Phone Firms Covet Cable TV Market, and Cable Industry Raises the Alarm

Since the cable television industry was deregulated in 1987, San Diego-based Southwestern Cable TV and other cable operators nationwide have raised rates and raked in revenues, riding a wave of growth that has made cable TV a $17-billion-a-year industry.

But all that success has attracted a potential competitor, one that cable television officials fear may run them out of the business: the phone company.

Phone companies, including Pacific Bell, are spending $21 million this year in a lobbying effort to persuade Congress to pass legislation that would allow them to enter the cable television business. In fact, Sen. Conrad Burns (R-Montana) is expected to introduce such a bill this week.

Independent phone companies and regional Bell operating companies--Pacific Bell and the six other “Baby Bells” that were formed following the 1984 breakup of AT&T--say; they can offer cable viewers more choice, as well as some revolutionary cable TV programming by combining video and voice technologies.

But cable television companies, such as Southwestern and Cox Cable San Diego, say the phone companies--with their deep pockets--will undercut existing cable operators’ prices, steal customers, spend more in developing new technology and ultimately force them out of business.

Cable operators also worry that the phone companies will “cross-subsidize”--that is, force its telephone users to finance its new venture by raising phone rates.

Under such circumstances, cable operators say they will quickly fold to the new competitor, allowing a major industry to be monopolized and holding consumers hostages to astronomical rates.

“It would be such a mismatch,” said Jeff Van Deerlin, a spokesman for Southwestern Cable TV. “They would undercut our rates, gather our subscribers and we would pack up our bags and go home. We would last about 10 seconds.”

Robert McRann, senior vice president and general manager of Cox Cable, says the phone companies’ offer to provide more competition is nothing less than a guise to take over a lucrative business.

“They want to, and will, obliterate the cable television business,” said McRann, who is also chairman of government affairs for the California Cable Television Assn., an industry group made up of the state’s cable operators. Cox Cable San Diego, which is the third largest cable company in the country, has 312,000 subscribers in San Diego County. The closely held company expects to post $115 million in revenues this year, up from $108 million in 1989.

“They want to bring television signals, telephone signals and data signals into everybody’s household,” McRann said. “They want to be the single line into the household. If that’s not a monopoly practice, I don’t know what is.”

Although phone companies are interested in entering the cable television business, Diane Olberg, a spokeswoman for Pacific Telesis Group--the San Francisco-based holding company for Pacific Bell--says accusations that the phone company wants to monopolize the industry are unfounded.

“They (cable operators) do paint us like we’re Darth Vader, don’t they?” Olberg said. “We’re a telephone company. We do not want to be the only cable provider. If the cable companies think they are being dealt unfairly, they have means (through regulatory commissions) to state their grievances.

“They’re implying that, if you’re a big company you’re automatically predisposed to sin,” Olberg said. “Well, they’re not exactly small companies either.”

Indeed, federal legislators have been alarmed by the incredible growth of the cable television industry.

In less than a single decade, the cable industry’s revenues have increased nearly six-fold, to $17.3 billion from $2.9 billion in 1980. And, since deregulation in 1987, basic cable rates nationwide have increased an average of 29%.

Some legislators and phone company officials say the cable companies arguments have heightened and taken a protectionist tone as they fight a two-front war: resisting several proposed bills that would re-regulate the cable industry as well as the Burns bill to enable independent phone companies to enter the cable TV business.

“We have taken all their legitimate arguments and concerns and we have installed safeguards to address them,” said Donald McClellan, legislative counsel to Sen. Burns. “If you get to the very bottom of this, you discover that their argument is purely a protectionist one.”

Two years ago, Pacific Telesis Chairman Sam Ginn publicly announced the company’s interest into the cable television, citing the industry’s tremendous growth.

“We’ve been looking for a new beachhead and this is it. . . . We think it’s a great business,” said Pac Tel’s Olberg. Already, Pacific Telesis operates cable in the United Kingdom and is trying to acquire Group W of Chicago, a Midwestern cable entity. Baby Bells are now allowed to participate in the cable industry outside their service regions.

But it’s the development of fiber-optic technology that has spurred the phone companies to intensify their lobbying efforts in Congress so that they can pursue cable on their home turf. Fiber-optics technology relies on hair-thin, flexible glass strands to transmit signals using pulses of laser light. In contrast with traditional copper cables, which send slow, electric signals, fiber-optic cables carry communications at the speed of light and possesses virtually unlimited capacity.

Most important, copper cables, unlike fiber-optic cables, cannot transmit video signals.

As phone companies increasingly switch to fiber-optic cables, Olberg says they would like utilize all of its advantages.

By constructing a fiber-optic network, Olberg said, it’s possible for the phone company to offer products such as video dial tone, which, in essence, would allow the viewer to use the phone to call up programs offered by a variety of cable operators.

“Instead of being limited to one cable company, you would be given a whole menu to choose from,” Olberg said. Widespread use of fiber-optics could also offer consumers a “video window” that would enable “two people talking on the phone to see each other,” Olberg said.

But cable operators say such products will not come cheap.

If legislation is passed allowing phone companies to enter the cable television business, cable operators say, the phone companies will quickly rip out and replace existing copper cables with more expensive fiber-optic cables. Although a precise figure is not available, studies estimate that rewiring the nationwide phone network would cost $170 million to $500 billion.

“And, do you know where that money is going to come from?” asked Van Deerlin, the Southwestern spokesman. “It’s going to come from you and me.”

Cable operators say the phone companies will increase phone rates to pay for the cost of installing a fiber-optics network.

“That would give them an unfair advantage, one that would wipe us out,” Van Deerlin said. “It’s clear that there are not enough auditors (Federal Communications Commission and state Public Utilities Commission) to make sure this would not happen.”

Although Pacific Bell officials concede that cross-subsidization could occur elsewhere in the United States, they say such a scenario is impossible.

“The argument that we’re going to pass it on to the ratepayers is impossible because our local rates are capped,” Olberg said. According to an agreement reached between the state Public Utilities Commission and Pacific Bell, residential rates, for example, cannot exceed $8.35 per month.

“So, just like any other business, the question becomes, how do we use the available money, not how do we go about getting more money,” Olberg said.

The cost of fiber-optics, however, is dropping, Olberg added, saying that replacing a copper network with fiber-optic cables may become affordable in the near future.

According to McClellan, legislative counsel for Burns, the Montana senator is introducing his bill not punish the cable operators or to favor the phone companies, but to hasten the implementation of fiber-optics technology. He adds that the bill would include safeguards for consumers and cable operators. For example, McClellan said, the proposed bill includes stiff penalties for phone companies that willfully engage in cross-subsidization.

“In essence it will call for amputation. The FCC will force the phone companies to divest their video entity.

In a written statement, Burns said, “Because of policy restricting telecommunications companies in the U.S., we are falling behind the rest of the work in developing information services . . . . If we are going to compete in the world marketplace, the U.S. must have access to a fiber-optic system. Such a system can provide immediate access to virtually any information.”