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Bad News Bells

Help from Congress may be too little too late for telephone companies battling with cable.

In the past two weeks, lawmakers have announced plans for three different bills with the same mission: eliminating the need to apply for tens of thousands of local cable franchises in markets across the country, a process that would take years to complete. Although the bills would pave the way for phone companies to add video service, many see them as anything but a cure-all for the telcos.

The bills would allow Verizon, SBC, BellSouth and other phone companies to add television service without getting permission from local regulators, as long as they pay franchise fees and comply with other requirements that municipal officials typically demand of cable companies, such as airing public-access channels.

Cable Eating Into Business

The phone companies say they want to get into the business immediately because cable is rolling out local phone service and eating into their business at a furious pace. Sanford Bernstein telecom analyst Jeffrey Halpern predicts the Bells will lose 15%-20% of their consumer voice market to cable and Internet-based competitors in the next five years.

Legislation allowing the phone companies to bypass the local approval process has been introduced in the House by Rep. Marsha Blackburn (R-Tenn.) and in the Senate by Sen. Gordon Smith (R-Ore.). Sen. John Ensign (R-Nev.), chairman of the Senate Technology Subcommittee, also is expected to help bail out the Bells with a sweeping revamp of the Telecommunications Act.

“These important, bipartisan bills are great news for consumers who want choice in television,” says Peter Davidson, Verizon senior VP for federal government relations.

Many lawmakers are also eager to bring a new competitor to cable in hopes of stemming cable's ability to raise programming prices at a steady 15%-a-year clip.

Action May Come Too Late

Capitol Hill—which is preoccupied with the war in Iraq, Supreme Court appointments and Social Security privatization—is likely to find relief for the Bells too controversial to deal with quickly. The cable industry is fighting any deregulation that doesn't also reduce local governments' oversight of cable operators.

City governments are similarly opposed because they don't want to relinquish any authority in setting cable-franchise fees and dictating schedules for ripping up roads and laying fiber communications lines into the ground.

“The Bells are unlikely to offer video as quickly and broadly as they need to respond to cable's quick invasion of the telephone market,” says Scott Cleland, analyst with Washington-based Precursor Advisors.

Earlier this year, the phone companies suffered disappointments at the state level as well. In both Virginia and Texas, phone companies pushed for statewide franchise models, but Texas lawmakers voted down the idea, and Virginia tabled the debate until next year.

Any phone company could cut the time needed for negotiating a franchise to a month or two by agreeing to the same terms as the local cable company. But few phone companies will take that option because they would be required to serve an entire market, not just the most profitable neighborhoods.

Easy Road Untraveled

“Their big objection to complying with existing franchise deals is the market- wide–buildout requirement,” says Paul Gallant, media-policy analyst for Stanford Washington Research Group.

Cheryl Leanza, legislative counsel for the National League of Cities, makes no apologies for fighting to preserve the municipalities' authority.

She says, “We're very concerned about efforts to nationalize video franchising.”