A new view for cable TV
Virginia law attempts to accelerate competition among video service providers

by Lorrie Long
for Virginia Business
July 2006

For 18 months, Vienna Councilman Mike Polychrones was knee-deep in negotiations with Verizon Virginia. The town and the telephone company were trying to hammer out a franchise agreement that would allow Verizon to offer its cable TV and broadband services. “The big sticking point was the town’s requirement for all providers to [bury] cable in commercial areas,” says Polychrones. “We have streetscape and maintenance considerations. I’m going to do what I need to do to protect the town. Verizon wanted to charge exorbitant fees [for putting cable underground].”

Then came passage of Virginia’s Cable Competition Speed of Entry Act, which took effect the first of this month. The law says new video service providers still must negotiate franchise agreements with cities, towns and counties. But if talks bog down, the law permits a new competitor to proceed with its plans to offer service under an alternative legal arrangement, called an ordinance franchise. (See an explanation of the new law on page 32.) Polychrones’ negotiations with Verizon now have stalled while the town establishes the terms of its ordinance franchise. “It doesn’t allow for much negotiation or give and take on either side,” says Polychrones, who believes that the new law has removed the town’s bargaining power with Verizon.

The law is part of a growing trend to streamline the process for introducing more competition to cable TV. Texas was the first state to pass a law accelerating cable TV franchising, and other states are contemplating a similar legislation. But the federal government may pre-empt the trend. Congress is considering creating national cable TV franchises, bumping the entire process up from the local to the national level.

But Andrew Cohill, president and CEO of Design Nine Inc., a telecommunications consulting firm based in Blacksburg, warns against taking franchising decisions out of local hands. “Local franchising agreements compensate communities for the use of local rights-of-way” for laying fiber optic and coaxial cable, says Cohill, former director of the Blacksburg Electronic Village project. “It’s the government’s natural role to manage these scarce resources for the good of the community.”

Cohill fears that, with national franchising, bigger companies may be able to install their cables before anyone else, possibly locking out competition. “Negotiating local franchise agreements may be cumbersome; however, it’s also an important way to maintain control of rights-of-way,” he says.

Telephone companies, however, favor national franchising as a rational way to invest in video services. While the new Virginia law preserves local franchising authority, Harry Mitchell, mid-Atlantic director of media relations for Verizon, says it will encourage new TV providers to enter local markets, creating competition that will lead to lower prices.

The law prompted Richmond-based Cavalier Telephone to accelerate plans to introduce a “triple play” bundle of services. The offering includes high-speed Internet access, local telephone service and broadband television. With the video component, “we have a new universe of 250,000 consumers in Richmond,” says Andy Lobred, who is Cavalier’s vice president of product management and marketing. He says that the total average cost for individual services within the bundle is about $146 a month in the Richmond area. “Our [bundled] service will cost $96 per month,” he says.

(Before Cavalier’s announcement in May, Comcast Corp. had begun offering a bundled package with Internet, telephone and TV service for $99 to new customers in the mid-Atlantic region. Existing customers are allowed to add services they did not have for $33 a month each if they become subscribers to all three services.)

Virginia’s new law supports the continuing evolution of telecommunications, says Earl Bishop, executive vice president of the Virginia Telecommunications Industry Association. Telephone, television and Internet services are converging. “Telephone companies are negotiating cable franchises, cable providers are launching wireless offerings, and wireless companies are rolling out third-generation mobile video applications,” he says.

But cable television companies point out that they have spent decades and millions of dollars establishing their current franchises. The new law reflects their concern that new competitors aren’t given any unfair advantages. For example, the law requires new competitors to provide services to a predefined percentage of the local market, known as “buildout,” just like existing cable TV providers. This provision prevents newcomers from selecting only lucrative local market segments while ignoring less attractive areas. “In addition,” says Ray LaMura, president of the Virginia Cable Telecommunications Association, “the law requires local governments to offer any terms offered to new entrants to the existing provider, as well.”

Still, some cable TV providers are on guard. “Comcast will monitor how the new legislation is applied to ensure that a level playing field exists for all businesses offering video products in the Commonwealth of Virginia,” says company spokesman Jim Gordon.

Adding more large franchisees in local cable TV markets may moderate prices for a while, says Cohill, the Blacksburg telecommunications consultant, but he believes many markets will eventually evolve into a “duopoly” with two large firms selling similar services in a particular location, with little price competition. Instead of letting big companies lay cable in their rights of way, Cohill advises communities to build their own “digital roads” and offer capacity to small telecommunications startups.

That strategy, he believes, will create more choice and pressure on prices.
But cable TV and telephone companies say such concerns are exaggerated. Cavalier’s Lobred believes rival video providers will compete on programming as well as price. “We’re trying to come up with offers that separate us beyond just price point,” he says.