L.A. Council OKs Cable Competition

Bringing an end to long-standing monopolies, the Los Angeles City Council on Tuesday cleared the way for the first head-to-head competition in the cable television business citywide--a move that could lead to lower rates and better service.

The council, in a 12-2 vote, approved plans by Western Integrated Networks to build a fiber-optic network for delivering cable television, high-speed Internet access and telephone service to the city’s 3.4 million residents.

The development, which is expected to be approved by Mayor James K. Hahn, would put Los Angeles into an exclusive league of cities whose residents have more than one cable operator from which to choose. In the last five years, companies known as “overbuilders” have cropped up to duplicate cable networks, attempting to capitalize on new digital technologies that improve the economics of constructing these expensive networks.

For instance, the nation’s largest overbuilder, RCN Corp., has a total of about a million customers in New York, Boston, Chicago, San Francisco and Washington. Cable rates are 20% lower on average in areas such as these with competition, according to Consumer Federation of America.

“This is the day we’ve all been waiting for,” Council President Alex Padilla said. “This is a historic opportunity. Residents will have two options instead of one.”

Consumers have for years complained about rising cable rates and poor service and chafed at the lack of choices.

Frank Casazza, president of Western Integrated, also known as WINfirst, said the 2-year-old Denver-based company would give Los Angeles residents competitive prices when service is introduced as early as next year.

AT&T; Broadband, Adelphia Communications Corp., AOL Time Warner, Charter Communications and Cox Communications currently carve up the city’s 14 franchise areas and together serve a total of 620,000 households.

“Competition makes us more sensitive to customers, and we’re ready for it after having faced the satellite players, DirecTV and the Dish Network,” said Bill Rosendahl, regional vice president for Southern California at Adelphia Communications, the area’s largest cable provider. “But the question is whether WINfirst has the deep pockets, so ask me in two years.”

Padilla, who as chairman of the council’s Information Technology and General Services Committee has championed the franchise approval, acknowledged that spurring competition does not come without risk. WINfirst could, for instance, run out of money before the end of its 15-year contract, leaving streets and sidewalks disrupted.

Because of the enormous capital required and the uncertain returns, Wall Street has been reluctant to fund overbuilders. As a result, fewer than 5% of the nation’s 100 million households have a choice of more than one cable operator today, according to the Consumer Federation.

In December, the funding drought forced RCN to temporarily suspend its franchise application in Los Angeles after two years of negotiations. The company needed to conserve capital for markets where it had broken ground, according to analysts.

Cable operators and City Council members have raised questions about whether WINfirst, founded by a group of cable veterans, has the financial wherewithal to complete the eight-year project. Under the city ordinance, the company is obligated to complete construction by 2009 of a state-of-the-art network that the city estimates will cost $2.2 billion.

“Some communities wouldn’t get built until the tail end, and I wonder whether the company will be commercially viable by then,” said Councilwoman Janice Hahn of District 15, who along with Councilman Nate Holden of District 10 voted against WINfirst.

Hahn’s district, which serves Watts, San Pedro, Harbor City and Wilmington, is last on the company’s construction schedule.

Though cable operators had concerns that competitors would cherry-pick the most affluent neighborhoods, the city says it has guarded against that by requiring WINfirst to wire all of Los Angeles.

At the council’s Tuesday meeting, Holden argued that WINfirst’s $829 million in capital is not nearly enough to complete construction in Los Angeles and the handful of other cities that have awarded the company franchises. “They are not financially stable,” Holden said. “WINfirst is not operational anywhere in the U.S. What they will do is get this franchise and sell it.”

City officials say that under the cable franchise agreements, the council has the rights to approve or deny all sales or transfers.

WINfirst also is putting up a $29-million performance bond for repairing streets should it run out of money before completing the project.

Under the agreement with the city, WINfirst is committed to finishing half the project by 2007. WINfirst would be tearing up streets to lay cable in some areas and stringing wire from telephone poles in others.

By 2005, the company is supposed to have completed construction in its first franchise area. That area, the so-called Hollywood-Wilshire franchise, is served by AT&T; Broadband and includes neighborhoods such as Hancock Park, Hollywood, Park La Brea, Cheviot Hills and Koreatown.

An AT&T; spokeswoman said the company is ready to take on WINfirst, having nearly completed a $6-billion upgrade of its Los Angeles systems for advanced digital services. The investment has enabled AT&T; to expand its TV channel lineup and provide high-speed Internet access and phone service over cable wires.

WINfirst plans to begin construction as early as this year and have its first customers in Los Angeles within 12 to 18 months after breaking ground. The company intends to offer service neighborhood by neighborhood as it works its way through the city.

Casazza said the company plans to concentrate construction in three or four cities and use revenue from its initial customers to fund the completion of those projects.

Casazza said the company has attracted blue-chip investors such as J.P. Morgan, First Union Bank and Blackstone Group. He said the company has enough to be operating profitably within a few years.

Casazza said the company should begin commercial sales in Sacramento this fall and has been constructing a network in its second market, Dallas, for six months. The company is determining whether Los Angeles or another city will be its third market. The company also has franchise agreements in San Diego; Austin, Texas; Dallas; Houston; and Seattle.

He said the ability to sell not only television but also high-speed Internet modems and phone service makes overbuilding attractive. “As technology evolved, allowing three revenue streams, business plans began to make sense,” he said.

The mayor has 10 days to sign or veto the ordinance. Janice Hahn, his sister, said he could veto the measure but probably wouldn’t because the council could easily come up with the 10 votes needed to overturn a veto.