From: John Higgins <[email protected]>
Subject: Cable Regulation Digest 10/24
Date: Sat, 22 Oct 1994 17:22:10 -0400 (edt)


 CABLE REGULATION DIGEST
 Summary of regulatory news from Multichannel News 10/24/1994. Vol.1, No.43
 Copyright 1994 Multichannel News. Reproduction/distribution is permitted
so long as this document is left fully intact. NO CHANGES are to be made
to this document without the written consent of Multichannel News.
Listserver, Gopher, FTP info attached at bottom.
 Refer questions to John Higgins ([email protected] or
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 Multichannel e-mail contacts:
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John M. Higgins, finance editor: [email protected]
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Leslie Ellis, technology editor: [email protected]

 HOT NEWS
* FCC's Telco Video Move Has Cable Howling
* MSOs Blamed For Cable Rule Delay
* Tiny Op Facing Ch. 11 From Rate Regs

 QUOTES OF THE WEEK
 "We had this thing wrapped up weeks ago," but cable "keeps coming
back" for further refinements.
     FCC chief of staff Blair Levin, on the delay in setting the next
     round of "going forward" rules for cable pricing.

 "We have had a consistent position since early this summer in response
to [Chairman Reed Hundt's] request for a consensus proposal and they
control the agenda,"
     National Cable Television Association spokesman Rich D'Amato.

 CABLE FURIOUS OVER FCC RULING ON VDT
 Washington -- Telephone company entry into cable picked up steam
last week as federal regulators adopted final rules for the rollout
of video dial tone and dismissed cable's arguments on cost allocation.
 In a unanimous vote, the Federal Communications Commission backed a
scheme  that would allow phone companies to compete against cable
operators without violating the federal ban on telco ownership of
cable systems in their regions.
 In finalizing its VDT rules, the FCC specifically rejected a request
by the cable industry to force telcos to allocate their costs before
being given the green light to build their networks.
 However, the FCC did agree with cable by rejecting the "anchor
programmer" concept in which a single video programmer would control
much of the network's capacity.
 While cable operators can own both their networks and their
programming offerings, VDT postulates telephone company ownership of
the network only, leaving unaffiliated interests to program the
channels.
 "This is an incredibly bad decision that flies in the face of all
logic and the record before the FCC, and we will appeal," said
National Cable Television Association president Decker Anstrom. "The
core question of who pays for this was not answered."
 Under the FCC's new rules, a telco may receive permission to build
its network before the FCC would require a review of its proposed
rates or "tariffs." The cable industry fears that the FCC will quickly
approve tariffs under pressure from telcos that have already sunk
billions of dollars into their networks.
 Under current FCC rules, a tariff can become effective within 45
days of its filing date.
 In a letter to FCC chairman Reed Hundt last Tuesday, the cable
industry and Rep. Edward Markey (D-Mass.), urged the FCC to adopt a
formula in which VDT costs would be allocated up front and fairly
spread between the video and voice portions of the network. Cable
fears the FCC will allow telcos to load their costs onto the voice
portion to keep video rates low and underprice their cable
competitors.
 Markey issued a statement suggesting the FCC's decision was flawed
because the agency has authority to promote competition to cable but
not to the local phone industry.
 "Significant questions on consumer protection and competitive
fairness remain unanswered because of the Commission's lack of
authority to advance competition in local telephone service," Markey
said.
 The cable industry has to devote considerable resources to monitor
each tariff filing -- a laborious process that could last for up to
nine months for each application if the process is extended to its
legal limit.
 Telco applauded the FCC's action but reserved final judgment as
details of the decision were contained in a six-page press releases.
The final order is expected to be made public within 30 days.
 FCC officials said the cable industry's concerns about cost
allocation were unfounded. They pledged to assure proper cost
allocation at the tariff stage -- not only to protect cable from
unfair competition but also to protect captive local phone ratepayers
from price gouging.
 Hundt said the FCC would not permit "predatorily low prices for the
transmission of video [dial tone]."
 That would be very wrong from the perspective of the telephone
company ratepayer and it would be very, very wrong from the
perspective of the cable companies, who are perfectly willing to face
competition but ought not to face unfair competition," he added.

 FCC AIDE CHIDES CABLE FOR DELAY
 Washington -- Federal Communications Commission chairman Reed
Hundt's chief of staff last week blamed the cable industry for
delaying action on going-forward rules.
 "We had this thing wrapped up weeks ago," said Blair Levin, Hundt's
top lieutenant, but cable "keeps coming back" for further refinements.
 FCC officials continued to put off going-forward rules despite
reports of agreement. Levin said a major sticking point was a la carte
issues.
 The cable industry, he said, is seeking a commitment from the FCC
that it doesn't have the authority to regulate a la carte packages.
Levin said the assertion was contrary to the 1992 Cable Act and
economically unjustified.
 National Cable Television Association spokesman Rich D'Amato
acknowledged that the industry and the FCC were in disagreement on a
la carte.
 "We believe there is a difference between the authority the FCC is
seeking and what we believe the statute authorizes," D'Amato said.
 The FCC is planning to allow cable operators to establish a non
price-regulated "new product tier." The FCC will allow existing
programming to migrate to the new tier so long as the programming
remains available on the regulated tier. The rules would allow
operators to add new programming to regulated tiers and migrate it to
the new tier within two years.
 Still at issue is the allowable markup on new programming added to
regulated tiers. The FCC is considering allowing between 20 cents and
25 cents per channel with a yearly overall increase capped at between
$1.25 and $1.50, including the program license fee.
 FCC sources said they wanted the FCC to decide the new product tier
issues at the same time it decides the programming incentives for
regulated tiers to ensure a balanced result. The cable industry has
been pressing for resolution of a la carte packages with going
forward-issues.

 BELL SURVEY: MANY WOULD DROP CABLE
 A Bell Atlantic Corp. survey of cable television subscribers in its
region found that 46 percent were very likely or extremely likely to
switch over to the telco's video service if it were comparably priced.
 Cable marketers scoffed at the survey of 500 Bell Atlantic
customers, done for internal use but released to the public because of
the results. "That's way higher than anything I've seen," said Char
Beales, chairman and COO of the Cable Television Administration and
Marketing Society. She said realistic estimates put the figure at
between 5 and 10 percent, and said recent polls show subscriber
dissatisfaction is dropping.
 If valid, the Bell Atlantic survey would indicate people are more
willing to try cable service from a phone company than to try phone
service from a cable operator. A survey of 1,010 adults released in
September by Opinion Research Corp. found 31 percent were willing to
test phone service offered by the local cable operator, if costs were
similar.
 The Bell Atlantic survey also found that 56 percent would switch if
the telco offered movies-on-demand; 61 percent would switch if the
telco offered cable programs plus movies-on-demand for 10 percent less
than cable service; and 30 percent of phone customers who don't
subscribe to cable would take the Bell Atlantic video service if it
included video- on-demand.

 FCC ANCHOR RULING RAISES QUESTIONS
 The anchor programmer concept is sunk -- or is it?
 Last Thursday, Federal Communications Commission staffers said
alternatively that they had rejected the idea and then backed off
saying such pitches would be considered on a case-by-case basis.
 The definition of an anchor -- an entity that controls "all or
substantially all" of a telco's video dial tone platform -- will
depend on a variety of conditions, including how many channels are
proposed in total, said Common Carrier spokeswoman Donna Lampert.
 Controlling half of a 500-channel system leaves more room for other
programmers than would controlling half of an 80-channel system, she
added.
 So are anchors dead or not?
 Officials at Pacific Telesis Group -- which bluntly named its anchor
supplier Anchor Pacific -- said afterward they were confident their
version of the concept would stand up to scrutiny.
 Yet cable representatives hailed the anchor-programmer aspect as the
only pleasing thing about the FCC order and were confident PacTel's
scheme was finished.
 James Ewalt, executive vice president of the Cable
Telecommunications Association in Washington, D.C., said in a
statement that the anchor programmer concept "would have made a
charade of the presumption that video dial tone will be a true common
carrier service."
 Anchor programmers are supposed to gather together a core package of
popular broadcast and cable channels that will give phone companies'
VDT networks a solid programming base to compete against cable.
 The controversial notion has been overtly embraced by Pacific
Telesis Group, Sprint Corp., GTE Corp. and Nynex Corp., adopted after
a fashion by BellSouth Corp. and endorsed in writing by SBC
Communications Inc. Bell Atlantic Corp. lost a partner that would have
filled the anchor role in Morris County, N.J., when cable MSO Sammons
Communications Inc. backed out of a deal to shift cable programming
onto a proposed VDT system.
 Robert Stewart, a PacTel spokesman in Washington, said, anchors give
consumers a competitive service to cable and convenient way to deal
with dozens of individual program suppliers to duplicate a basic cable
package.
 Cable interests, including the National Cable Television
Association, argue that the selection of an anchor programmer is an
improper role for the phone company to play. Under VDT rules, telcos
are limited to owning up to 5 percent of an individual programmer.
 Jeff Ward, vice president of federal policy at Nynex Corp., said the
FCC appeared to reject "exclusive" anchor programmers but seemed open
to other methods of managing analog channel space, including Ameritech
Corp.'s channel-sharing plan, which would make sure various program
providers had access to the same programming.
 Ward said Nynex, in its Section 214 permit applications for VDT
networks in Massachusetts and Rhode Island, proposed a "third-party
neutral administrator" that would oversee about 20 channels of a 70-
channel analog tier. That third-party would assign channels to other
programmers, he said.

 TCI GOES DEEPER INTO GAME BUSINESS
 Englewood, Colo. -- Tele-Communications Inc. and Acclaim
Entertainment Inc. may be on the verge of determining how cable
television delivers interactive video games in the future.
 In an $80 million-deal, TCI and Acclaim formed a new company last
week that will develop and acquire interactive games for electronic
delivery, as well as develop standards for a new network games
platform that can be built into future set-top cable television boxes.
 John Malone, TCI president and CEO, called the deal moving "up the
food chain" by developing new technologies that will allow interactive
games to go from cartridge to electronic delivery.
 "We'll be supplying [game content] electronically through Sega
Channel-type distribution, then evolve to 32- or 64-bit processors to
enhance the experience," Malone said, adding he hopes to pluck
$15/month from subscriber pockets for the Sega Channel service.
 Malone's vision is for an electronic game environment, where updated
versions are sent to subscribers over cable's broadband platform each
week, and where subscribers can compete against each other for prizes.
 "For example, on Sunday at 3 p.m., we may electronically download
version 27 of Mortal Combat 2," Malone said. "Whoever plays it and
wins first receives recognition and a prize. We think [that kind of
scenario] electrifies the distribution system."
 Meanwhile, analysts said developing industry-accepted standards
would give the new company control of the "mechanism" needed to
deliver interactive video games to U.S. households.
 "It's absolutely critical," said Jim Trautman, cable analyst with
Bortz & Co., a Denver-based industry consulting firm. "If you
establish a standard, then in many ways you control the market place."

 LITTLE ON HORIZON FOR CALIF. SYSTEM
 Washington -- A small California cable operator facing bankruptcy in
a matter of weeks has sent federal regulators an SOS: Save Our System.
 Horizon Cable TV, a mom-and-pop operator located in Marin County
north of San Francisco, claims it needs to raise basic rates nearly 30
percent if it realistically wants to survive past Dec. 15.
 The trouble is, Horizon cannot legally do so unless it has
permission from the Federal Communications Commission. Horizon's
owners blame consecutive FCC rate freezes -- and to an extent their
own naivete -- for triggering the financial plunge that now borders on
a rout.
 Horizon is so broke it cannot afford to hire an accountant to
organize the necessary records to make a cost-of-service filing at the
FCC to justify a rate structure well above benchmark pricing.
 "We are in technical default of our loan covenants," said Susan
Daniel, who owns and operates the 2,300-subscriber system with her
husband Kevin. "If the FCC says no, we will be looking to sell the
systems."
 Susan Daniel is worried, however, that potential buyers would know
Horizon was a distress sale and use that as leverage to drive down the
asking price.
 Both Daniels are in their early 30s and are raising three young
children. They and members of their extended family risked personal
assets to secure a $1.4 million bank loan to purchase the four-system
company in 1991. The present loan balance is about $1.3 million.
 "It's been very stressful -- that's putting it mildly," Susan Daniel
said in an interview.
 Last week, Horizon, through its attorney, filed for "hardship"
relief at the FCC. It's believed to be the first such petition since
the FCC enunciated new, looser guidelines for reviewing cases that
find operators facing near-term financial collapse.
 An official in the Cable Services Bureau promised prompt, but not
necessarily special, consideration of the Horizon petition.
 "In a situation like this, time is very important," said Susan
Cosentino, an attorney for the FCC's Cable Services Bureau's policy
and rules division. "It will be treated procedurally like any other
petition filed with the commission."
 FCC officials and cable attorneys are at odds over whether the
commission has adopted a new standard by which to judge hardship
cases. The dispute involves Footnote 20 in the FCC's Sept. 26 order in
which it pledged to review certain small operator concerns, including
exemptions based on company revenue.
 "I doubt this Footnote 20 comes anywhere near becoming a
'standard,'" Cosentino said. "We can't rubber stamp [Horizon] ... They
are asking for some substantial relief."

 FEDS TO PROD STATES TO OPEN LOCAL LOOP
 New York -- Cable companies asking state regulators to open up local
phone competition may get more help from the federal government,
according to the government's No. 2 man.
 Vice President Al Gore said last Monday at a media conference that
the federal government may take a more active role in encouraging
states to open up the local loop. With this year's failure by Congress
to rewrite the Communications Act of 1934, attention shifts to the
states, Gore said.
 He called the recent approval of local-phone competition by Time
Warner Cable in Rochester, N.Y., "terrific" and added, "By acting now,
states can demonstrate the inevitability of real competition for local
telephone service."
 The vice president, on crutches and wearing a cast after rupturing
his left Achilles tendon playing basketball, said there will be a
"summit" of local, state and federal government officials early next
year aimed at crafting a comprehensive strategy for local phone
competition.
 Greg Simon, a Gore aide who also attended the Center for
Communication forum in Manhattan, said the summit had been in the
works long before S. 1822 died last month. Local regulators wanted the
meeting to discuss their role in carrying out the new federal
telecommunications policies, Simon said.
 Gore blamed regional Bell operating companies for derailing federal
legislation this year. He said the administration will press again for
legislation in the next Congress. He also urged the Federal
Communications Commission to act on measures to open interstate phone
markets and promote local number portability and network
interconnections.

 ALT ACCESS INDUSTRY CAPPING OFF STRONG YEAR
 The alternate-access telephone industry is growing strongly, led by
switched-services revenue, even as the cable industry's domination of
the business has waned, a new survey shows.
 Companies from outside the cable industry are entering the
alternate-access business but much of the new fiber in competitive
phone networks is coming from cable operators, according to the survey
by Connecticut Research of Hampton, N.H.
 Underscoring that growth, Teleport Communications Group, the biggest
cable-owned company in the industry, said it is building new networks
in five cities: Baltimore, Cleveland, Denver, Indianapolis and
Providence, R.I. TCG, already in 20 markets, bought the Indianapolis
network from City Signal.
 According to the survey, the alternate-access or competitive-access
provider industry will grow to $650 million in revenue this year, up
80 percent from $350 million in 1993. Switched services -- using
switches to connect calls from alternate-access customers to local
exchange company networks -- will grow to $165 million in revenue this
year from $30 million last year, a 410 percent rise.
 Only a few states allow competition for local exchange switched
services, but competitors had installed 21 switches as of September
and another 36 switches were in the process of being installed,
Connecticut Research analyst Richard Tomlinson said.
 He predicted competitive-access providers, or CAPs, will account for
$10 billion in revenue in 1999 and that $1.2 billion of that will come
from switched services.
 As the industry grows, its ownership is becoming more diverse. A
year ago, cable companies owned more than half of all alternate-access
providers. Today, the cable industry owns about 21 percent of
alternate-access firms, and a rising share is independently owned,
Tomlinson said.
 Still, cable operators are leading the charge in building out CAP
networks. Between July 1993 and this past July, network route miles
more than doubled, to 11,693 from 5,190, with most of the growth
coming from fiber deployment by cable operators, the report said.
 The dominant CAPs are still Teleport Communications Group, the
Staten Island, N.Y., firm owned by four cable MSOs, and MFS
Communications Co. Inc., the Oakbrook Terrace, Ill., firm mostly owned
by construction firm Peter Kiewit Sons Inc. Teleport's owners are
Tele-Communications Inc., Cox Enterprises Inc., Comcast Corp. and
Continental Cablevision Inc.
 TCG and MFS each accounts for about 29 percent of access revenue in
the industry, Tomlinson said. The next biggest CAP is IntelCom Group
Inc., with a 7 percent market share.

-=-=-=-=-=-=-=-=-=-=-=-=-=-=And Finally...-=-=-=-=-=-=-=-=-=-=-=-=-

 Should subscribers pay the cost protecting their operator from
competition?  That's what some Wisconsin customers of Marcus Cable
faced in the MSO's cost-of-service petition on rates to the FCC.
Franchise consultant Barry Orton discovered that when Marcus acquired
systems from Star Cable in 1990, Star chairman Don Jones agreed not to
come back into the markets and compete, a standard deal clause. The
kick is that Marcus allocated a $14 million value to the agreement and
writes off a piece of that cost over Jones' former systems. "Why
should our subscribers pay for a non-compete clause?" said Union
Grove, Wis., Mayor Edna Lowe. By including the non-compete costs,
basic rates were boosted by more than 10 percent. A Marcus Cable exec
replied its treatment was fine under the FCC rules in place last fall,
and in any case, the MSO isn't contesting the point.

 As a couple of pesky reporters trailed Reed Hundt after a speech in
New York last week, the FCC chairman accused another media trade pub
of repeatedly distorting his views on children's TV programming as
disregarding the First Amendment. Hundt jokingly suggested that
magazines simply reprint the full text of his speeches so his position
wouldn't be misrepresented. We countered that everyone would then
notice that in several recent speeches Hundt keeps recycling the same
Woody Allen line that the trick to planning the future "is to avoid
the pitfalls, seize the opportunities and get home by six." Hundt then
quiped that the FCC will strive to meet the first two goals, but has
long given up getting home early. Undaunted, Hundt responded that "I'm
going to keep using that until I get a laugh."

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