From: John Higgins Subject: Cable Regulation Digest 10/24 Date: Sat, 22 Oct 1994 17:22:10 -0400 (edt) CABLE REGULATION DIGEST Summary of regulatory news from Multichannel News 10/24/1994. Vol.1, No.43 Copyright 1994 Multichannel News. Reproduction/distribution is permitted so long as this document is left fully intact. NO CHANGES are to be made to this document without the written consent of Multichannel News. Listserver, Gopher, FTP info attached at bottom. Refer questions to John Higgins (higgins@dorsai.dorsai.org or 212-887-8390) Multichannel News subscription information: 800-247-8080. A bargain at $78/year. Multichannel e-mail contacts: Marianne Paskowski, editor: Mpcable@aol.com John M. Higgins, finance editor: higgins@dorsai.dorsai.org Kent Gibbons, new media editor: kentgibb@well.com Leslie Ellis, technology editor: Ellis299@aol.com HOT NEWS * FCC's Telco Video Move Has Cable Howling * MSOs Blamed For Cable Rule Delay * Tiny Op Facing Ch. 11 From Rate Regs QUOTES OF THE WEEK "We had this thing wrapped up weeks ago," but cable "keeps coming back" for further refinements. FCC chief of staff Blair Levin, on the delay in setting the next round of "going forward" rules for cable pricing. "We have had a consistent position since early this summer in response to [Chairman Reed Hundt's] request for a consensus proposal and they control the agenda," National Cable Television Association spokesman Rich D'Amato. CABLE FURIOUS OVER FCC RULING ON VDT Washington -- Telephone company entry into cable picked up steam last week as federal regulators adopted final rules for the rollout of video dial tone and dismissed cable's arguments on cost allocation. In a unanimous vote, the Federal Communications Commission backed a scheme that would allow phone companies to compete against cable operators without violating the federal ban on telco ownership of cable systems in their regions. In finalizing its VDT rules, the FCC specifically rejected a request by the cable industry to force telcos to allocate their costs before being given the green light to build their networks. However, the FCC did agree with cable by rejecting the "anchor programmer" concept in which a single video programmer would control much of the network's capacity. While cable operators can own both their networks and their programming offerings, VDT postulates telephone company ownership of the network only, leaving unaffiliated interests to program the channels. "This is an incredibly bad decision that flies in the face of all logic and the record before the FCC, and we will appeal," said National Cable Television Association president Decker Anstrom. "The core question of who pays for this was not answered." Under the FCC's new rules, a telco may receive permission to build its network before the FCC would require a review of its proposed rates or "tariffs." The cable industry fears that the FCC will quickly approve tariffs under pressure from telcos that have already sunk billions of dollars into their networks. Under current FCC rules, a tariff can become effective within 45 days of its filing date. In a letter to FCC chairman Reed Hundt last Tuesday, the cable industry and Rep. Edward Markey (D-Mass.), urged the FCC to adopt a formula in which VDT costs would be allocated up front and fairly spread between the video and voice portions of the network. Cable fears the FCC will allow telcos to load their costs onto the voice portion to keep video rates low and underprice their cable competitors. Markey issued a statement suggesting the FCC's decision was flawed because the agency has authority to promote competition to cable but not to the local phone industry. "Significant questions on consumer protection and competitive fairness remain unanswered because of the Commission's lack of authority to advance competition in local telephone service," Markey said. The cable industry has to devote considerable resources to monitor each tariff filing -- a laborious process that could last for up to nine months for each application if the process is extended to its legal limit. Telco applauded the FCC's action but reserved final judgment as details of the decision were contained in a six-page press releases. The final order is expected to be made public within 30 days. FCC officials said the cable industry's concerns about cost allocation were unfounded. They pledged to assure proper cost allocation at the tariff stage -- not only to protect cable from unfair competition but also to protect captive local phone ratepayers from price gouging. Hundt said the FCC would not permit "predatorily low prices for the transmission of video [dial tone]." That would be very wrong from the perspective of the telephone company ratepayer and it would be very, very wrong from the perspective of the cable companies, who are perfectly willing to face competition but ought not to face unfair competition," he added. FCC AIDE CHIDES CABLE FOR DELAY Washington -- Federal Communications Commission chairman Reed Hundt's chief of staff last week blamed the cable industry for delaying action on going-forward rules. "We had this thing wrapped up weeks ago," said Blair Levin, Hundt's top lieutenant, but cable "keeps coming back" for further refinements. FCC officials continued to put off going-forward rules despite reports of agreement. Levin said a major sticking point was a la carte issues. The cable industry, he said, is seeking a commitment from the FCC that it doesn't have the authority to regulate a la carte packages. Levin said the assertion was contrary to the 1992 Cable Act and economically unjustified. National Cable Television Association spokesman Rich D'Amato acknowledged that the industry and the FCC were in disagreement on a la carte. "We believe there is a difference between the authority the FCC is seeking and what we believe the statute authorizes," D'Amato said. The FCC is planning to allow cable operators to establish a non price-regulated "new product tier." The FCC will allow existing programming to migrate to the new tier so long as the programming remains available on the regulated tier. The rules would allow operators to add new programming to regulated tiers and migrate it to the new tier within two years. Still at issue is the allowable markup on new programming added to regulated tiers. The FCC is considering allowing between 20 cents and 25 cents per channel with a yearly overall increase capped at between $1.25 and $1.50, including the program license fee. FCC sources said they wanted the FCC to decide the new product tier issues at the same time it decides the programming incentives for regulated tiers to ensure a balanced result. The cable industry has been pressing for resolution of a la carte packages with going forward-issues. BELL SURVEY: MANY WOULD DROP CABLE A Bell Atlantic Corp. survey of cable television subscribers in its region found that 46 percent were very likely or extremely likely to switch over to the telco's video service if it were comparably priced. Cable marketers scoffed at the survey of 500 Bell Atlantic customers, done for internal use but released to the public because of the results. "That's way higher than anything I've seen," said Char Beales, chairman and COO of the Cable Television Administration and Marketing Society. She said realistic estimates put the figure at between 5 and 10 percent, and said recent polls show subscriber dissatisfaction is dropping. If valid, the Bell Atlantic survey would indicate people are more willing to try cable service from a phone company than to try phone service from a cable operator. A survey of 1,010 adults released in September by Opinion Research Corp. found 31 percent were willing to test phone service offered by the local cable operator, if costs were similar. The Bell Atlantic survey also found that 56 percent would switch if the telco offered movies-on-demand; 61 percent would switch if the telco offered cable programs plus movies-on-demand for 10 percent less than cable service; and 30 percent of phone customers who don't subscribe to cable would take the Bell Atlantic video service if it included video- on-demand. FCC ANCHOR RULING RAISES QUESTIONS The anchor programmer concept is sunk -- or is it? Last Thursday, Federal Communications Commission staffers said alternatively that they had rejected the idea and then backed off saying such pitches would be considered on a case-by-case basis. The definition of an anchor -- an entity that controls "all or substantially all" of a telco's video dial tone platform -- will depend on a variety of conditions, including how many channels are proposed in total, said Common Carrier spokeswoman Donna Lampert. Controlling half of a 500-channel system leaves more room for other programmers than would controlling half of an 80-channel system, she added. So are anchors dead or not? Officials at Pacific Telesis Group -- which bluntly named its anchor supplier Anchor Pacific -- said afterward they were confident their version of the concept would stand up to scrutiny. Yet cable representatives hailed the anchor-programmer aspect as the only pleasing thing about the FCC order and were confident PacTel's scheme was finished. James Ewalt, executive vice president of the Cable Telecommunications Association in Washington, D.C., said in a statement that the anchor programmer concept "would have made a charade of the presumption that video dial tone will be a true common carrier service." Anchor programmers are supposed to gather together a core package of popular broadcast and cable channels that will give phone companies' VDT networks a solid programming base to compete against cable. The controversial notion has been overtly embraced by Pacific Telesis Group, Sprint Corp., GTE Corp. and Nynex Corp., adopted after a fashion by BellSouth Corp. and endorsed in writing by SBC Communications Inc. Bell Atlantic Corp. lost a partner that would have filled the anchor role in Morris County, N.J., when cable MSO Sammons Communications Inc. backed out of a deal to shift cable programming onto a proposed VDT system. Robert Stewart, a PacTel spokesman in Washington, said, anchors give consumers a competitive service to cable and convenient way to deal with dozens of individual program suppliers to duplicate a basic cable package. Cable interests, including the National Cable Television Association, argue that the selection of an anchor programmer is an improper role for the phone company to play. Under VDT rules, telcos are limited to owning up to 5 percent of an individual programmer. Jeff Ward, vice president of federal policy at Nynex Corp., said the FCC appeared to reject "exclusive" anchor programmers but seemed open to other methods of managing analog channel space, including Ameritech Corp.'s channel-sharing plan, which would make sure various program providers had access to the same programming. Ward said Nynex, in its Section 214 permit applications for VDT networks in Massachusetts and Rhode Island, proposed a "third-party neutral administrator" that would oversee about 20 channels of a 70- channel analog tier. That third-party would assign channels to other programmers, he said. TCI GOES DEEPER INTO GAME BUSINESS Englewood, Colo. -- Tele-Communications Inc. and Acclaim Entertainment Inc. may be on the verge of determining how cable television delivers interactive video games in the future. In an $80 million-deal, TCI and Acclaim formed a new company last week that will develop and acquire interactive games for electronic delivery, as well as develop standards for a new network games platform that can be built into future set-top cable television boxes. John Malone, TCI president and CEO, called the deal moving "up the food chain" by developing new technologies that will allow interactive games to go from cartridge to electronic delivery. "We'll be supplying [game content] electronically through Sega Channel-type distribution, then evolve to 32- or 64-bit processors to enhance the experience," Malone said, adding he hopes to pluck $15/month from subscriber pockets for the Sega Channel service. Malone's vision is for an electronic game environment, where updated versions are sent to subscribers over cable's broadband platform each week, and where subscribers can compete against each other for prizes. "For example, on Sunday at 3 p.m., we may electronically download version 27 of Mortal Combat 2," Malone said. "Whoever plays it and wins first receives recognition and a prize. We think [that kind of scenario] electrifies the distribution system." Meanwhile, analysts said developing industry-accepted standards would give the new company control of the "mechanism" needed to deliver interactive video games to U.S. households. "It's absolutely critical," said Jim Trautman, cable analyst with Bortz & Co., a Denver-based industry consulting firm. "If you establish a standard, then in many ways you control the market place." LITTLE ON HORIZON FOR CALIF. SYSTEM Washington -- A small California cable operator facing bankruptcy in a matter of weeks has sent federal regulators an SOS: Save Our System. Horizon Cable TV, a mom-and-pop operator located in Marin County north of San Francisco, claims it needs to raise basic rates nearly 30 percent if it realistically wants to survive past Dec. 15. The trouble is, Horizon cannot legally do so unless it has permission from the Federal Communications Commission. Horizon's owners blame consecutive FCC rate freezes -- and to an extent their own naivete -- for triggering the financial plunge that now borders on a rout. Horizon is so broke it cannot afford to hire an accountant to organize the necessary records to make a cost-of-service filing at the FCC to justify a rate structure well above benchmark pricing. "We are in technical default of our loan covenants," said Susan Daniel, who owns and operates the 2,300-subscriber system with her husband Kevin. "If the FCC says no, we will be looking to sell the systems." Susan Daniel is worried, however, that potential buyers would know Horizon was a distress sale and use that as leverage to drive down the asking price. Both Daniels are in their early 30s and are raising three young children. They and members of their extended family risked personal assets to secure a $1.4 million bank loan to purchase the four-system company in 1991. The present loan balance is about $1.3 million. "It's been very stressful -- that's putting it mildly," Susan Daniel said in an interview. Last week, Horizon, through its attorney, filed for "hardship" relief at the FCC. It's believed to be the first such petition since the FCC enunciated new, looser guidelines for reviewing cases that find operators facing near-term financial collapse. An official in the Cable Services Bureau promised prompt, but not necessarily special, consideration of the Horizon petition. "In a situation like this, time is very important," said Susan Cosentino, an attorney for the FCC's Cable Services Bureau's policy and rules division. "It will be treated procedurally like any other petition filed with the commission." FCC officials and cable attorneys are at odds over whether the commission has adopted a new standard by which to judge hardship cases. The dispute involves Footnote 20 in the FCC's Sept. 26 order in which it pledged to review certain small operator concerns, including exemptions based on company revenue. "I doubt this Footnote 20 comes anywhere near becoming a 'standard,'" Cosentino said. "We can't rubber stamp [Horizon] ... They are asking for some substantial relief." FEDS TO PROD STATES TO OPEN LOCAL LOOP New York -- Cable companies asking state regulators to open up local phone competition may get more help from the federal government, according to the government's No. 2 man. Vice President Al Gore said last Monday at a media conference that the federal government may take a more active role in encouraging states to open up the local loop. With this year's failure by Congress to rewrite the Communications Act of 1934, attention shifts to the states, Gore said. He called the recent approval of local-phone competition by Time Warner Cable in Rochester, N.Y., "terrific" and added, "By acting now, states can demonstrate the inevitability of real competition for local telephone service." The vice president, on crutches and wearing a cast after rupturing his left Achilles tendon playing basketball, said there will be a "summit" of local, state and federal government officials early next year aimed at crafting a comprehensive strategy for local phone competition. Greg Simon, a Gore aide who also attended the Center for Communication forum in Manhattan, said the summit had been in the works long before S. 1822 died last month. Local regulators wanted the meeting to discuss their role in carrying out the new federal telecommunications policies, Simon said. Gore blamed regional Bell operating companies for derailing federal legislation this year. He said the administration will press again for legislation in the next Congress. He also urged the Federal Communications Commission to act on measures to open interstate phone markets and promote local number portability and network interconnections. ALT ACCESS INDUSTRY CAPPING OFF STRONG YEAR The alternate-access telephone industry is growing strongly, led by switched-services revenue, even as the cable industry's domination of the business has waned, a new survey shows. Companies from outside the cable industry are entering the alternate-access business but much of the new fiber in competitive phone networks is coming from cable operators, according to the survey by Connecticut Research of Hampton, N.H. Underscoring that growth, Teleport Communications Group, the biggest cable-owned company in the industry, said it is building new networks in five cities: Baltimore, Cleveland, Denver, Indianapolis and Providence, R.I. TCG, already in 20 markets, bought the Indianapolis network from City Signal. According to the survey, the alternate-access or competitive-access provider industry will grow to $650 million in revenue this year, up 80 percent from $350 million in 1993. Switched services -- using switches to connect calls from alternate-access customers to local exchange company networks -- will grow to $165 million in revenue this year from $30 million last year, a 410 percent rise. Only a few states allow competition for local exchange switched services, but competitors had installed 21 switches as of September and another 36 switches were in the process of being installed, Connecticut Research analyst Richard Tomlinson said. He predicted competitive-access providers, or CAPs, will account for $10 billion in revenue in 1999 and that $1.2 billion of that will come from switched services. As the industry grows, its ownership is becoming more diverse. A year ago, cable companies owned more than half of all alternate-access providers. Today, the cable industry owns about 21 percent of alternate-access firms, and a rising share is independently owned, Tomlinson said. Still, cable operators are leading the charge in building out CAP networks. Between July 1993 and this past July, network route miles more than doubled, to 11,693 from 5,190, with most of the growth coming from fiber deployment by cable operators, the report said. The dominant CAPs are still Teleport Communications Group, the Staten Island, N.Y., firm owned by four cable MSOs, and MFS Communications Co. Inc., the Oakbrook Terrace, Ill., firm mostly owned by construction firm Peter Kiewit Sons Inc. Teleport's owners are Tele-Communications Inc., Cox Enterprises Inc., Comcast Corp. and Continental Cablevision Inc. TCG and MFS each accounts for about 29 percent of access revenue in the industry, Tomlinson said. The next biggest CAP is IntelCom Group Inc., with a 7 percent market share. -=-=-=-=-=-=-=-=-=-=-=-=-=-=And Finally...-=-=-=-=-=-=-=-=-=-=-=-=- Should subscribers pay the cost protecting their operator from competition? That's what some Wisconsin customers of Marcus Cable faced in the MSO's cost-of-service petition on rates to the FCC. Franchise consultant Barry Orton discovered that when Marcus acquired systems from Star Cable in 1990, Star chairman Don Jones agreed not to come back into the markets and compete, a standard deal clause. The kick is that Marcus allocated a $14 million value to the agreement and writes off a piece of that cost over Jones' former systems. "Why should our subscribers pay for a non-compete clause?" said Union Grove, Wis., Mayor Edna Lowe. By including the non-compete costs, basic rates were boosted by more than 10 percent. A Marcus Cable exec replied its treatment was fine under the FCC rules in place last fall, and in any case, the MSO isn't contesting the point. As a couple of pesky reporters trailed Reed Hundt after a speech in New York last week, the FCC chairman accused another media trade pub of repeatedly distorting his views on children's TV programming as disregarding the First Amendment. Hundt jokingly suggested that magazines simply reprint the full text of his speeches so his position wouldn't be misrepresented. We countered that everyone would then notice that in several recent speeches Hundt keeps recycling the same Woody Allen line that the trick to planning the future "is to avoid the pitfalls, seize the opportunities and get home by six." Hundt then quiped that the FCC will strive to meet the first two goals, but has long given up getting home early. Undaunted, Hundt responded that "I'm going to keep using that until I get a laugh." ---------------------------------------------------------------------- HOW TO GET IT: The best way to obtain CABLE REGULATION DIGEST each week is subscribing to the TELECOMREG mailing list (listserver@relay.adp.wisc.edu, SUBSCRIBE TELECOMREG YOUR NAME). Available by finger with the command: FINGER higgins@dorsai.dorsai.org.Anonymous FTP and Gopher archives are now graciously made available at Vortex Technology. 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