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Friday, August 26, 2005

Reasonableness in Video Service Deployment
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To some, FCC Chairman Martin's statement this week questioning whether cities can deny permission for Verizon and SBC to offer optical fiber-based video services was nothing short of provocative. As reported in USA Today, some cities may view the statement as an attempt to usurp their authority to award video franchises. At the very least, cities may resent the Chairman using his "bully pulpit" to dissuade them from hindering companies from competing against cable and DBS providers.

Provocative or not, the Chairman may be on to something. Even if one assumes a franchise is necessary for telephone companies to provide video service, there are many reasons why denying such a franchise outright could be viewed as unreasonable.

Section 621(a)(1) of the Communications Act states that cities "may not unreasonably refuse to award an additional competitive franchise." This provision could give the FCC authority to overrule franchise denials unless cities can show they are reasonable.

But what constitutes a reasonable basis for denying a franchise? To the extent the Act imposes clear requirements, such as public access channels, a city might justify refusing a franchise to a company that did not satisfy those requirements.

Some of the most prominent franchise requirements, however, are rather murky, leaving cities to fight what could be an uphill battle to show how refusing a franchise can be considered reasonable.

For example, one of the chief questions in considering whether to grant a franchise is whether deployment of the network would frustrate a city's ability to manage the public rights-of-way. Cities justifiably wish to prevent network-builders from disrupting traffic or otherwise burdening citizens unduly. The companies seeking to offer fiber-based video service, however, already have permission to occupy the rights-of-way for purposes of providing other services, like telephone service. Thus, to justify the additional burden of a video franchise, cities could be forced to show that providing video service somehow burdens rights-of-way more than providing other services for which a new franchise isn't necessary. And surmounting this burden seems unlikely given that any number of services can be offered via an optical network without changing it physically or, accordingly, changing how it affects rights-of-way.

Another question in considering whether to grant a franchise is whether access to the proposed video service would be denied to people living in low income neighborhoods. But that requirement presumably must be balanced against the statute's insistence that cities give prospective video providers a "reasonable period of time" to become capable of providing service to the entire city.

The Act does not say what constitutes a reasonable period of time. Presumably, however, cities would not violate this condition if a company seeking to provide video over fiber said it would never serve poor neighborhoods. But that kind of negative pledge seems unlikely.

To the extent companies instead claim service to poor neighborhoods merely will be delayed, they can point to the fact that the FCC has determined repeatedly that deployment of broadband, such as fiber networks, is "reasonably and timely" for purposes of section 706 of the Act. Further, that overarching broadband provision instructs the FCC to promote broadband, not by imposing hurdles such as denying franchises, but removing "barriers to infrastructure investment."

In addition, companies may be able to argue credibly that their self-interest will ensure that they ultimately serve all neighborhoods. They can say they face strong incentives to expand fiber networks to spread their heavy fixed costs over as many customers as possible. Companies also can point to the fact that, according to a Pew study, some groups that may live in poorer neighborhoods, such as African-Americans, nonetheless use cable and satellite services (including premium channels) at least as much as the population generally. (See Appendix.) Moreover, fiber-based video providers will surely note that they enter a market already occupied by well-established competitors, thereby increasing the risk that they will fail to attract enough business to recoup their enormous network investments. These factors would make it difficult for cities to demonstrate that a provider's deployment plans are unreasonable even if the provider does not plan to reach low income neighborhoods for a few years.

Given the intensification of competition among cable, DBS and now potentially fiber-based offerings, the better part of valor may be to reconsider whether franchise requirements (along with other forms of video service regulation) are still in consumers' best interests. If obtaining a franchise remains a prerequisite to providing service, however, this analysis suggests it may be difficult for cities to explain how denying permission for companies to bring consumers more video competition can be called anything but unreasonable.

posted by Kyle Dixon @ 1:46 AM | Broadband , Cable , Communications , Wireline

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