Does video delivered over a telephone network require a cable franchise?

• Author: Crandall, Robert W.

1. INTRODUCTION II. THE DEVELOPMENT OF CABLE SERVICES A. The Retransmission of Distant Broadcast Signals B. Local Franchising of Cable Systems C. The Emergence of Rival Programming Distributors and Vertical Integration into Programming by Cable Operators D. Consolidation of Cable Operators at both the National and Local Levels III. THE DEVELOPMENT OF NON-CABLE SERVICES A. The Development of Cable Modem Service B. The Development of Cable Telephony and the Subsequent Movement toward Voice over Internet Protocol C. FCC and Court Rulings that Cable Modem Service and Cable Telephony are Not Cable Services IV. THE REGULATORY HISTORY OF CABLE SERVICE A. The Cable Communications Policy Act of 1984 1. The Act as Protective Legislation for Incumbent Cable Operators 2. The Act's Definition of Cable Service as One-Way Programming Comparable to Broadcast Television B. The Cable Television Consumer Protection and Competition Act of 1992 1. The Attempt to Protect Consumers by Re-regulating Cable Television Rates and Ensuring Access of Affiliated Programming to Rival Programming Distributors 2. The Absence of Any Change in the Definition of Cable Services C. The Telecommunications Act of 1996 1. The Decision to Enhance Competition in Video Programming by Removing Barriers to Entry 2. Expansion of the Definition of Cable Service, But Not in a Manner that Changed the Fundamental Understanding of It as a One-Way Service V. CASE STUDY: IP-ENABLED VIDEO SERVICE A. IP-Enabled Video Service over a Telephone Network as an Interstate Service B. IP-Enabled Video Service over a Telephone Network as an Interactive Service that is Controlled by the User C. Other Critical Differences between IP-Enabled Video Service over a Telephone Network and Cable Service VI. ON PUBLIC POLICY GROUNDS, SHOULD VIDEO SERVICE PROVIDED OVER A TELEPHONE NETWORK BE TREATED AS CABLE SERVICE? A. The Consumer Welfare Gains from Price Reductions by Cable Operators in Response to Entry of Video over Telephone Networks B. The Excess Burden on Taxpayers from Imposition of Franchise Fees on Video Services Provided over Telephone Networks C. The Absence of Economic Justification for the Imposition of Additional Fees for a Telephone Company's Use of Rights-of-Way D. The Consumer-Welfare Justification for a Uniform National Approach to Video Franchising E. Public Policy Arguments of Cable Operators VII. CONCLUSION I. INTRODUCTION

   Beginning around 2004, certain local telephone companies--most notably, AT&T (the former SBC) and Verizon--began to upgrade their local fiber networks to provide a bundle of services consisting of voice over Internet protocol ("VoIP"), digital video, and high-speed Internet access. Once the fiber upgrade is completed, a local telephone company will have the capability to offer multiple high-quality television streams that include high-definition television video ("HDTV") programming and video-on-demand for each household. These upgraded telephone networks will provide a third pipeline for the delivery of multi-channel video programming services to compete against cable television operators and direct broadcast satellites ("DBS"), and will provide a comprehensive service package in competition with cable's bundle of voice, video, and data services. In September 2005, the investment firm Sanford C. Bernstein & Co. predicted that by 2010 nearly forty percent of U.S. households will be able to get video service from their local telephone companies. (1)

   Verizon has named its new fiber network "FIOS." Verizon plans to invest $20 billion to lay thousands of miles of fiber-optic cables across its service area from Maine to Florida and into parts of Texas and California. (2) As of the end of October 2005, Verizon had initiated negotiations with roughly 300 municipalities, but it had secured only fourteen franchise agreements (a 4.6% initial success rate) for video service. (3) Verizon's low success rate has been attributed to "regulatory holdup"--that is, unrealistic demands made by municipalities in return for franchise approval. (4) According to Morgan Stanley, the local franchise requirements in thousands of communities will delay telephone entry into video services by nine to eighteen months. (5) Not only are municipalities seeking to impose onerous requirements on telephone companies, but some are competing directly with local telephone companies for broadband customers by launching citywide wireless fidelity ("Wi-Fi") networks. (6) These municipalities (which include Philadelphia, Madison, Minneapolis, Tempe, and Sacramento) (7) have a pronounced incentive to raise the entry cost of rival providers of broadband service. (8) Indeed, the mere threat that the municipality might build a broadband network could be sufficient to extract additional payments from local telephone companies.

   Verizon's FIOS project started in the Dallas/Fort Worth suburb of Keller, where the company offered video service to residents in September 2005. (9) Verizon planned to introduce its video service by the end of 2005 in other parts of the country, including Fairfax County, Virginia; the New York City suburb of Massapequa Park; a community outside of Tampa, Florida; and several communities in California. (10) Verizon was charging $36.90 per month for 140 channels of digital service, and $43.90 for 185 channels of digital service, including the $3.95 rental charge for a set-top box. (11) Telecommunications consultant Kagan Research estimates that the comparable (digital) package from a cable company would cost $55 per month. (12) UBS Securities estimates that Verizon will spend $7 billion to offer television service to about one-half of the 32 million homes reached by its network.

   AT&T has named its new fiber upgrade initiative "Project Lightspeed." AT&T launched its video service in July of 2006. (13) AT&T predicts that it will be able to provide video service to nearly 19 million homes by the first half of 2008. (14) For new builds, AT&T is extending fiber all the way to the customer's home. For existing homes, AT&T is extending fiber-optic lines into nodes of those neighborhoods and is using enhanced copper wire to carry video signals the last few thousand feet to the home. (15) Through this choice of network architecture, AT&T projects an initial cost of $4 to $5 billion to offer video service. (16)

   The technologies used by local telephone operators to offer video service are distinct. Verizon will provide television signals using the same technology that cable companies use, which essentially broadcasts all channels to a set-top box at once. (17) In contrast, AT&T's video customers will request one channel at a time from off-premises servers, using the same Internet protocol ("IP") technology that enables users to access Web pages on their computers. (18)

   This Article evaluates whether video services provided over a telephone network are or should be subject to the same regulations as current cable television services. This is an open question in policy circles and is the subject of ongoing debate amongst policymakers. Congress is considering legislation that stands to significantly affect the future of video service provided over telephone networks. In June 2006, the House passed legislation that would create a new national franchising process for companies seeking to provide video programming and existing cable operators which are subject to competition in their franchise areas. (19) The legislation would permit a franchising authority to impose franchise fees of up to five percent of a cable operator's gross revenue and would require national franchise holders to pay additional fees for public, educational, and governmental access support. (20) There have also been a number of state bills passed recently that are intended to facilitate competitive entry into the video programming market. (21) This Article addresses the legal, policy, and economic questions presented by various reform proposals and their impact on the provision of video service provided over telephone networks.

   In Part II, we examine the historical development of cable services. Cable television was primarily retransmitted broadcast signals in its early stages. Cable systems were franchised locally, and the Federal Communications Commission ("FCC") initially took a passive stance on several regulatory issues. Rival programming distributors did not emerge until the late 1980s, and incumbent cable operators responded by integrating vertically into content and then denying rivals access to that affiliated content.

   In Part III, we trace the development of other cable services by cable operators, including cable modem service and cable telephony. We examine the FCC's decisions classifying those ancillary services as non-cable services, which meant that those services were exempt from regulation under Title VI of the Communications Act, as added by the 1984 Cable Act. The FCC concluded that cable modem service was not a cable service because the broadband user controls her experience, whereas the definition of cable service requires the operator to control the user's experience. The FCC's decisions on the scope of cable services have largely withstood scrutiny from the courts.

   In Part IV, we analyze the regulatory history of cable service, beginning with the Cable Communications Policy Act of 1984. (22) In the 1984 Act, Congress defined cable service as one-way programming comparable to broadcast television. The Cable Television Consumer Protection and Competition Act of 1992 (23) sought to protect consumers by re-regulating cable television rates and ensuring access to affiliated programming by rival programming distributors, but this legislation did not change the definition of cable services. The Telecommunications Act of 1996 sought to enhance competition in video programming by removing barriers to entry, including barriers that prevented entry by telephone companies. (24) Although...