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Thursday, May 17, 2012
Department: July 2007
At Your Service
Will consumers emerge the winner when telcos duke it out?
Story by Rich Ehisen
For years, most Californians didn’t think much about who provided cable as long as HBO, ESPN and the Disney Channel were there when they reached for the remote. Fussing about it didn’t really matter anyway because most communities had just one cable provider.
State lawmakers, however, changed that last year by approving the Digital Infrastructure and Video Competition Act, or DIVCA, which busts monopolies and encourages telecommunication companies to join satellite networks in competing head-on with cable companies. While telcos could claim a huge victory, consumers may emerge as the ultimate winner.
“Two things you will definitely see from this are a decrease in the price of video products and an increase in the services all of these companies are offering,” says Assemblyman Lloyd Levine, who co-authored the state legislation. “It may not happen right away … but it will happen.”
Levine’s enthusiasm may be well founded. According to a report issued by UC Berkeley professor Yale Braunstein last year, DIVCA could save consumers in the Sacramento Region as much as $100 million annually on video bills.
But cheaper TV is only part of the equation. DIVCA proponents also look to increase the availability of broadband, fiber-optic networks and other high-speed Internet products. That wish list goes far beyond telco boardrooms, reaching all the way to the Capitol.
“If buildout is not fully required and robustly enforced, which it can’t be under this law, then there is a strong chance of discrimination.”
— Judy Dugan, Foundation for Taxpayer and Consumer Rights
Gov. Arnold Schwarzenegger signed an executive order last fall that creates a task force charged with clearing obstacles to “ubiquitous” broadband access across the state. For Schwarzenegger, “the telecommunications revolution” is a matter of dollars and cents: He predicted in 2003 that reaching even 50 percent broadband saturation could pump $365 billion a year into the state economy within seven years, creating more than two million jobs along the way. Whether those figures are accurate is yet to be seen.
“The governor is very pragmatic,” says Rachelle Chong, a commissioner with the California Public Utilities Commission, which is charged with overseeing DIVCA’s implementation. “He sees that having really fast fiber systems is going to be particularly positive for Hollywood, the music industry and Silicon Valley, and that is going to be a huge plus to our economy.”
Although California is often the state that leads national trends, the new telco shift actually took hold two years ago in Texas when lawmakers there — under heavy lobbying from telco heavyweights SBC and Verizon — approved a proposal to allow those companies to jump into the cable business via a single statewide franchise license. This was an enormous sea change for cable providers, who had long been required to work out individual deals with each community they wished to operate in.
“We’ve had so many false starts because we’re ahead of our time in some way.”
— Barbara O’Connor, director, Institute for the Study of Politics and Media
at Sacramento State
The theory behind the old system was simple: Cable TV infrastructure is expensive to construct, so government didn’t stop cable operators from monopolizing a market so they could recoup their investment. In exchange, local governments nationwide required cable operators to provide public programming, serve entire areas rather than just certain parts of them, and submit to rate regulation. Providers also had to pony up more than 5 percent of annual revenue to local government.
While that system ensured cable companies carried public-interest programming and served all areas rich and poor, it did little to control cable costs. According to a 2005 report from the Federal Communications Commission, nationwide cable prices have increased by 90 percent over the past decade, climbing annually at more than twice the rate of the Consumer Price Index. Many consumer advocates also have complained of poor customer service, but there was little consumers could do other than pay the piper or go without.
Or at least that was the case until Texas approved its landmark cable competition measure in August 2005, which wiped out local governments’ exclusive ability to issue video franchises. Freed from having to cut deals with thousands of individual communities, AT&T and Verizon immediately jumped into the video services game. Cable bills for customers who switched in these first areas of competition — the Dallas suburbs of Plano and Keller — dropped as much as $22 per month, according to the American Consumer Institute. Cable providers, suddenly faced with a real competitor, immediately responded with cuts averaging more than $26 per month.
With the market kicked open, telcos also began rolling out big plans to get new products and services to the market. San Antonio-based AT&T, for instance, announced an $800 million plan to lay fiber-optic cable in order to provide voice, Internet and television services across Texas. According to a report by The Perryman Group, a Waco-based economic and financial analysis firm, telcos are expected to ultimately invest more than $3 billion in new fiber infrastructure in Texas alone. AT&T spokesman Gorddon Diamond says his company plans to spend approximately $4.6 billion to lay more than 40,000 miles of new fiber lines nationwide, with more than $1 billion of that targeted for California. Verizon has also indicated it will invest more than $20 billion in its new fiber system.
In addition, recent research by Robert Crandall and Robert Litan of the Washington D.C.-based Brookings Institute claims that increased competition could encourage more consumers currently without cable video services to give them a try, or to dump their satellite dish in favor of wireline video services like those offered by either telcos or the cable companies. That would mean big boosts in business and revenues for cable companies as well as the incoming telcos. If so, the report says, it would in turn pump up local video franchise fees nationwide by as much as 20 percent and produce thousands of new jobs. Other possible benefits from increased broadband saturation also abound, from futuristic telemedicine capability and interactive education programs to vastly improved government services. All of which, proponents say, could add even more intellectual and fiscal equity to the state’s economy.
Given those possibilities, it is not surprising that many states have also gone to the statewide franchise model. Including California, at least a dozen states have passed their own video services reform measures. While there is some variation on buildout requirements from state to state, most new laws still require video providers to keep paying local communities a right-of-way levy for being allowed to access public property in their buildout while letting them garner a single statewide license to do business pretty much wherever they like.
But many consumer advocates are not convinced DIVCA will level the playing field for all video consumers in the way it does for video providers. Specifically, many fear a series of loopholes in the measure will allow incoming telcos to cherry-pick wealthy communities.
“It is a natural tendency for profit-making companies to want the easiest customers in order to make the biggest profits,” says Judy Dugan of the Foundation for Taxpayer and Consumer Rights, which opposed DIVCA. “This is why the government has always required cable service providers to build out on a specific schedule.” Dugan says that while DIVCA has buildout requirements, they are sufficiently complex and many communities will have trouble enforcing them without going to court. “If buildout is not fully required and robustly enforced, which it can’t be under this law, then there is a strong chance of discrimination.”
