Phone Fight

Last October, Verizon announced plans to bring TV-like video service to communities in New York state, using new high-speed fiber lines to provide fresh competition to incumbent cable operators. Cable interests responded by asking regulators to block Verizon from even laying the new line until the company submits to local franchising requirements. Verizon cried foul. "This is an attempt by the cable industry to delay technology," Verizon spokeswoman Christy Reap says.The long-regulated cable industry says it wants a level playing field. "New cable competitors…should be required to adhere to the same regulatory requirements," Verizon said in its March 2 petition to the New York Public Service Commission, which is considering the matter. The petition's authors were the town of Babylon, N.Y., Cablevision franchisee CSC Holdings and the Cable Television & Telecommunications Association of New York, a trade group.The skirmish is part of a larger battle between the cable industry, which serves video to 74 million customers, and the telephone industry, which wants a piece of that pie. Verizon and SBC have announced aggressive plans to extend high-speed fiber and use it to offer customers the lucrative "triple play" of high-speed Internet access, telephone service and, beginning later this year, TV service. Their plans, which hinge on serving more affluent neighborhoods first, have drawn some unwelcome attention—and not just from cable.Rep. Ed Markey (D-Mass.), a congressional leader on television issues, says he is concerned. "Because the currently announced deployment plans encompass serving the more affluent communities in their territories, questions are being raised about economic redlining," or withholding service from communities, Markey tells Mediaweek. "Less affluent, more diverse communities also deserve competitive choice." Markey says Congress might act if communities "continue to be excluded and bypassed." A first step could come soon, at hearings planned in the House telecommunications subcommittee in coming weeks.Verizon and SBC each say they must start their services where it is economically feasible, and each plans to expand beyond initial service areas.At issue is an increasingly converging marketplace. Cable companies are looking for new sources of revenue such as telephone and Internet service, as their share of the video marketplace stagnates and even shrinks. Cable's share of the multichannel marketplace dropped from 95 percent a decade ago to 72 percent last year, according to government statistics. Direct-broadcast satellite picked up most defecting customers.In response, cable has invested billions in its own high-speed lines and nontraditional services. From paltry numbers five years ago, cable serves 20 million high-speed Internet subscribers and 3 million phone customers, according to the trade group the National Cable & Telecommunications Association.The group issued a loud alarm late last year, when president/CEO Robert Sachs made a speech attacking telephone companies' video plans. "Cable operators must be vigilant about plans by phone companies to circumvent the local franchising process to gain unfair competitive advantage by red-lining or any other means," Sachs said. "Serving only high and middle-income neighborhoods in a community is both discriminatory and anti-competitive."The red-lining charge is incendiary. "We're really offended," says Michael Balmoris, spokesman for SBC, which plans to invest $5 billion to extend fiber lines and offer new services to 18 million households, including video services later this year. Balmoris said SBC hopes eventually to offer the high-speed service to all its customers. "We are a new entrant supplying a new service against an entrenched incumbent," he says. "And to do that, you have to get a toehold in the market."SBC maintains it doesn't need a franchise agreement to offer TV-like service, arguing that its on-demand streaming of only requested channels into a home makes its service different from cable. Franchise agreements typically set basic terms of service and involve payment of a fee to local authorities, often 5 percent.Verizon, which is building its high-speed fiber lines in 14 states, says it will enter franchising agreements. Some critics say the company has begun building its network without agreements. In New Jersey, cable and municipal officials say Verizon wants to craft new franchise agreements that may include a statewide agreement. Karen Alexander, president of the New Jersey Cable Telecommunications Association, said Verizon appears to want franchise agreements that do not include build-outs of entire communities—a key requirement for many localities that want equal video service for all neighborhoods.David Young, another Verizon spokesman, says expansive build-out requirements would serve as a deterrent. "Imposing that kind of obligation on a new entrant is really going to prevent anyone from entering" the market, he says. Verizon, he adds, submits only reluctantly to traditional franchising requirements. "The franchise process is a barrier to entry and slowing down real competition for consumers," he says. Coralie Wilson, president of the National Association of Telecommunications Officers and Advisers, a professional association for regulators, took another view, saying: "I think they ought to play by the same rules as the cable companies." Todd Shields is the Washington editor of Mediaweek.

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