Telcos Facing Video Obstacle

Jun 6, 2005  •  Post A Comment

For the telephone companies, the road to video just got a lot steeper.

The failure late last month by the Texas Legislature to pass a bill that would have cleared a path for SBC Communications and Verizon Communications to offer video services without having to obtain OKs at the municipal level is likely to throw cold water on the hopes of both companies to roll out TV services as quickly as possible, analysts said last week.

It also adds to what a growing number of analysts already are calling an uphill climb facing telcos looking to get into the video-delivery business against a cable industry fiercely committed to protecting its place as the dominant provider of pay-TV services. Aside from the cable operators protecting their turf, the telcos already face a number of challenges, including the huge capital outlay involved in upgrading networks in order to handle video content, obtaining programming at favorable rates and, perhaps most important, execution.

“It’s bad news for SBC and Verizon, [which] will now face lengthy delays in realizing any video revenues from their fiber deployments, even while the capital expenditures associated with fiber deployment continue apace,” said Craig Moffett, a cable analyst at Bernstein Research.

The bill ‘s failure in the legislature would seem only to impact the state of Texas.

However, some observers pointed out that several states are examining the issue of whether to, in effect, grant statewide approvals-also known as franchises-to the telcos, and many were looking to Texas to serve as an example by which other states would follow.

Texas is the home state to SBC, whose presence looms large at the state capital in Austin. The company reportedly has one lobbyist for every two state legislators, and with Verizon, spent $7.8 billion pushing the statewide franchise agenda. Those factors, along with the state’s history of being supportive of telco-led initiatives, made Texas perhaps the most hospitable state with which to tweak the franchising rules in favor of the telcos.

However, lawmakers in Texas failed to move on a bill before the legislative session ended over the Memorial Day weekend, delayed by what one Texas legislator blamed on the cable lobby’s ability to convince municipalities they’d lose big if they lost the ability to issue franchises to phone companies.

“Texas was an important litmus test for the statewide franchising issue, not least because of its long RBOC-friendly [Regional Bell Operating Companies] regulatory climate,” Mr. Moffett said. “Other states are likely to be less hospitable.”

The next battleground state is New Jersey, where legislation is expected to be introduced later this year. Texas legislators won’t be able to take up the issue again until 2007, when the state legislature, now adjourned, goes back in session.

Central to the issue is whether the telcos will have to obtain franchises-at either the state or local level-in order to offer television programming over fiber-optic telephone lines. Cable operators for decades have been required to seek approval from local municipalities to offer TV content to residents, but the telcos have pushed to get clearance at the state level, which would enable them to roll out their TV services at a faster pace.

SBC has long argued that because its video service is based on Internet protocol technology it should not be subject to traditional franchise rules. However, many experts see that argument as a nonstarter among federal and state regulators.

Verizon Lobbying

Verizon, for its part, has lobbied across the country for laws that require statewide franchises, but also allow local municipalities to continue collecting franchise fees of 4 percent to 5 percent of revenues generated in that jurisdiction and mandate that a telco carry local access channels. Analysts and observers see this proposal as potentially gaining traction, though such measures have had difficult getting off the ground in states such as Massachusetts and Virginia.

In an apparent nod to the long odds of obtaining statewide franchise rules, Verizon is hedging its bets by getting local franchises in municipalities where it plans to introduce video services. But that move has proved time-consuming for the company, several people pointed out. It took the company around six months to obtain the six franchise licenses it presently has, and, as an executive at another telco quipped, “It could take them 200 years to get franchises across the country.”

Getting federal regulations modified could be a challenge as well, with some analysts saying it isn’t likely that Congress will consider examining telecommunications laws before 2007.

From the perspective of cable, the Texas legislature’s inaction was a big win.

“This marks a significant victory for cable operators, as they reportedly spent $1 million lobbying compared to the $7.8 million reportedly spent by SBC and Verizon,” said Merrill Lynch analyst Jessica Reif Cohen. “It appears that a combination of political advertising on cable channels and an alliance with the cities, which stood to lose significant franchise fee revenue and regulatory authority, overcame this spending gap.”