Do Not Adjust Your Set
The members of the Greater Metro Cable Consortium know Tele-Communications Inc. has a habit of making surprise announcements. But even veteran TCI watchers weren't ready for the bombshell dropped by company spokeswoman Margaret Lejuste during a group meeting last December.
"She simply said, 'The rebuild has stopped,'" recalls Norman Beecher, the attorney for the consortium, a federation of local cities that until Lejuste's abrupt announcement thought they were poised to get brand-new cable systems from the Greenwood Village-based conglomerate. "I think we asked whether that meant for good or not. Her response was that all they could say was that it stopped and they have no plans to go forward with it in the future."
Nearly two months later, the realization is beginning to sink in among the Denver-area cities dependent on TCI: In Denver, the cable revolution will not be televised. Work crews assigned to upgrade systems to the fiber-optic cable that could conceivably have delivered telephone service and Internet access through the same cable "pipe" have literally stopped in their tracks. And apart from ambiguous assurances about an alternate technology that might be able to pick up the slack, TCI is making few promises about whether cities will get the state-of-the-art cable systems they're expecting. "My experience with TCI is that there'll be fourteen different press releases before we actually get to what they're going to do," says a dubious Gary Casner, purchasing and telecommunications officer for the City of Westminster.
Oddly enough, it was TCI, not the cities, that raised expectations about the brave new world of cable service. When company chairman and chief executive officer John C. Malone waxed prophetic in 1992 about the "500-channel future," cities in TCI's backyard assumed they'd be first in line at the broadcast orgy. Even as recently as 1994 and 1995, when the fifteen-year contracts many cities had signed in the early 1980s were beginning to expire, "TCI was touting fiber optics at a great rate," says Beecher.
Today Malone has admitted to touting a lot more than he could deliver. Wall Street has responded by roughing up the company's stock, and once-mighty TCI also is awash in debt--$14 billion at last count, much of it lavished on fiber-optic rebuilds even as customers were threatening to desert in droves to direct-broadcast satellite TV. "The 800-pound gorilla has a large tab on his charge card right at the moment," says Richard Varnes, director of the cable-TV office for the City of Boulder, where voters last December rejected a proposed franchise agreement with TCI, forcing a new round of formal negotiations. "And the banks are noticing it."
So are viewers. In recent months TCI has taken to yanking popular services like Bravo and the Comedy Channel off the air in favor of channels it owns a stake in or those that are willing to pay in advance for air time. Viewers who aren't willing to shell out hundreds for a satellite dish can do little but kvetch: Thanks to the exclusive nature of cable contracts, they're stuck with what they've got.
Last December Malone's money crunch got so bad that the company layed off 2,500 people, roughly 6.5 percent of its workforce. TCI is also facing a class-action lawsuit in Denver District Court over its practice of slapping an across-the-board late fee onto overdue bills. According to plaintiff's attorney Ed Holub, late fees of up to $250,000 per month are assessed; a similar suit in Washington, D.C., resulted in a $7 million judgment against the company.
But fortunately for TCI, even as its financial picture has grown cloudy, market forces have turned down the pressure on the company to live up to its fiber-optics promises. For example, industry analysts predicted that the much-debated federal Telecommunications Act of 1996 would lead to cutthroat competition between cable companies and phone providers as the huge firms fought for one another's customers. Instead, the big boys have found it much more profitable to chase profits within their respective niches. Long-distance phone companies are horning in on local phone business, prompting local providers like US West to spend most of their time and money fending off the competition. With little to fear from the phone companies for the time being, cable firms have refocused their energies on their core cable businesses--and on pinching pennies.
"What the cable companies have done is kind of divided the country up," says Kelly Narde, assistant to the city manager in Littleton, where a dispute over contract provisions has dragged on since August 1995, prompting the city council to renew TCI's franchise in three- and six-month chunks. "They've said, 'You take the Denver market, we'll take the Pittsburgh market, you take Miami, we'll take L.A.' They've traded systems with each other like Monopoly pieces."
If the country is a game board, metropolitan Denver is shaping up to be TCI's equivalent of lowly Baltic Avenue: a plain neighborhood, without the frills. Malone's company has been gobbling up local cable contracts throughout the 1990s, and with its recent purchase of former Jones Intercable operations in Jefferson County and Broomfield, it now controls the cable signal in about 90 percent of the six-county metro area. That has allowed it to back away from fiber optics with little fear of being upstaged by a competitor. Yet company spokeswoman Lejuste insists that halting the fiber rebuild is actually a positive development for local cities and their television viewers.
"Stopping the rebuild right now does not mean we are reneging on any kind of promises," she says, adding that while TCI representatives may have talked about using fiber optics during discussions of the rebuild, the model agreement negotiated with several local cities doesn't actually use the term. "It means we are exploring different ways to bring better services to our customers in a faster, less expensive, less disruptive way," says Lejuste. "And that is key to cities."
The cities themselves, however, don't seem jazzed about the prospect. Last month acting Arvada city manager Christopher K. Daly fired off a letter to TCI's Denver metro manager, Steven Jon Santamaria, informing him that the city believes TCI's cancellation of Arvada's cable rebuild violates the city's 1995 franchise agreement. In Golden, officials are still peeved that TCI crews walked off the job with only about 25 percent of the fiber rebuild complete. "At this point, we're just kind of up in the air about it," says Angela Champion, administrative assistant to the city manager. "We're not too happy about that."
Champion says TCI has suggested that "digital compression" technology now being tested in Hartford, Connecticut, and Arlington Heights, Illinois, may be able to boost channel capacity without the need for a fiber-optic rebuild. Under that system, a new cable box is installed that supposedly can squeeze four or five channels into the space now needed for just one. If it proves successful, it will be a godsend for TCI, which instead of spending up to $250 per household on fiber rebuilds could roll out roughly 170 channels of programming and pay-per-view services without having to make any appreciable system upgrades.
But questions remain about compression technology. According to cable consortium attorney Beecher, TCI has made no effort to let local officials kick the tires. And even TCI's Lejuste isn't offering any guarantees. Asked if the company knows for sure that the technology actually works, she replies, "That's why it's being tested."
If there is a winner so far in the local cable sweepstakes, it's Lakewood, the only metro market where TCI has actually completed the fiber rebuild. Most of that system has been switched on, though even with it the city doesn't get Internet access--or anything close to 500 channels. "We do have a little more channel capacity," says Joani Inman, the city's telecommunications coordinator. "I know, for instance, that we have five pay-per-views instead of two. And we still have the Comedy Channel." Overall quality is better with the new system, Inman adds, and service interruptions have been reduced.
Lakewood's head start has led to grousing in neighboring Arvada, where officials fear that businesses or residents might be lured across the border where the TV grass is greener. Other municipalities, meanwhile, worry about unequal treatment within their own borders. In Aurora, for example, about 60 percent of the city was wired for fiber optics before construction crews knocked off; other viewers are stuck with technology left over from the cable Stone Age of the early 1980s. Tom Nicholas, the city's director of library, recreation and television services, says TCI has proposed upgrading the old sections and installing compression technology, a move it claims will provide between 75 and 79 channels of programming--about the same as the fiber-optic lines now in place.
The metro area's largest cable customer, the City of Denver, has benefited from good timing in the current dispute. That's because its franchise agreement with TCI doesn't expire until June 1999, leaving the city time to see how the controversy over the rebuild shakes out before committing itself to a new deal. However, the clock is ticking. A series of twelve public workshops designed to elicit public comment begins this week, says Dean Smits, director of the city's office of telecommunications. The city also plans to conduct a financial audit and a random phone survey of customers before negotiating a new pact. Smits declines to specify what Denver might ask for in a new agreement, but he says it's reasonable to assume the city will demand more capacity than the sixty channels it now receives.
Some local observers never really bought into Malone's 500-channel future in the first place. "What that was all about, none of us really understood," says Boulder's Varnes. Another government official, who asked not to be identified, remembers Malone's own senior managers being bewildered by the CEO's fanciful predictions. "You'd see Malone announcing 500 channels of programming by 1998," she recalls, "and his own staff was going, 'What?'"
But that doesn't mean expectations haven't been raised, says Varnes, who notes that when Boulder asked residents for feedback on its franchise agreement, it got back a clear message: "We want the telecommunications future now." People raised on promises about the Information Age expect bells and whistles, Varnes adds, and "if we get into a situation where, by corporate fiat, rebuilds are taken off the table, this is a definite problem."
The abrupt way that TCI pulled away from the rebuild still rankles Arvada City Councilman Ken Fellman. "Obviously, you never like to get a letter that says, 'You know that stuff we said we were going to do? We're not doing it,'" says Fellman, an attorney who negotiates cable contracts for cities as part of his private practice. But Fellman says cities that have signed binding contracts with TCI can expect to get some sort of cable upgrade--as long as they're prepared to fight for it. "For cities that demand that TCI come talk to them, I think they'll be more than happy to do that," says the councilman. "For cities that don't respond, that's one less headache they have to deal with."
So far, says cable consortium attorney Beecher, TCI hasn't exactly put out the welcome mat for his clients. "They have not expressed much willingness to negotiate or communicate with us," adds Beecher, who says he plans to pressure TCI to "live up to its commitments."
Beecher says cities typically lose money on cable deals, despite collecting hefty annual franchise fees from the cable company. The costs associated with maintaining the cable right-of-way--everything from inspection requirements to directing traffic while cable crews dig trenches across busy streets--add up to much more than the 5 percent of gross revenues cable companies typically pay cities where they do business. In fact, according to one estimate, cities get back only about 13 percent of what they spend to accommodate cable systems.
Even so, TCI may wind up calling most of the shots in contract disputes. That's because the only real recourse cities have is to cancel their franchise agreements, a procedure that under federal law is painfully laborious. Even if a city does manage to can TCI, its only reward would be pulling the plug on the company's signal, a move that would leave viewers without their MTV, their HBO or their ESPN. The resulting outcry could make dueling with TCI look like child's play.
TCI's Lejuste says her company is busy plotting its next move but doesn't plan to make its deliberations public. And up in Westminster, where the rebuild hadn't started yet anyway, Gary Casner says he's in no hurry to call TCI on the carpet. Until he knows more about the company's plans, he says, "I don't see any sense in getting real upset. I have yet to see anything come out from them that they haven't taken back at least once."
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