In the past two years, telephone companies have rushed to introduce national and statewide video franchising legislation around the country to better position themselves as cable TV providers. Having failed last year in Congress to buy favorable national legislation, the telcos have now turned to the states for the regulatory edge they seek. Thus far 14 states have passed statewide video franchise bills, beginning with Texas back in 2005.

The elusive telco goal is "triple play," a combination of three communications services (phone, data and pay TV) rolled into one marketing gimmick - and more importantly an airtight one-year contract at the now predictable introductory $99 monthly rate. As Harold Feld has pointed out, the trick to triple play is that once consumers enter into these agreements, they seldom manage to get out. Even if one service is substandard, the user is locked into a contract and may be reluctant to switch over all three of their necessary communications services at the risk of being left for a time without any services at all. And as telcos know, creating enduring hassles and contractual obligations for consumers is the second best business model for profitability (physical addiction being the number one).

Since cable has already locked in so many triple play subscribers, the telcos need to have another trick up their sleeve. Their eventual answer will be "quadruple play," which will combine wireless telephony with the other three services and quite possibly a lifetime user contract. This is something the cable companies don't have, and won't have in the foreseeable future, short of a few unlikely mergers or a windfall acquisition in the upcoming FCC 700MHz spectrum auctions (again, see Feld's article).

Past Misdeeds Going Well Rewarded

On the subject of mergers, we would be remiss not to remind ourselves that in 2001, AT&T was the largest cable TV operator in the country. Having acquired TCI in 1999 for 48 billion and MediaOne for 54 billion in 2000, AT&T Broadband once counted over 16 million cable subscribers. Lacking the foresight of internet telephony, much less the skill to conceive a double play service, AT&T botched their market advantage and promptly sold off their entire cable division to Comcast in late 2001 for 47.5 billion, taking a 54.5 billion dollar loss in the process. Why SBC would choose to merge with such a fountain of business knowledge in 2005 is anyone's guess - it must have been the NSA connections. AT&T wasn't alone. By 1999, Ameritech, US West and Bell South had also bought cable systems. Combined, they had local video franchises able to serve more than 63 million households. Local video franchises weren't a barrier to entry then, nor are they now.

Having squandered an advanced cable infrastructure, AT&T now races to catch up with a combination of fiber and 50 year old copper wiring. And in some suburban and rural areas, that aging copper will remain the primary infrastructure while DBS TV (satellite) completes the triple play. For all this wonderful foresight and financial commitment to technological innovation, AT&T, Verizon and Qwest are now storming statehouses around the country, demanding the elimination of public interest obligations and protections in exchange for more favorable statewide video franchise agreements (for which they graciously provide the language). All this, so they can compete equally with cable companies whom they allege are able to overcharge consumers because there are no competitors. Given the obviousness of intention here, one could wonder what elected official could possibly be fooled by such a ploy. But that is why there is . . .

The Lie of Competition

Actually there are layers of lies here - contradictions, deceptions, false promises and then of course, the eventual pay-off to those who know better. The telephone companies offer the following justifications for their legislation:

Current local franchising is too burdensome for new entrants into the market

In 1993, the telephone companies were granted permission by the FCC to begin offering video services via the VideoDialtone Ruling. Later in 1996, more efforts were made to ease their entry into the cable TV market. For 12 years the telephone companies did absolutely nothing to pursue their professed market goal, and as noted above, AT&T even went so far as to buy their way into becoming the biggest cable operator (with hundreds of local franchises) only to sell out at a huge loss.

Today the telephone companies publicly blame the intricacies of local franchising for their late entry, though their cable competitors have negotiated these local contracts for over 30 years with little complaint. The reality is that the majority of municipalities are willing to allow the telcos to sign the existing cable franchising agreements, many even offer to expedite the process. But these local franchises don't accomplish the elimination of public interest obligations that the telcos seek with the new state legislation (eliminating build-out protections, PEG provisions, local control of right-of-way), The contradiction is that telco executives also have been quoted claiming that local franchising is not a barrier to their entry into markets. In fact, some companies, like Verizon, seem to prefer it, since local franchising allows them to pick and choose the most affluent communities and reap the reward of premium service contracts. And in many states, telco infrastructure capable of video services is mostly built out only in urban and new expensive residential developments where local franchising may make greater short-term profits.

Cable rates have skyrocketed because there has been no competition

The best deceptions are rooted in glimmers of truth. Cable rates around the country actually have sky-rocketed the last ten years, 60-90% percent, depending on whose market scripture you ascribe to. What is never mentioned is that cable pricing was deregulated by Congress in the 1996 Telecommunications Act and the rapid rate increases have occurred as a direct result (actually since 1998, when the rate deregulation took effect). It was in this time that multiple tiers of service also came into effect (basic, basic enhanced, standard, standard enhanced, premium, etc., etc.). In addition, content providers (like Disney) gained enough market clout to charge cable operators higher fees for carriage; other channels followed suit. All this contributed to greater costs and higher rates (not that cable isn't still grotesquely profitable). In short, cable prices have skyrocketed because Congress decided they no longer were responsible; instead, the market would be trusted. And the remedy offered by the new state legislative bills - more deregulation, of course.

Curiously, there is one tier of cable service that remains under "local municipal" pricing and regulatory control. This is entry level basic cable service, now mostly reduced to a handful of broadcast channels, shopping channels and PEG channels, in most cities. Municipal regulation of basic cable service ensures that seniors and low-income families on fixed incomes can afford the service, in addition to those who may be geographically challenged by broadcast TV. Ironically, this last bastion of affordable pricing regulation is now eliminated the minute a "competitor" enters the video marketplace. The FCC is now lifting this pricing control as telephone companies acquire local and state video franchises - often before they even begin offering the service.

Competition will result in lower rates

It's so simple, according to Marc Cooper, Director of Research of the Consumer Federation of America, “In a duopoly, both of the competitors typically decide fairly quickly it is best not to compete aggressively with each other,” says Cooper. “A duopoly is not true competition.” In other words, the competition the telcos offer will only fix prices, not lower them.

In confidence, telephone company executives reflect the same sensibility and when talking to Wall Street analysts, assure them there will be no price wars. Yet, the telephone companies pay PR firms to mount phony public interest campaigns (astroturfs) to convince the public (and comfort politicians) that their desired legislation will result in significant price drops. Behind the slickness of these direct mail and TV campaigns, the telephone companies also fund free market orientated "think tanks" to conduct studies that demonstrate the desired pricing effect. Quoted by politicians, these studies quickly become "fact" and in some cases have been referenced in FCC and GAO reports. Although discredited by literate observers, the market myths these studies spawn become irrefutable doctrine in the cyclical PR campaigns that now tour the states like a carnival medicine shows.

Since the first state franchise wasn't passed until late 2005, and in Texas where AT&T has been slow to actually offer services to many communities, there are only glimpses of actual competitive markets. But in Texas, there already has been one study showing that basic and standard cable rates are still rising despite telco competition. AT&T and Verizon also recently announced price increases for many of their video services - although they have yet to offer the service on a widespread basis.

What's in a name?

A brief look at state video franchise titles speaks volumes on the creative writing intentions of the authors. What politician could possibly vote against legislation with such egalitarian, well intentioned titles? Of course, few elected officials actually read these mammoth bills anyway, most never get past the bill summaries which are often as fictitious as the titles. It's just surprising that "Patriotism" wasn't somehow worked into one these bill titles:

More accurate titles would be:

When in Doubt - Pay Out

The telcos spent and lost billions in the late nineties, buying and selling cable companies as their business plans changed and floundered. Today, they have found buying legislation to be much cheaper. When the telcos and Rep. Barton (TX) needed a democratic sponsor for the House bill in 2006, they found an ardent supporter in Bobby Rush (IL), after AT&T donated 1 million to his private foundation. Politicians are cheap dates for the telcos, and these state legislative affairs treat the statehouse as cheap motels with hourly rates. The California legislation only cost the telcos 30 million, Texas was a bargain for 7 million and in return, the telcos also got to raise local phone rates (they'll recoup their lobby expenses in a year). A signature from Georgia's governor, paid for by AT&T, runs only $200,000 (to help pay for the governor's inaugural festivities). The list is endless, and is one of the reasons politicians love telecommunications legislation.

Non-profits aren't immune to the wink and bribe either. In Georgia, a million dollars each to Clark Atlanta University, Piedmont Park Conservancy, Woodruff Arts Center and $500,00 to the Atlanta Women’s Foundation bought their support for AT&T's bill. Minority organizations are also favorite targets for telco donations: the NAACP, The Hispanic Coalition, LULAC, the Black Caucus, National Black Chamber of Commerce and many others have been eagerly enlisted to support these state bills for a price.

Suggested reading: ICMA "Forced Franchise" PDF Document

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