Commentary: The High Cost Of Killing Cable Competition Monday January 08, 2001 - 04:39PM
by Joe Shea
American Reporter Correspondent
Hollywood, Calif.
Special to Money.net from The American Reporter
LOS ANGELES — In July 2000, a cable "overbuilder" called RCN RCNC presented an application to the City of Los Angeles that would provide competition to other cable companies for the first time in 30 years. Today, at best estimates, that contract is still "several months" from being signed. Indeed, it may never be. Meanwhile, this city's largest cable provider, Adelphia ADLAC, has arbitrarily excluded adult programming from its 1.1 million homes, raised rates to some customers, and will soon require all to use a set-top device that ensures all premium programming is charged for — at another $8 or $9 a month. And AT&T T and Cox COX, two other L.A. cable providers, have gone to court to quit paying cities a franchise tax on their cable-based Internet access service, backed by a Ninth Circuit Court of Appeals decision in another case.
Other cable providers are taking heat for poor reception, interruptions of service and other ills that plague their aging systems.
A survey by the Information Technology Agency early this fall showed that more than half of all cable users in the city would switch providers if there were competition to switch to; many even asked the city to start its own cable system, presumably believing it would not only be cheaper and more reliable, but that service calls and customer complaints would be handled with friendliness and dispatch.
So why is the city holding up the RCN application, which would let the Princeton, N.J.-based upstart provide 110 channels, local and long distance fiber-optic telephone service, and cable service with more clarity and less frequent interruptions? The bruising clash of giant competitors and huge amounts of money spent on lobbying city council members and other local officials may have a lot to do with it.
RCN, just last year the darling of Wall Street and what Business Week called "the juiciest morsel in telecommunications" for prospective merger partners, with almost $2.1 billion in cash from Microsoft billionaire Paul Allen, is feeling the pinch. It announced a month ago that it would no longer be seeking franchises beyond its current commitments (in Los Angeles, New York, Boston, Chicago, Portland, Philadelphia and Washington, D.C.), saw its stock downgraded by on Dec. 28, its stock price fall from $74.88 to $6.44 per share in a year, and is named in the Jan. 8 Barron's as one telecom firm that may have difficulty servicing its debt. Also, an agreement with Southern California Edison SCE that RCN hoped would help build out its system a year earlier than originally planned may now be in doubt as he utility flirts with bankruptcy. Meanwhile, politicians are holding the company up for everything they can get.
Did I say holdup? I did. According to Councilman Alex Padilla's spokesperson, David Gershwin, the RCN deal is still "several months" away. But as long ago as Nov. 1, the deputy city attorney who negotiated the contract told me the contract had been fully approved and would in all likelihood come before the full council on Nov. 21. Before that time, too, he gave me a copy of the contract — marked "final." Yet the only action in the council that day on cable issues was to direct the city attorney to go to bat for the city before the FCC in support of "open access," which requires a cable operator that provides Internet access using an affiliated ISP to also sell unaffiliated ISPs access to its system.
"Open access" is the key to the holdup. According to a statement Councilman Padilla made at the Nov. 1 meeting of the Information Technology Committee he heads, it is his goal to provide a "level playing field" (a term coined under a state law that requires overbuilders to pay as much as incumbent cable providers to gain a franchise) not only to the incumbents — Time Warner TWX , Adelphia, AT&T, Cox, etc., and an overbuilder such as RCN or WINfirst, but future "service providers" as well.
That is an extension of the state's requirement the state law never intended. It means that RCN's price of entry must be so high that service providers who lease its lines to deliver high-speed Internet access, for instance, won't be able to offer lower prices than incumbents do. Thus, Padilla is telling consumers that if competition comes, it will be at the same price they pay now. So what's the point?
Los Angeles City Council members and mayoral candidates are swimming in a sea of cash from cable companies. City Atty. James Hahn, whose deputy drafted the contract that has now been indefinitely delayed, got at least $14,000 from cable giants AT&T and other cable lobbyists. So has Padilla, whose MIT background has helped him understand the issue but may have blinded him to the economic realities of the cable marketplace.
If RCN can't offer lower prices, the advent of wireless technologies that don't need a monopoly to offer the same services — and probably at rock-bottom prices — may devastate the city's cable franchise tax revenues. If RCN is competitive, though, some revenue may still be generated by cable long after wireless has taken over most of the Internet access market. But RCN's competitors have given generously to Padilla and wined and dined him, and so far he has been responsive. The cost to the city is incalculable, though: RCN promised to give away high- speed Internet access to every public entity in Los Angeles, from schools and hospitals to senior centers and field offices and fire and police stations. Perhaps Padilla's backers prefer that the city buy it from them.
The largesse of cable companies battling over open access has been so great, in fact, that the City Ethics Commission has issued two special reports about it. In addition to AT&T and Adelphia paying $750,000 each to sponsor the fizzled New Millennium celebrations in 1999, cable companies have spent some $6 million lobbying city offices since 1999. But a Federal court ruled last fall that cities can't regulate "open access" anyway, so what have all those lobbyists gotten for their money? The answer, I fear, is a stifling of competition in the services new technology can bring.
City officials, RCN attorneys have said, have asked RCN to do much more than the earlier franchisees were asked to do — yet RCN isn't getting what they got: a monopoly. At a thousand pressure points along the fault lines of the RCN proposal, cable operators have pushed the city and Padilla to eke out more cash, more concessions and more freebies for the city that will all end up costing consumers far more than they needed to pay for cable services. That's one reason that, as ITA official Paul Janus noted, competition has not brought lower prices to cable consumers.
It's time to take cable competition issues away from the City Council, where four members are unable to vote on them anyway due to conflicts of interest, and to leave them with the Information Technology Agency, which approved the "final" RCN contract last September (the Board of Information Technology Commissioners approved it Oct. 16). Otherwise, the "historic moment" Padilla promised months ago — the day when Los Angeles would see cable monopolies opened up to competition at last — may never come. |
