Monday, May 08, 2006

"Bill may let Bell offer TV services"

John Hill, Gannett political writer, runs a story on the front page of the Advertiser this morning that paints the upcoming set of bills being introduced by Montgomery in the Louisiana House and Ellington in the Senate as a three-cornered debate between BellSouth, the cable companies, and local governments.

Here's how he characterizes the situation:

South Central Bell wants to offer on-demand digital television services statewide without having to negotiate individual franchise agreements with governments.

Louisiana's cable television operators - the big ones are Cox and Time-Warner - are fighting a bill that would allow South Central Bell that freedom...

Now, aside from the fact that BellSouth hasn't been known as South Central Bell in decades, that intro sets the conflict up as a classic battle between huge corporations. The story goes on to endorse the claim that the fundamental issue is competition: whether BellSouth will be allowed to facilitate its competition with Cox, Time Warner and others by gaining the right to an easy, fast state-wide franchise. Based on that framing the story goes on to give brief position statements by each of the two corporations and a final bit by local government officials concerned about the loss of their authority.

Trouble is, as someone who has been reporting on the legislature for long enough to recall the time that the dominant political player in the state legislature was called "South Central Bell" instead of BellSouth ought to recognize, that's not the most accurate way to frame the story. The story needs to start from the presumption that BellSouth is playing for advantage on its best field: the legislature.

Here's what needs to be the starting points for analysis:
1)There is absolutely nothing stopping BellSouth/AT&T from competing with the cable companies right now.
2) BellSouth has more influence in the state legislature than any other corporation.
3) BellSouth, aka South Central Bell, has always used the state legislature and the Public Service Commission to enhance its profit margin. (The most notable recent example being the now infamous anti-Lafayette law, the "Local Government Fair Competition Act.")

Once you understand that background clearly the real question must be: "What advantage does BellSouth seek to gain over its adversaries by using the legislature?"

The answer lies in an obscure but vitally important issue to local communities: "build out requirements." That's the pivot point upon which the entire story turns. BellSouth wants to eliminate the local franchise because local governments would require them (as they currently require cable companies) to "build out" service to the entire community as part of the lease they sign to rent the public rights-of-way which they must have to string their wires.

BellSouth would much rather build out to only the most wealthy and profitable areas of each town. That would offer them a huge competitive advantage over their cable competition. Any retailer understands the difference between high-margin and low-margin products. Right now the cable companies have to service areas that make lots of profit (and we do mean lots) and areas which are much less profitable. People who take only basic cable aren't very profitable. People who take tons of extra channels, all the premium channels, hit pay-per-view regularly, and might even sign up for the new Voice Over Internet Protocol phone services are hugely profitable.

BellSouth only wants to serve those profitable ones. The prefer the new, wealthy, densely packed, areas. In Lafayette, for instance, think: River Ranch. They'd like to offer those folks the more profitable, advanced service. They are much less eager to offer the older, poorer neighborhoods off Willow street on the north side the same level of service. If they succeed in the state legislature any price drop they offer to win customers away from cable will effect only the wealthy areas they serve. The cable companies, bound by current contracts to serve all equally, will have to cut prices to everyone in order to match the prices that BellSouth is offering in only a small fraction of the community. This is what BellSouth calls "competition," and, yes; they love that sort of competition.

In order to get to that sweet spot they'll have to take local governments out of the equation. That's where going to the state legislature for "relief" comes in. Local politics will make it impossible for the mayors and councilmen to accept a contract for an outside corporation to rent the community's property without requiring that all of that community's people be served. Issues of class and race, and the resentments associated with that history make it impossible for any city to allow a new, more advanced and cheaper service to offered to only the most privileged parts of the community. That raw political fact is not going to change and BellSouth/AT&T recognizes that.

Bellsouth's ruthless solution is to have the state step in and limit the contracts local governments can make with telecommunications companies (and only telecommunications companies) to outlaw build-out requirements. Frankly, this amounts to a substantial "taking" of the property rights of the local owners.

So that's what you need to understand as you read John Hill's reporting. The real battle is between BellSouth and local communities. The cable companies are the ultimate target but it is Louisiana cities and towns that must be run over to get to the point where it is possible to disadvantage the cable companies. Reading Hill's article with this framing in mind the reshapes the story into a very interesting set of details about the strategic positions and the way the participants want to frame the nature of the battle. Well worth your read.

Here's a little extra spice for the story. The players have a real history and you can figure out who is acting on whose behalf by who they've supported in the past. Montgomery and Ellington have carried water for BellSouth many times, a fact that is widely understood in the halls of the legislature. Ellington, for instance, gutted a rural broadband bill he had sponsored and substituted the BellSouth attack on Lafayette that eventually emerged from the sausage grinder as the Local Government Fair Competition Act. If you see Ellington's name on a bill you should think "Phone Company." The back and forth of amendments offered and rejected often tells a clearer story of what the bill is really about than the text of the bill itself. For instance, representatives of local governments offered an amendment that would have guaranteed BellSouth a franchise in 90 days from any municipality where they wanted to compete with cable. BellSouth rejected it. Trouble was, it achieved that end by the simple expedient of offering BellSouth a truly level playing field: BellSouth would have simply agreed to the same contract already negotiated by the cable companies locally. (They could have chosen to negotiate their own, separate agreement.) What could be fairer competition? By rejecting that solution out of hand BS was making it clear that ease, a level playing field, and the rapidity of achieving the go-ahead to compete were not really their most important issues, no matter how they played their rhetoric to the public. BellSouth, for its part, offered the cable companies an amendment which would allow them to invalidate their current franchise contracts with cities. Supposedly this would level the playing field an allow the cable companies to join BellSouth in abandoning marginally profitable areas. Cable was tempted but its legal eagles apparently let them know that an amendment that was so blatantly unconstitutional would be severed from the law and struck down. (Clever BS lawyers!) Speaking of clever BS lawyers, the intricate language of the bill makes it possible for BellSouth to get out of both build out requirements and avoid paying any franchise fees to local governments by differently defining who can get a certificate that exempts them from build out requirements and who has to pay fees for offering cable services. It's a huge bait and switch. (This deserves a post of its own. More later.)

Eyes on the prize folks: the issue is build out requirements and the law takes aim at the local control of local property that makes build out requirements a political necessity.


Anonymous said...

I know you are tired of hearing this, but I think if government builds the infrastructure and then opens it up to all competitors to use that infrastructure to provide services to the consumer, this whole agruement goes away. Bell, Cable companies, anyone, could use the public infrasturcture (in this case fiber) to deliver services to the consumer. Same as the streets and roads.

John said...

Right you are...I'm tired of hearing that. :-) I'm sure you're tired of hearing my stock response as well: As soon as the competition decides to similar tie its hands behind its back.

But there is another point we've not beaten to death: The idea that Bell, Cox are any of these guys would contribute a penny to a municipally-owned network is a fantasy without any grounding in history. They are confirmed monopolists. They don't want to take part of the profit and compete against a plethora of similarly-enabled businesses. They want to own and control the network and everything that runs over it.

This is exactly what the Net Neutrality issue is about at the national level curently. It is what the franchise bill is about right now.

Most cogently, it is all that the Local Government Fair Competion Act was about. There was no excemption proposed for the sort of structurally separated system you suggest. It is all about killing competition (not only direct muni retail competition) and, failing that, making it as hard as possible to run.

There are certain realities that simply need to be understood if we are really going to do what's best for our community. BellSouth and Cox would fight us on this idea as well for the same reason that they fought LUS: they don't want the competition.

All we can do is decide whether we want to knuckle under or fight.