Friday, March 10, 2006

What National Franchise Agreements are Really About

A recent flurry of news in the specialized venues that worry about telecom and internet issues has focused on an agreement on unspecified "principles" (I use the word loosely) between legislative leaders in the federal house of representatives that would give the phone companies what they want in a national cable franchising bill. That issue had been mired in a general rewrite of telecom law but the phone companies--especially Verizon and our overlord-in-waiting, ATT--indicated their deepest desires by demanding that a National Franchise bill be split out of the package.

On the announcement that the leaders had reached an agreement to push a national cable franchising bill through the phone companies immediately stood up and cheered.

The cable companies shot back; complaining in appalled terms that the still-vague "principles" amounted to a bill that legislated competitive advantages specifically for the phone companies and expressing astonishment that anyone would think that the phone companies--where individual companies are larger than the entire cable industry--need any special help from congress to compete.

If that sounds oddly familiar let me draw the connection explicitly: the cable companies are endorsing the principle that phone company legislation that imposes competitive disadvantages on the little guys is a bad thing (when they are the little guys). Does anyone wonder if the people over at Cox have the least little frisson of unease over the phone company bill they backed in Louisiana that imposed competitive disadvantages on Lafayette while they complain about phone company tactics? Somehow I doubt that the complaints Cox executives mutter at cocktail parties around the region reflect any consciousness of the implicit hypocrisy.

All that aside, the raw battle emerging between cable and phone companies on this issue is revealing what the phone companies really want. The phone companies have been stringing a bunch of ideological rhetoric over the scene, dressing up their debate in red, white, and blue bunting that tries to cast the whole thing in terms of bringing "competition" to the provision of video services. The Bell companies want us to believe that they are noble advocates of consumers and patriotically want to help bring down consumer costs.

But the phone companies pro-consumer rhetoric ends precisely where they begin to make explicit suggestions about just what legislation they actually favor.

It turns out that what they'd really like to do is to get Federal legislation that would prohibit a price war between cable companies and phone companies until the phone companies decide it would be comfortable for them to compete. (Maybe never? Maybe.)

Here's a synopsis of how the Bell's suggested laws would work: phone companies wouldn't ever have to supply the entire community with new, advanced service. (Local community franchises almost universally require universal service and that is the real reason the phone companies want a national franchise; eliminating the universal service requirement has been a part of every bill suggested). The latest "principles" apparently suggest that cable companies would continue to be bound by local franchises requiring universal service and uniform pricing until a phone company competitor had 15% of the market.

So phone companies could build only in the wealthiest 15% of a community where profit margins are highest and be confident that they could both undercut their cable competitors' profits by whatever amount was necessary to insure dominance in that 15% and still make a nice fat profit. They could drive their competitors into the least profitable segments of the overall market while they dominate the most profitable parts with no obligation to ever match their cable competitors current level of service to the least profitable areas of the community. Isn't that sweet? Aren't the phone companies obviously trying to be pro-competitive friends of the majority of consumers?

Here's a local example of how that might work. Let's guess that the wealthy, densely populated River Ranch "new town" development in Lafayette is the area in which profit margins are highest in Lafayette. BellSouth could build out their new fiber ONLY in River Ranch, compete ONLY there and drop prices dramatically while still making a healthy profit. Let's say that was a 30% break. Cox, because it also finds that a high-profit zone could probably match that in River Ranch. But Cox would be obligated by its current contract with the city-parish to make any deals offered the favored few in River Ranch to the whole community including areas in which they were previously making much less than a 30% margin because of the city's requirement that almost all areas be served. So to compete for River Ranch's 2% of the population they'd have to lose money system-wide. They couldn't, rationally, do that--at least not for long. So River Ranch is conceded and 80% of the people there switch to BellSouth. In short order BellSouth decides that it is ready to tackle the next 2% of the profitable population and 4% of the people get good deals. This creeps up to 14% of the population which, conceivably, accounts for 40% of the profit margin available in Lafayette. BellSouth puts its expansion in idle, slowly ratcheting up its prices in the rich regions until its profit begins to fall a little. Cox struggles trying to provide both advanced services attractive to high-margin customers and to eke out some sort of profit in the areas that were always problematic while BellSouth fattens up for a final push behind its wall; federally protected from any effective competition.

That is clearly BellSouth's and the phone industry's business plan. It is utterly rapacious, anti-competitive, and anti-consumer. It depends completely on the Federal Government stepping in to make it work by removing the rights of cities and towns to make contracts with the cable and phone corporations that require equitable service and equitable prices in exchange for the use of citizen-owned rights of way.

Here's the way the cable companies talk about it.
Another provision McSlarrow disliked involved the inability of cable companies to price their products in response to competition. He said that if a phone company is offering discounts to homes in one section of a franchise, the cable company couldn't offer the same deal to those customers alone. It would have to make the offer available to all of its subscribers in the market under a process called uniform pricing.
Does that sound at all like the phone companies bill will foster competition, or bring the benefits of advanced broadband to all, or is intended to provide the average consumer with any real break? It doesn't, it won't, and it isn't.

It's hard for me to believe that our federal representatives really believe all this BS. I'm pretty much out of patience with the cavalier way they carry out their duties on any even vaguely economic issue. You get the definite impression from watching our congress that they think that doing as large corporate powers like BellSouth, ATT, and Verizon ask is a natural and obviously part of their task as legislators. That flat out isn't true. What should be natural and obvious is that our representatives are in Congress to promote the best interests of citizens, not corporations. There are clearly times when these interests are in conflict and when they are members of Congress are morally obliged to represent their constituents, not their contributors.

This whole business of the feds stepping in to prevent local governments from exercising their property rights by making perfectly reasonable contracts with corporations that require them to serve the whole community and to serve them all with the same product for the same price is a clear example of our representatives deciding to side with the corporate interests over community or citizen interests.

It'd be a good idea to tell them you think so...It isn't clear they've got the message.

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