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Even as local telephone companies grow larger — witness the AT&T-BellSouth megamerger — the Bells continue to jockey for every possible edge over cable companies. Now, the Bells are claiming that they deserve a regulatory advantage over incumbent cable operators to jump-start competition in video and broadband services. Lawrence Spiwak echoes these Bell claims in his March 13 Legal Times commentary (“Competition’s Calling,” Page 50). He suggests that the Bells deserve a special break from franchise regulations to get themselves into new markets. Lawmakers have heard these sorts of arguments before. But with the perspective of additional experience about the claims of the Bell companies, both lawmakers and consumers should know better than to fall for the Bell arguments this time. The Bell companies don’t need or deserve special treatment to give them a competitive edge over cable providers. SPECIAL TREATMENT The Bell companies today rightly see cable operators as their most significant competitive threat. The cable industry invested billions of dollars to build out a two-way, interactive fiber-optic network that can provide voice, video, and data services. The Bells also want to offer all three of these services. To help their efforts, the Bell companies want exemptions from complying with existing laws that require local permission to use rights of way. They also want exemptions from regulation such as discounts on the fees they pay local governments, an absence of customer-service regulation, and the right to refuse to serve hard-to-reach communities. All of this is supposedly so that they can play catch-up with the cable companies. The Bell companies contend that local franchising is the most important barrier to competitive entry in local cable markets. But there is no actual evidence this is so. The local franchise — essentially, a contract entered into between cable operators and municipalities (in some cases overseen by state governments) — has historically governed the terms of using local rights of way to operate cable systems. Although Congress may end up adopting some changes to the local franchising process to streamline it, the process generally works well to provide local input and accountability in responding to community needs. Incumbent phone companies are as capable of obtaining franchises as any other competitor. Indeed, more than a decade ago, another Bell company, Ameritech, embarked on an ambitious, large-scale initiative to provide cable service and obtained more than 100 franchises. It was then acquired by SBC, which showed no interest in investing in the business and eventually sold off the systems. Recently, SBC acquired its former parent company and again became AT&T. The new AT&T now argues that it doesn’t even need a franchise to offer cable services. The company claims it can go ahead and start providing service without any local government involvement because its service is not, technically, a cable service. Meanwhile, another Bell company, Verizon, complains about the franchising process even as it goes about successfully obtaining franchises — more than 42 to date, from Texas to Massachusetts. In these markets, Verizon competes head to head with cable companies, satellite companies, broadband service providers, broadcast television, and others in the video marketplace. In some markets, Verizon obtained franchises in less than a month. In short, the Bell companies themselves have proved again and again that the local franchising process is no serious barrier to entry. NO CHERRY-PICKING Even when they can obtain a franchise, the Bell companies argue, the franchise agreement often imposes unreasonable conditions, such as the requirement that cable operators provide service to every neighborhood in a community, not just the wealthiest ones. Spiwak asserts that build-out requirements unfairly increase the costs of entry. But then he also says that Bell company entrants will build out anyway because their business plan depends on the broadest possible customer base. So why would the phone companies be deterred by the requirement to serve everyone? In the end, these build-out requirements are hardly unfair. They ensure that poorer or less populated areas are not left behind. Obviously, revenues from wealthier (or more densely populated) areas subsidize the costs of serving these communities. If competitors are allowed to cherry-pick the wealthiest or highest-density communities, fewer dollars will be spent on infrastructure and services in poor and low-density communities. Incumbent phone companies, with annual revenues of $150 billion (three times those of incumbent cable operators), should not be arguing for an exemption to write off certain communities. In recent years cable operators have invested billions to upgrade their systems without the promise of exclusive franchises or government help. Phone companies should also do their fair share to close the digital divide. Some contend that cable operators will reap monopoly profits because of a lack of competition unless and until phone companies are given a helping hand from the government. This argument turns competition policy on its head. Even a monopoly is not anti-competitive or anti-consumer so long as it is achieved on the merits. The phone companies are just trying to circumvent the marketplace. Lest we forget, the Bell companies built their networks with a government-guaranteed rate of return for years, while cable companies are investing in broadband facilities at their own risk. What’s more, cable companies aren’t the big bad monopolists that the phone companies claim they are. If you think about your own choices, you know there is more competition in video markets than in local telephone markets. Direct broadcast satellite providers (EchoStar and DirecTV) reach nationwide and serve more than 26 million households. Many urban markets are served by cable “overbuilders” (newer firms such as RCN and Knology) that provide a bundle of broadband services over terrestrial cable facilities. Local broadcast stations are also on their way to becoming multichannel digital video providers nationwide as they move from analog to digital signals and acquire the capability to deliver multiple program streams. In short, rumors of a shortage of video alternatives in the market are overblown. And this doesn’t even consider the multiple video devices, like the iPod, that are coming into the market. Bell supporters make a big fuss over the fact that the price of basic cable service has risen since 1992. But several interrelated factors help explain this. Congress’ deregulation of rates in 1992 unleashed a torrent of private investment in cable infrastructure. Cable operators rolled out a new generation of services, including cable modem Internet access and video on demand. These new services have been wildly popular with consumers. At the same time, the number of cable channels has increased, and the quality of cable programs has improved. As people turn to cable a lot more than they did 10 years ago, the cost per hour of viewing this more varied and higher-quality programming has actually declined. To be sure, ongoing cable regulation can pose challenges for providers and even harm to consumers. In particular, the program access rules (which force programmers owned by cable-operators to sell their channels to competitors) and the retransmission consent regime (which forces cable operators to add unwanted cable channels owned by broadcasters to carry the actual broadcast stations) have made it harder for cable operators to differentiate video services and to offer more flexible packages to customers. Yet the overall popularity of the basic cable package is indisputable; it remains a formidable consumer value. And recent analysis confirms that whatever customer savings the Bell companies can offer in providing video services alone, that discount evaporates once additional services, such as high-speed Internet, are added to the bundle. Perhaps the real irony in all this is that the incumbent phone companies are seeking special treatment so an industry without much of a track record for competition can finally compete. They promised to offer video in the 1980s, then didn’t. They promised to do it in the 1990s, then didn’t. In fact, they have repeatedly closed down their video businesses after launching them with much fanfare. Now they’re promising to finally do it this century if the government helps them out. Why should regulators and the public believe them this time?
Fernando Laguarda is a partner in the D.C. office of Mintz Levin Cohn Ferris Glovsky and Popeo and a member of the communications and information technology practice group. The firm represents cable operators on this and other issues.

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