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Cable Regulation in an Evolving IP World

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Brian T. Grogan Presentation to Washington Association of Telecommunications Officers and Advisors (WATOA) Spring Conference on May 1-2, 2014

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Cable Regulation in an Evolving IP World

  1. 1. 1 Cable Regulation in an Evolving IP World Washington Association of Telecommunications Officers and Advisors Spring Conference – Chelan, WA May 1-2, 2014 Brian T. Grogan, Esq. 612-877-5340 brian.grogan@lawmoss.com
  2. 2. Cable Marketplace • Homes Passed 130.7 M • Basic Cable Subscribers 57.3 M • Basic Cable Penetration 44.4% • Homes Passed by Internet 125.4 M • High Speed Internet subs 50.3 M • Cable Phone subs 26.7 M • 2011 cable operator revenue – Video revenue = $57 B – Broadband/telephone revenue = $41 B • No programming costs for non-video services Source: SNL Kagan – NCTA website (visited August 2013) 2
  3. 3. Marketplace Challenges • Decreasing Subscriber Base – Over the top (OTT) competition – Satellite and telephone competition – Franchise Fees paid by cable $3.2 B (2011 est.) • Cable “gross revenues” Nearly Flat – Subscribers decreasing – Rates increasing – Is the “cable pie” getting smaller? • Will 2015 franchise fees = $3.2 B 3
  4. 4. Chromecast OTT Video Device $35 4
  5. 5. OTT Devices • Chromecast • Apple TV, • Boxee Box (with Live TV dongle), • Xbox 360 (with Kinect), • Nintendo Wii, • Roku XDS, • Seagate GoFlex TV, • Sony PS3, • Logitech Revue, • Sony SMP-N200, • TiVo Premiere, • ViewSonic NexTV, • WD TV Live, • OnLive • All DVD players 5
  6. 6. OTT Platforms 6
  7. 7. OTT Platforms • Netflix, • Hulu Plus, • HBO GO, • iTunes, • VUDU, • Zune Video, • Amazon Prime Streaming, • DISH/Blockbuster • Sony PlayStation Network, • Google TV, • MLB.TV, • EPIX, UFC, • ESPN, • YouTube, • EPIXHD, • OnLive and others. 7
  8. 8. Impact of OTT on Renewal • Limited ability to communicate with OTT subs • Reduced consideration – Franchise fees – PEG fees – I-Net • Same burden on ROWs – limited regulation 8
  9. 9. Regulating Cable When City is “not” in Renewal • Six steps you should take during the franchise term • Don’t wait until renewal to worry about compliance • Delaying enforcement is not helpful to City position 9
  10. 10. 10 Periodic Franchise Fee Audits • Are you collecting the correct amount of revenue? • “Gross Revenue” definition – Fee on Fee – Advertising, home shopping, non-subscriber revenue – Launch fees – Bundled rates • Annexation
  11. 11. 11 Bonds, Letters of Credit and Security Funds • Does your franchise require these? – Do you know where they are? – Have they expired? – Are the levels of coverage accurate? • Has anyone reviewed the terms – Notification – Statute of limitations – Waivers • Don’t wait until you need to enforce franchise
  12. 12. 12 Customer Service Standards • Do you have unique standards in your franchise? – You can impose FCC standards • What reports is the operator required to submit? • Are you enforcing compliance? • Adopt separate ordinance?
  13. 13. 13 Technical Audits • When was the last tech audit conducted? • Is the system in compliance with all local, state and federal standards? – Unique franchise provisions – National Electric Safety Code – Separation of facilities – Grounding – FCC Technical Standards • Health, safety and welfare at stake
  14. 14. 14 PEG Programming • How many channels are required under your franchise? – Triggers? • What level of capital funding? – Timing of payments – Verification • Two-way capacity and I-Nets
  15. 15. 15 Free Service Drops • Have you read the franchise requirement? – What level of free service? – Does it include equipment? • Are all eligible institutions hooked up? • Does the franchise impose distance limitations? – How are they measured?
  16. 16. 16 PEG Fee • The term "franchise fee" does not include: – Capital costs which are required by the franchise to be incurred by the cable operator for public, educational, or governmental access facilities. - 47 U.S.C. § 542 • What is a capital cost? – Depreciable asset – Fixed, one-time expense – Land, buildings, construction, equipment – Total cost needed to bring a project to a commercially operable status • Is that what the Cable Act intended? • What is a capital cost in the production of a television show or movie? – Total cost of production – including labor, production and marketing
  17. 17. PEG Fee • Who pays for the equipment required to deliver a PEG HD signal? – After it leaves city hall – demarcation point – Is city responsible for production equipment? – Is operator responsible for transport? – Are all of the these costs “capital”? • PEG signals transported over an I-Net – Is the I-Net a PEG capital cost? – Is I-Net management a capital cost? 17
  18. 18. Offsets From Franchise Fee • PEG fees offset from franchise fees? – Operator may seek language to allow “offset” – Based upon 47 USC 542 “Capital v. operational” – Watch out for: • “as permitted under federal law” or • “So long as payment of PEG fees does not serve to reduce the amount of franchise fees paid to City” • If an operator offsets fees what can City do? – Violation proceeding? – Court challenge? – Contract terms are critical 18
  19. 19. Schools and Public Buildings • How many free drops are in place today? • How many additional outlets are in use? – Has digital conversion occurred? – Is equipment required for every TV set? • Who pays for equipment and service? • Existing drops v. new drops – Construction cost allocation for new drops • Can operator offset all in-kind costs? – From franchise fees? – Operator will cite FCC 621 Order 19
  20. 20. 20 Institutional Network “I-Net” • A communication network which is constructed or operated by the cable operator • Generally available only to subscribers who are not residential subscribers §611(f) [531(f)] • A franchising authority may require as part of a cable operator’s proposal for a franchise renewal – that channel capacity . . . on institutional networks be designated for educational or governmental use, and – may require rules and procedures for the use of the channel capacity designated pursuant to this section. 47 U.S.C. §531(b).
  21. 21. Institutional Network “I-Net” • In practice an I-Net is typically: – a dedicated network built by an operator – used by a city free of charge or at a low cost – for voice, video and data transmissions • Operators may want to convert I-Nets to: – commercial services contracts - increase profits – can the operator “mandate” a commercial contract? 21
  22. 22. 22 Can an Operator Say NO to a Requested I-Net? • Cable operator usually cites to: Cable Act §621(b) [541(b)] A franchising authority may not impose any requirement that has the purpose or effect of prohibiting, limiting, restricting, or conditioning the provision of a telecommunications service by a cable operator or an affiliate thereof. • Cities should look to: Cable Act §621(b) [541(b)] Except as otherwise permitted by sections 611 and 612, a franchising authority may not require a cable operator to provide any telecommunications service or facilities, other than institutional networks, as a condition of the initial grant of a franchise, a franchise renewal, or a transfer of a franchise.
  23. 23. 23 Customer Service Simple path -Use FCC standards in franchise -Look to both • 47 C.F.R. § 76.309 and • 76.1601 - 1604 (notices) – Reporting/enforcement - not in FCC regs • Specify in franchise or city code Aggressive path - Adopt separate Customer Service Ordinance • Part of city code
  24. 24. Competitive Equity • Operator will demand Level Playing Field language – Nothing in federal law requires such a provision – Check for state obligation • Why should the city agree to any language more burdensome than state or federal law? • Fairness? • Issues to watch for in proposed language – “Opt-out” provisions that allow operator to avoid franchise obligations without city approval – “Line item veto” - allows the operator to unilaterally modify franchise if different than competing franchise – Consider “all or nothing” approach • operator can have the same terms as the competitor • but it must take all requirements – no pick and choose 24
  25. 25. 25 Thank You! Brian T. Grogan, Esq. Moss & Barnett 4800 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402-4129 Phone: 612-877-5340 Facsimile: 612-877-5999 E-mail: Brian.Grogan@lawmoss.com Web site: www.lawmoss.com

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