Broadband Cable Association of Pennsylvania


October 28, 2013

For the better part of a century, the old phone system was a subsidy machine providing rural America with service at the expense of urban and business dialers. When the old copper landline finally bites the dust, what happens to those far from cell towers and fiber optics who've never known the full cost of their service? That question Washington and the phone companies will have to face one day, and credit AT&T in particular with urging the necessary debate. But contrary to what may be gathered from press coverage, the Jersey Shore is not Appalachia.

Mantoloking, a half-square-mile strip of sand with million-dollar homes, took a battering in last year's hurricane. Now the town supposedly is being ravaged again by Verizon's decision not to rebuild the old phone network, leaving residents with a choice of wireless or Comcast's cable. How the town became an object of pity tells more about the media's bag of overused story lines than it does the reality of the copper-to-IP transition. Forbes rates Mantoloking the 139th most expensive town in America. The 2000 Census found it the single richest community in New Jersey.

Like most of America, Mantoloking was already abandoning copper without any encouragement from Hurricane Sandy. Before the storm, 80% of the island's phone traffic was wireless, and much of the rest was Comcast's voice-over-internet service. A better question might be: Why don't the handful who want the copper network preserved reach into their own pockets and pay for it? They could form a nonprofit and call it the Museum of Technology. This would be a nice change of precedent for Mantoloking and other coastal communities, so used to living off subsidized federal flood insurance. Verizon already has received provisional authority to build out its Voice Link system-which uses the cell network to deliver voice and data to fixed addresses. The company is awaiting formal permission to abandon its copper network destroyed by the storm. On nearby Fire Island in New York, under political pressure, Verizon agreed to deploy its fiber network to the island's 300 full-time residents. But Fire Island doesn't have the option of Comcast cable.

Those who cling to circa 1980s analog appliances, to be sure, are inconvenienced by a switch-over to all-digital. Ancient faxes, credit-card readers used by small businesses, and dial-up modems won't work anymore. People whose heart pacemakers report their status monthly over phone lines might have to trade in for a newer model, as they must periodically anyway. The Ned Ludds opposing this transition, however, get most excited about power outages in natural disasters. The copper phone network has its own power source, so landlines keep working when the electric grid goes down (unless, of course, the same winds or flooding take out the phone lines). Another overrated advantage is that your landline number is confined to a fixed location, so 911 knows where you're calling from even if you don't or can't speak. Triangulating on a cellphone signal is still a business of approximation.

These alleged advantages are better described, though, as tradeoffs. Americans benefit on net from a shift to phones that go everywhere and, to boot, provide mobile access to rich information sources. In Hurricane Irene, it was the landlines that failed and the cell towers that kept working. And with each disaster and outage, operators get better at preparing for the next. Cell towers that once had backup batteries now have backup generators. COWs and COLTs-cells on wheels, cells on light trucks-allow service to be quickly restored even when the fixed infrastructure is a mess.

The Federal Communications Commission already has ordained in principle that plain old telephone service must die since soon nobody will be willing to pay for its upkeep. Whether rural America still needs to be subsidized in the digital age-or whether high-cost communications should be deemed an ordinary trade-off for the joys of rural life-is a question Congress will have to answer. That question should be no question for places like Mantoloking, though. Wall Street Journal

DirecTV, Time Warner Cable Inc. and Charter Communications Inc., taking a page from Aereo Inc., are considering capturing free broadcast-TV signals to avoid paying billions of dollars in so-called retransmission fees, said people with knowledge of the deliberations.

Aereo, which charges $8 a month for online access to broadcast TV, is locked in a court battle with CBS Corp. and other media companies over the legality of its service. If Aereo prevails, cable companies could use the same approach to bypass the fees they now pay for network signals, said the people, who asked not to be identified because the discussions are at an early stage. Time Warner Cable has even considered buying Aereo, said one of the people.

Broadcast TV companies petitioned the U.S. Supreme Court this month to rule that Aereo is an illegal operation. The startup, backed by billionaire Barry Diller, uses thousands of small antennas to capture free over-the-air signals and transmits the programming to paying subscribers over the Internet - without the permission of broadcasters. "If found to be legal, the Aereo concept is very interesting, especially as it relates to retransmission consent fees," Maureen Huff, a spokeswoman for New York-based Time Warner Cable, said yesterday. She declined to comment on whether the cable company would consider buying Aereo. Justin Venech, a spokesman for Stamford, Connecticut-based Charter, declined to comment, as did Aereo's Virginia Lam. Darris Gringeri, a spokesman for El Segundo, California-based DirecTV, didn't return messages seeking comment.

Aereo's legal fight pits the New York-based startup against some of the world's largest media companies, including Walt Disney Co., 21st Century Fox Inc. and Comcast Corp.'s NBCUniversal. The broadcasters are trying to preserve their ability to charge retransmission fees, which let pay-TV companies air CBS, ABC, NBC and Fox on their systems. "This threatens the retrans gravy train," said Rich Greenfield, an analyst with BTIG LLC in New York. "As Aereo continues to win legal battles, it's becoming more apparent it could survive these challenges." Federal regulators require pay-TV systems to gain consent from TV stations to rebroadcast their signals. The networks, including Spanish-language broadcasters Univision Communications Inc. and NBCUniversal's Telemundo, own many of their stations. Others are affiliates owned by companies including Sinclair Broadcast Group, Tribune Co., Hearst Corp. and Gannett Co. The networks are beginning to share in the fees collected by their affiliates.

Retransmission fees in the U.S. are expected to double to $6.1 billion in 2018 from $3.01 billion this year, according to research firm SNL Kagan. The fees are essential to the broadcast TV industry, Fox President and Chief Operating Officer Chase Carey said in April. If Aereo is permitted to stay in business, Fox's broadcast network will convert into a cable channel and cease to provide over-the-air access, he said at the time. CBS CEO Leslie Moonves said he would do the same, as did Univision Chairman Haim Saban.

Cable companies are within their rights seeking to match Aereo's ability, if it stands up in court, to capture free broadcast signals rather than pay for land-based access, said Leo Hindery, managing partner of New York-based private equity fund InterMedia Partners and former chairman of the YES Network. "It is intellectually and legally inconsistent to saddle the cable industry with billions of dollars each year of broadcast retransmission fees, while allowing a similarly for-profit company to pluck broadcast signals out of the air and sell them without paying any such fees," Hindery said in an interview. "The cable companies are fully entitled to do everything in their power to stop this travesty." Shares of Time Warner Cable, the second-biggest U.S. cable system, were little changed yesterday in New York, closing at $119.44. Charter rose 0.4 percent to $138.58. DirecTV, the biggest U.S. satellite-TV system, fell 0.3 percent to $62.81. Bloomberg

Liberty Global PLC agreed to sell substantially all of its international content division Chellomedia to AMC Networks Inc. in a deal worth $1 billion, allowing the cable company to focus on its core markets. Chellomedia's television channels are distributed to more than 390 million households in 138 countries. The deal includes assets such as Chello Multicanal, Chello Central Europe and Chello Latin America as well as Chellomedia's stakes in its joint ventures with CBS International, A+E Networks, Zon Optimus and certain other partners. These assets generated about $451 million of revenue in the 12 months ended June 30.

Liberty Global, which is led by media mogul John Malone and has been one of the most active deal makers this year, will retain its Dutch premium channel business, which consists of the Film1 and Sport1 channels. The company said the deal, which is expected to close in the first quarter, has an enterprise value of 750 million euros ($1.04 billion). Liberty Global Chief Executive Mike Fries noted the divestment is "attractive from both a valuation and liquidity perspective," simplifies the company's business and allows it focus on more strategic programming opportunities.

Liberty Global has pursued an aggressive global expansion plan, focusing on Europe. The company's acquisitions this year include its purchase in June of U.K. cable-television and Internet provider Virgin Media for roughly $14.1 billion. For AMC Networks, the acquisition builds on its existing international programming business. The company, which was spun off from Cablevision Systems Corp., has reinvented itself in recent years with a lineup of highly rated original shows. AMC Networks Chief Executive Josh Sapan said the deal allows the company to secure a large global platform to distribute its original programming. Wall Street Journal