Troubled Cable Firms Ask Cities for Concessions
Three years ago, Group W Cable Inc. won a heated battle for the exclusive cable franchise in El Monte by promising to install a 120-channel system, equip and train residents to produce programs and provide a studio with several full-time staff members to run it. Group W was so eager to secure the contract that it prepaid $500,000 in franchise fees to the city.
Today--with its El Monte operation awash in red ink--Group W Cable is engaged in another struggle, this one to persuade the El Monte City Council to renegotiate major portions of its franchise contract to help stem mounting losses. The company says operating losses totaled $1.9 million at the end of last year. A hearing on the proposal is scheduled for 7 p.m. Oct. 14 at City Hall.
Cable companies throughout the country are seeing their once-rosy projections of viewership and return on investment give way to the harsh realities of low market penetration and higher-than-expected costs that add up to big losses.
Consequently, Group W and at least three more of the 12 cable television companies serving the San Gabriel Valley have sought relief from expensive conditions of their franchise agreements, most involving commitments of equipment, training and personnel for community access programs.
Several companies already have been freed of local rate restrictions by a state law that went into effect this year. Others, which may not have sufficiently fulfilled franchise obligations and therefore are not covered by the state law, are asking cities to deregulate them anyway. A federal law deregulating all cable rates will take effect in December, 1986.
Group W, whose monthly rates for basic service are strictly regulated by the El Monte City Council, wants permission for a $2 increase over its present $7.95 rate. It also wants to deactivate one of its two 60-channel cables, cut staff assigned to help produce local programming and slash $385,000 from allocations for equipment. If Group W receives everything it wants, it will save more than $400,000, but the company said it expects to lose more than $2 million next year on its El Monte operation.
Group W is not seeking changes in its Arcadia and Sierra Madre franchise agreements, a spokeswoman said.
Meanwhile, Group W’s parent firm, Westinghouse Electric Corp., announced in August that it wants to sell the company, which is the nation’s third largest cable operator with 2.1 million subscribers. Westinghouse set a $2.5 billion price tag on the total system.
In Monterey Park, Falcon Cable TV wants to buy its way out of a franchise obligation to operate a television studio in the basement of City Hall. Falcon, which has canceled its lease on the studio, is willing to to provide $14,000 for equipment and programming and throw in a $1,000 donation to the Boys’ Club if the city takes over operation of the facility.
‘They Overpromised’
Foothill Cablevision plans to ask for increases in its basic rate it in Monrovia, Glendora and Upland, operations manager J. B. Bush said.
“What a lot of cable companies are finding is that they overpromised,” said Michael Friedman, vice president of Telecommunications Management Corp., a Los Angeles-based consulting firm serving El Monte and other cities. “The systems cost more to build than they anticipated. They are approaching cities to get relief to make their systems financially viable.”
Friedman said that many other cities, including Denver, Portland, Milwaukee and other large cities have renegotiated franchises in recent years to ease the burden on financially troubled cable companies. He added, however, that renegotiation demands have become so common that the issue of the companies’ original intent has been raised.
“There are some communities that feel that operators overpromised knowing that they would come back at some point along the line and ask for concessions,” Friedman said. “Competition sometimes brings out the best in us and sometimes brings out the worst. When you see so many cities going through this experience so quickly--as soon as the ink is dry--it fuels suspicion about intentions.”
Cable company officials insist that their dilemma was caused by the unexpectedly high construction costs. They say they underestimated the cost of installation, the amount of cable needed and the cost of operations and programming. The officials said revenues have not met expectations, in part because much of the programming and services expected to attract customers never materialized or were canceled.
Willing to Listen
So far, most cities have at least been willing to listen.
“Most cities have approached it from the point of view that it’s to no one’s benefit for cable operators not to succeed,” Friedman said. “The subscribers do not benefit. The city doesn’t benefit. Service suffers. Ideally, everyone benefits when the cable company is making a reasonable return on its investment.”
Louise Anlyan, Group W’s general manager in El Monte, said she approached the city because Group W had lost more than $1.9 million by the end of 1984, a time by which the company had projected a $865,000 profit, and no prospects for a surplus were in sight. She blamed the poor profit picture partly on the fact that only 37% of Group W’s potential customers have signed up for cable, far short of the 52% it expected to have by this time. Anlyan also said that the El Monte system cost $14.5 million to build, almost double the $7.8 million Group W had budgeted. The higher-than-expected costs eventually will be passed on to customers in the form of higher rates, she said.
“The customers are the ones who will have to pay,” Anlyan said.
Pasadena already has granted a major concession to Falcon, which was awarded a 15-year franchise in May, 1983, after a vigorous bidding war. Before the final contract was signed six months later, Falcon had received permission to install one cable instead of two, reducing the number of channels available to 64 from 140, according to Victor Laruccia, the city’s telecommunications administrator. The change saved Falcon at least $1 million, an industry consultant said. In exchange, Falcon agreed to rebuild part of an old system and expand community access channel capability and provide additional video equipment not included in the contract.
“It wasn’t as though someone was trying to drop a bomb,” Laruccia said. “We satisfied ourselves that there was no demand for the B (second) cable and the capacity on the A cable was sufficient to meet our needs for the foreseeable future.”
Transmitter Agreement
Falcon negotiated the same concession with West Covina, Tom LaFourcade, executive vice president of Falcon, said. In return, he said, the city was permitted to put its communications transmitters on the company’s 200-foot tower. LaFourcade said Falcon has not sought major concessions elsewhere in its San Gabriel Valley service area, which covers Alhambra, Altadena San Gabriel, Temple City and Walnut.
Soon after it won the South El Monte franchise about two years ago, Heritage Cablevision of California Inc. received permission to postpone construction of a promised studio, according to general manager Chip Crawford. Heritage has fewer than 1,000 subscribers, is losing money and has no plans to build the studio, Crawford said.
Efforts to renegotiate franchise terms have had chilly receptions in some quarters.
El Monte officials maintain that they are flexible, but they are less than enthusiastic about granting major concessions and have hired Friedman’s firm, Telecommunications Management, to review Group W’s requests.
“This is a 15-year franchise agreement that they’ve signed and as far as I’m concerned they have to live up to it,” said Councilman Ernest Gutierrez, who until recently was chairman of the El Monte Cable Access Corp. board of directors.
“These guys were not novices when they came in. They knew cable. They knew the data. They knew penetration. Group W (as a corporation) isn’t losing money. They’re just not making it as fast as they want.
“They knew what they were getting into. They’re no dummies. They’ve done it all over the country. Get in, get the franchise, then renegotiate. The big guys from New York came in here and they think we’re just a bunch of dummies who are going to roll over and play dead. Hell, no! I will listen to them, but they are not going to get much sympathy.”
Revocation Threatened
In its dispute over funding for a studio, Monterey Park wants twice as much as the $15,000 Falcon has offered and the City Council has has threatened to begin hearings on revocation of Falcon’s franchise unless the company meets its obligations. City Manager Lloyd de Llamas accused Falcon of “attempting to renege on franchise commitments” and complained that the company had “never given local programming a chance.”
Falcon officials downplayed the feud, saying they planned to meet with city officials to iron out the problem. But the officials echoed a sentiment expressed by other cable operators: The companies spend a lot of money training residents to produce local programming, but the results have been disappointing.
“Some people took advantage of it, but as the video revolution gained speed, we found we trained people at tremendous cost and they never produced anything for us,” LaFourcade said. “You get a big burst of enthusiasm, and as time goes by it starts to wane and pretty soon we have to sit down and ask ourselves why are we doing this.”
City officials aren’t the only ones irked by the renegotiation trend. Mel Matthews, founder of Kinneloa Television Systems, which operates cable systems in East Pasadena and Duarte, said he stayed out of the bidding in Pasadena because he did not think he could profitably build the same kind of system Falcon had promised.
“I understand what they’re (Falcon) talking about, because when we looked at the system, we wondered whether they could make money,” Matthews said. “We would have liked to have the opportunity to bid, but we took the city at its word that there would be no changes in the contracts. Once you bid, that was it.”
