March 15, 2005 Hearing Information

Informational Hearing

Cable Competition: The Public Policy Issues Raised
By Telephone Companies Offering Video Service

 

State Capitol, Room 112
March 15, 2005
9:30 a.m.

 

I. Opening Comments
  • Senator Martha M. Escutia, Chairwoman
    Senate Energy, Utilities & Communications Committee
II. Panel One
  • Tim McCallion, Region President
    Verizon Communications, Inc.
     
  • Fred A. Arcuri, Senior Vice President and Chief Operating Officer
    SureWest Broadband
III. Panel Two
  • Stephen Welch, Senior Executive Vice President of Policy and Planning
    SBC
IV. Panel Three
  • Dennis Mangers, President
    California Cable & Telecommunications Association
     
  • Gary Matz, Assistant General Counsel
    Time Warner Cable
V. Panel Four

CABLE COMPETITION: THE PUBLIC POLICY ISSUES RAISED BY TELEPHONE COMPANIES OFFERING VIDEO SERVICE
ISSUE PAPER

 

Background


It is a scary time to be a cable operator. For years cable’s main competition had been satellite providers that didn’t offer local channels.[1] But that is about to change. Technological advancements now enable telephone companies to offer cable television-like service over telephone lines. Both Verizon and SBC, the two largest telephone companies in the United States, have announced plans to do just that. If those plans are realized many, though by no means all, California customers will benefit from a competitor to their cable or satellite provider.

The question for policymakers is how to open the market for video services. Of course the simplest way would be to simply throw open the doors and invite either SBC or Verizon to provide the service. But that approach, while intuitively attractive, raises issues of fair competition and the offering of service in a non-discriminatory manner. 

How Level is the Playing Field?


The Legislature is often beseeched to establish a level playing field upon which fair competition can play out. But determining which legislative and regulatory decisions unlevel the playing field in material ways is not so easy.

The incumbent cable operators provide service on a playing field created using a locally-approved franchise. That franchise provides local governments with a franchise fee of 5% of the cable revenues, negotiated levels of public access to the cable network, and customer service oversight, but no oversight over prices. In exchange the cable operator has use of the public right of way.

Verizon is willing to obtain a local franchise, just like the cable operators, and compete under substantially the same franchise terms.[2] SBC has a different approach, arguing that it does not need a local franchise because of the way it provides the video service, though expressing a willingness to negotiate on local revenues. If SBC prevails then the playing field will be unlevel, giving SBC a cost advantage of 5%, relief from the obligation to serve all customers within the city, freedom the other public interest obligations imposed on cable operators relating to public access, and no obligation to deal with local regulators. Whether these telephone company competitors need to obtain a local franchise and comply with substantially the same franchise terms is the threshold question for dealing with the level playing field issue.

Because of the technology it is using, SBC believes it does not need a local franchise pursuant to federal law. This is a complicated legal issue which seems destined for the courts, but it raises questions about whether current law has been robust enough to keep pace with technological changes. The public policy goal of fair competition would seem to argue against SBC’s position, at least until all similarly situated competitors were subject to those same rules. But a relook at the federal and state cable laws to ensure fair applicability and consistency with our public policy goals may be worthwhile.

There is another secondary set of issues relating to the level playing field. Verizon and SBC are special companies because of their size and their current businesses. Both are huge, SBC with $40 billion in revenue in 2004, Verizon with over $70 billion. Both are expect to grow substantially with pending mergers with AT&T and MCI, respectively. And, most notably, both offer telecommunications service. Telecommunications service is more regulated than cable service because it is a less competitive market and an essential service. Much of the telecommunications equipment which allows those regulated services to be offered also allows cable service to be offered. The question is whether there are opportunities to cross subsidize competitive cable service with excess profits earned from less competitive telephone services, or whether there are critical telecommunications assets which SBC or Verizon controls that can be used to unfairly disadvantage their cable operator competitors.

Redlining

Ensuring the widespread availability of communications technology without discrimination has long been a cornerstone of public policy. While most often thought about in the context of telecommunications service, the policy has also been applied to cable service. Federal law requires that franchising authorities assure that access to cable service is not denied to any group of potential customers because of income. State law also reflects that sentiment.

While Verizon is willing to agree to substantially the same franchise conditions as the incumbent cable operator, there is one provision of law to which they will not agree. That provision is the requirement that if a company wants to compete with an existing cable operator it must agree to serve the same geographic area as the cable operator. This is intended to provide a level playing field and to prevent redlining. Without this anti-redlining statute a competitor would understandably choose to serve only the areas where the demographics provide the best chance of financial success, leaving the poorer neighborhoods without cable service. Verizon wants to provide cable service only where it also offers telephone service.[3] Because Verizon’s telephone service boundaries were established long ago without regard to political boundaries, Verizon often provides service to only part of a city. Examples include Torrance, Rancho Palos Verdes, Fountain Valley, Pasadena, and Redlands. In those cases, if Verizon were required to serve the entire city as a condition of obtaining the franchise, Verizon would simply choose not to serve the city.

The redlining issue also arises in a larger context. Within Verizon’s telephone service area are cities both rich and poor. What obligations should Verizon have, if any, to obtain franchises and provide cable service to the poor cities? The same can be asked of SBC, who has announced that it will serve most of its “high value” customers but few of its “low value” customers.[4]

Mitigating the concern about redlining is the fact that cable service is not an essential service. Unlike telephone, electric, or water service, cable service is discretionary[5]. And while not all areas have cable service, satellite-based video service is available ubiquitously.

There is an inevitable tension between the public policy of prohibiting redlining and the economic disincentive such a policy creates. If taken too far an anti-redlining policy would hurt the public because it would cause SBC or Verizon not to provide cable service due to inadequate profitability.[6] The public clearly benefits from more cable competitors; having another cable competitor lowers prices and improves customer service.[7] And the infrastructure that SBC and Verizon will deploy to provide cable service will also enable high speed Internet service, a service becoming increasingly important to economic development within a community. Moreover, building that infrastructure creates jobs which cannot be offshored.

This dilemma illustrates the Digital Divide issue. Imposing no restrictions on building out the new networks (e.g. not barring redlining) will incent SBC and Verizon to quickly upgrade their networks to provide competitive cable service to the customers they choose to serve. Those customers will clearly benefit. But for those customers who are not so desirable, there will be no benefit. The Digital Divide widens.

Economic incentives create the Digital Divide. Public policy can close it, to a degree. For example, federal and state subsidies have pushed telephone service, and electric service, to rural areas where it would otherwise be uneconomic to serve. It may be appropriate to consider a combination of anti-redlining rules and subsidies/incentives to encourage network upgrades in economically less-desirable areas.[8]

 

[1] Satellite providers now offer local broadcast channels and have typically captured about 25% of the cable market.

[2] Verizon has simultaneously been pursuing legislation in Congress exempting it from local franchising.

[3] This issue is raised specifically in AB 903 (De La Torre).

[4] The terms “high value” and “low value” were used by SBC in a November 2004 presentation to financial analysts describing their technology deployment plan, known as Project Lightspeed. There was no further explanation of those terms.

[5] ESPN notwithstanding.

[6] Though the eventual offering of telephone and high speed Internet service by the incumbent cable operator is a strong countervailing incentive for SBC and Verizon to make the cable investment to protect their existing investment.

[7] United States General Accounting Office, Subscriber Rates and Competition in the Cable Television Industry, GAO-04-262T. The GAO found that where cable operators faced competition from a wire-based competitor, cable rates were 15% lower than in markets without this competition.

[8] Recent public policy decisions have reached mixed conclusions, though the trend has been to favor deployment of the technology by not imposing any anti-redlining requirements. In the early 1980’s the upgrading of telephone service from rotary “dialing” to “touch tone” was required statewide; no redlining. In the late 1990’s the scope and pace of the offering of DSL service, a form of high-speed Internet service, was left to the telephone companies; no redlining prohibition.
 

Committee Address

Staff