, and California. Meanwhile, the phone companies may not even need state help. On Mar. 28, Representative Joe Barton (R-Tex.), the chairman of the House Energy & Commerce Committee, introduced a bipartisan bill creating a national video franchise to let phone companies bypass states and cities. Analysts see a chance of getting a franchise-focused bill passed into law this year. That's unlikely, though, if legislation is broadened to include such knotty topics as indecency and wireless spectrum allocations.

FCC Chairman Kevin J. Martin also has expressed an interest in streamlining the franchise process. On Mar. 28, the FCC ended its reply period for comments on rules designed to promote greater video competition. AT&T and Verizon have proposed that the feds require local officials to rule on an application within 30 days. "This is a priority for me," Martin told BusinessWeek. "We are trying to make sure we are doing everything we can to facilitate competitive entry."

A lot of lobbying muscle has been thrown at the issue. Phone companies are teaming up more than ever. Last year they spent a collective $60 million lobbying just at the federal level. The franchise campaign qualifies as the second-biggest lobbying effort in Washington today, trailing only health care, according to the Center for Public Integrity.


Coincidentally or not, there seems to be an emerging consensus among lawmakers, regulators, and consumer groups that more competition is needed to rein in cable-TV bills, which are still rising at twice the rate of inflation, according to the Consumers Union. Says Jeannine Kenney, a CU senior policy analyst: "We are eager to see the Bells enter the marketplace."

Cable operators respond that phone companies should have to clear the same hurdles to local service that they do. Cable execs also claim that if allowed to bypass antidiscrimination requirements of the franchise laws, the Bells will cherry-pick wealthy neighborhoods, leaving others with fewer choices. In fact, the three states that have passed franchise reform laws are not requiring video franchisees to build out 100% of their markets. In Indiana, they can pick and choose where they wish to provide service. Cable outfits dispute that they don't face competition, noting they already face off against satellite operators. "We welcome the Bells as the fourth or fifth competitor in our markets as we go into their phone markets as the second competitor," says Comcast Corp. (CMCSA ) Executive Vice-President David L. Cohen.

Some analysts say that if the FCC passes new rules, cable lawyers could tie them up in court for years. "There is no factual basis for any FCC action, nor do we believe they have the authority to make those types of changes," says Brian Dietz, spokesman for the National Cable & Telecommunications Assn.

Verizon, at least, isn't waiting for federal action. It already plans to spend $11 billion between 2005 and 2010 to lay fiber-optic cable, according to estimates by UBS (UBS ). And in each state that clears aside local franchise requirements, it is moving more quickly to deploy service. "Having an expedited process to get there means we will see better financial numbers sooner," says Verizon's Marilyn O'Connell, senior vice-president for video services. The laws also reduce the chance that Verizon has to pay what O'Connell calls "tributes" -- projects and fees that towns demand to obtain a franchise. Verizon has been asked to provide cell or Internet phone service for free, and one town was brazen enough to request a $13 million grant, says O'Connell.

But even if phone companies keep scoring wins on franchising, that won't solve all their challenges with video. Scott Cleland, CEO of research company Precursor, notes that cable operators have "a two- to three-year lead in offering a unified bundle" of phone, video, and Internet services. When phone companies gain access to the living room, they still have to wrestle away the remote.

By Spencer E. Ante

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