Wire Me Up, Wire Me Down
In the cross-wired, deeply incestuous world of communications conglomerates, nothing lasts forever. Telegiants swap partners with abandon; today's bitter foe is tomorrow's big-asseted object of desire, and vice versa.
US West knows the drill. The Englewood-based Baby Bell is currently duking it out in a Delaware courtroom with estranged partner Time Warner Entertainment. The three-year-old union has foundered on Time Warner's burning desire to merge with Turner Broadcasting System, in defiance of US West's wishes. But even as that $2.5-billion romance sours, US West has picked up another sweet-talking suitor for a mere $10.8 billion: Continental Cablevision.
Analysts regard last month's merger between US West's Media Group and Boston-based Continental as a shrewd match for several reasons. Continental, the nation's third-largest cable company (behind Englewood's TCI and Time Warner), has been gobbling up smaller companies in highly clustered markets. It's also been aggressively developing a lucrative "hybrid" network of fiber-optic and coaxial lines capable of delivering video, telephone, multimedia and computer services to homes--including Internet services via high-speed cable modems that can operate much faster than even the phone companies' vaunted Integrated Services Digital Network (ISDN). Like other Baby Bells, US West has lagged behind the cable giants in its ability to deliver such services; two weeks ago the company pulled the plug on a test network of interactive video services in Omaha, acknowledging that it wasn't cost-effective.
But Continental's hybrid "broadband" network isn't the only area in which it has been a pioneer. The company has also led the way in showing its rivals how to deal with cable regulators, negotiating a controversial "social contract" with the Federal Communications Commission to resolve more than 350 complaints of rate-gouging lodged by cable subscribers and franchise authorities around the country.
At first glance, the settlement Continental worked out with the FCC last August--and amended earlier this month to include a million more subscribers Continental acquired since last summer--seems like a good deal for all concerned. Under the terms of the contract, Continental pledged to invest $1.7 billion in upgrading its fiber-coaxial network, to lower the price of basic cable in many of its markets, to offer "in-kind" services (such as free coupons for pay-per-view movies) to some subscribers, and to provide free cable hookups and Internet access to 5,000 schools in communities served by the company.
Continental executive Robert J. Sachs described the contract as a "welcome event" and praised the FCC "for developing such an innovative mechanism for resolving rate cases." FCC officials have defended the arrangement as an efficient way of cutting through the red tape of cable regulation. Other cable companies, including Time Warner and Cox, have quickly followed suit, negotiating similar settlements in hundreds of other rate disputes.
But the FCC's social contracts have come under fire from franchise authorities and consumer advocates for offering less than they appear to. Critics of the Continental deal point out that many cable companies are already wiring local schools at no charge; in addition, Continental was committed to investing in fiber-coaxial upgrades well before the settlement was reached. (In a 1995 interview with a trade magazine, Continental chairman Amos "Bud" Hostetter boasted that the company was "well ahead of the industry norm" in upgrading.) And while the company agreed to offer refunds to some consumers and to lower its basic cable rates, the rates for its most popular "expanded" level of service were allowed to go up. As for the offer of in-kind services, such a concession costs the company far less than cold-cash rebates, particularly since many subscribers may not take advantage of the offer.
"The money left on the table in these deals is not pennies," says Washington attorney Stephanie Phillipps, who is representing various municipalities in a legal challenge to the Time Warner social contract. "We're talking millions."
Eileen Huggard, executive director of the National Association of Telecommunications Officers and Advisors, a trade group of local government representatives, says many of her members are involved in litigation with cable companies over the contracts.
Phillipps says the contracts are inconsistent with the FCC's own procedures for settling rate issues. "It's rather strange when the court sits down with one party and works out a deal, then tells the other party, 'Here it is,'" she says. "Many communities may benefit from these contracts, but should other subscribers in other cities pay for them?"
Continental spokeswoman Margaret Sofio says the sweeping settlements are both practical and fair. "What we settled are all issues within the jurisdiction of the FCC," she says. "You have to take into account that an enormous mass of regulations was imposed by the 1992 Cable Act and that one subscriber's complaint can trigger an enormous workload for the FCC."
In merging with Continental, US West agreed to take on not only the cable company's hefty $5.5 billion package of current debt but the obligations of the social contract as well. Barely a week after the merger news, Continental proposed a key amendment to the contract that not only settles rate disputes in recently acquired markets but allows the company to charge up to $12 a year in rate increases to fund the promised upgrades, mimicking Time Warner's settlement. The amendment hasn't yet been approved by the FCC, but Huggard claims that such an arrangement requires subscribers "to pay in advance for services they don't have."
Or, in some cases, to pay more for services they already have. Attorney Joseph Van Eaton represents the city of Ann Arbor, Michigan, one of the recently acquired cable franchises Continental is seeking to add to its social contract. "Ann Arbor already has everything the social contract offers," Van Eaton says. "They'll get nothing for it except the rate increase."
US West spokeswoman Lois Leach says the Continental merger is expected to be finalized in six to nine months. One requirement will be a waiver from the FCC allowing US West to temporarily control Continental's cable operations within its telephone service area; Continental has roughly 400,000 subscribers in the region that must be sold or swapped with another company to keep the merger in compliance with current telecommunications law.
But Leach doesn't anticipate any difficulty in obtaining the waiver. "It hasn't been a problem in the past," she says. In 1993 US West had to go through a similar procedure to complete its partnership with Time Warner, and the FCC didn't hesitate to bless the union.