Wednesday, January 18, 2012

LUS Fiber to join cable coop! Tentatively.

The Advocate tops its Acadiana section today with the news that LUS Fiber has been cleared to join the NCTC. This is a big deal. LUS' exclusion has been estimated to raise the purchase price of its cable programming 20%—easily the largest ongoing cost of providing LUS' cable services.

Details are exceedingly sketchy at this point. Reading between the lines it looks as though reporter Richard Burgess has actually dug into the bond details from the recently approved completion of the bonding authority approved by the voters in the fiber referendum. From the story:

A tentative agreement allows LUS Fiber to join the cooperative and to reap potential savings, according to a recent financial forecast that accompanied a bond offering by the city-owned service.
Just what 'tentative' means is unclear. Presumably that means that, while an agreement has been reached in principle, it has not been finalized. Hence the lack of an announcement from LUS and the reticence of Huval to discuss any details in response to Burgess' queries. (An aside: reporter Burgess has stayed on top of this story for years, since the beginning, and this sort of close following of a very significant but complex and unglamorous story that can only be pursued by teasing out the details in obscure places reminds us of what real reporting is all about: knowing enough to find the stories that need telling. Thanks Richard...)

While there may be an agreement in principle, the big issue has always been one of principles...or lack thereof.

Principles and History
The National Cable Television Cooperative is the largest of the national cable content buying cooperatives. It was enabled by the Cable Act of 1992 which was designed to foster competition by allowing smaller, local cable businesses to band together in a buying coop whose joint purchasing power could equal the buying power of the growing national corporations like Comcast and Cox. So it was odd when Cox and Charter communications were granted membership and Cox was granted membership on the board of directors. The coop exists to restrain the power of corporations of that size; to have them as members and directors is decidedly odd and certainly at odds with the history of the organization. If you are used to thinking of coops as minor players in markets please disabuse yourself of the idea: the NCTC has the second largest pool of potential subscribers in the nation. Only the largest private company, Comcast, has more. For a little history of the conflict here is how I described the relevant history awhile back:

  ..... LUS and two other cities with new FTTH networks who have submitted applications for membership after years of being ignored and then enduring a "moratorium" on new members started proceedings at the FCC asking the FCC to exercise its obligation under the Communications Act to block anticompetitive practices. The FCC requires that complaints be preceded by filings of intent at the FCC and fully informing the interested parties. LUS and its sister cities did so. (This is not fairly characterized as a "threat.") The FCC's hope in requiring this is pretty clearly that the two parties will get together and work it out without burdening their docket with the case. Indeed, the two other cities were admitted...and only Lafayette was refused. Why? Well the NCTC simply hasn't said. But the fact.... is that Cox Communications is the largest member (this is recent—they joined after the successful referendum battle in Lafayette and the "moratorium") and has a seat on the board of directors. The two other cities don't compete against Cox or any other NCTC member. (This is not established policy, other places have more than one competitor in the NCTC.) If the point of the NCTC refusing only LUS membership is to stifle competition on behalf its most powerful member—well...on the face of it that would make their action anti-competitive and the FCC would be obligated to act.

It is very difficult to draw any conclusion other than Cox having a malign influence on the NCTC...the two other cities whose competitors did not have a position on the board were let in, there are many examples of competing cable companies having membership, and LUS' technology is almost identical to Chattanooga's. The only difference is LUS' competitor.

This is clearly good news. Most obviously LUS will, as time marches on, come to enjoy a level playing field against Cox in regard to the prices and terms it can get on cable content and hardware. That differential, as much as 20%, is huge and that alone is immensely important. But there are further important advantages.

Once the NCTC question is settled it will end a large chunk of uncertainty and uncertainty is the enemy of wise decision-making. As long as LUS doesn't know what its future costs are likely to be it has to play the game as if the worst case were has to act as if it will for the indefinite future be at a radical disadvantage to its chief competitor on one of its largest and most rapidly escalating expenses. If it was to keep its pledge of keeping its prices below Cox's it would simply have to exist on a razor-thin margin or even subsidize cable through its other services. That would be especially galling since cheap cable service was never the point of building an next-generation network for Lafayette; revenues from conventional cable services were intended to support the network not the other way around.

There are also more subtle advantages to LUS joining the NCTC. The NCTC also has buying power in the set top box market and Motorola and other set top box makers would surely write relatively favorable contracts if the total buy was potentially much larger than one justified by the size of Lafayette. All those contracts, both for content and for ancillary hardware will not only be less costly they will also, crucially for smaller operations like ours, no longer demand the time, attention, and expertise of specialized individuals whom LUS must either hire or contract. Not only is the price of these contracts are likely to change; the stipulations included in them will likely change as well. As things currently stand LUS is not only a small customer, it is a decidedly odd one. And being odd has consequences; usually unpleasant ones. Aside from being oddly municipal LUS is also oddly configured. It's IP-based FTTH technology is rare in the world of cable and the content providers are notoriously nervous about the internet, piracy, and the supposed insecurity of the IP (Internet Protocol) standards on which the net is based. (Witness the industry's proposed laws behind today's SOPA-inspired blackout.) The result of Lafayette's utility being both odd and small is that it has little power to resist contractual constraints that would severely limit some of the more innovative things that an all-IP network would find relatively easy to create. So nervous content providers slather on codicils to their standard contracts that protect against every imagined danger—and make many innovative ideas contractually impermissible for some subset of the channels LUS feels it must offer to be competitive. (For example, an on-network DVR system is an idea that could suffer from excessively paranoid contracts. Slinging content to multiple screens from LUS' end to end IP-based network would be much easier to implement than over the more traditional cable technologies.) Moving to a simple, standard contract without special riders from the NCTC could open up many possibilities for a network as sophisticated technically as Lafayette's

It is a good thing that appears to be happening. Let's hope it goes through without further delay. 

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