Cable Franchise Renewal 101: A Primer

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Timothy Parsons
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1 Cable Franchise Renewal 101: A Primer National Association of Telecommunications Officers and Advisors 2012 Annual Conference September 27-29, 2012, New Orleans, LA Brian T. Grogan, Esq., Moss & Barnett

Advisors 2012 Annual Conference September 27-29,

2 Why is Renewal More Difficult Now Than 15 Years Ago? 1. Industry consolidation over the last decade 2. Increased competition from Direct TV 3. AT&T and Verizon franchising efforts 4. State franchising - impacting over 20 states 5. Online competition a. YouTube and over-the-top competition (Hulu) b. Wireless devices cable anywhere (ipad, iphone, laptops) 6. Poor economy a. Fewer subscribers b. Reduced cash flow for operator less staff c. Less capital expenditures d. Tight restrictions on franchise commitments 1

Online competition a. YouTube and over-the-top competition (Hulu) b. Wireless devices cable anywhere (ipad, iphone, laptops) 6.

3 Top 15 Cable Operators 2010 Subs 2012 Subs 1. Comcast Corporation 23,212,000 22,118, Direct TV 18,760,000 19,914, Dish Network Corporation 14,318,000 14,061, Time Warner Cable, Inc. 12,706,000 12,484, Cox Communications, Inc. 5,038,000 4,661, Charter Communications, Inc. 4,716,000 4,269, Verizon Communications, Inc. 3,203,000 4,473, Cablevision Sys. Corp. 3,067,000 3,257, AT&T, Inc. 2,504,000 4,146, Bright House Networks, LLC 2,222,000 2,059, Suddenlink Communications 1,225,000 1,230, Mediacom 1,216,000 1,037, Insight Communications 710,000 Sold to TW 14. CableOne, Inc. 654, , WideOpenWest Networks, LLC 393, ,000 Source: NCTA website 2

3,203,000 4,473,000 8. Cablevision Sys. Corp. 3,067,000 3,257,000 9. AT&T, Inc. 2,504,000 4,146,000 10. Bright House Networks, LLC 2,222,000 2,059,000 11.

4 Why Does One Contract Require So Much Effort? Because it s not just the cable franchise that is impacted During renewal cities must also consider: Cable regulatory ordinance Right-of-way ordinance or code provisions Customer service provisions General code provisions Competing operators franchises Gas, electric, telephone franchises Some of the City Code may require redrafting Certain agreements with operator may be in side letter 3

regulatory ordinance Right-of-way ordinance or code provisions Customer service provisions General code

5 Renewal Documents Existing Cable Franchise City Code Provisions ROW Provisions Customer Service New Cable Franchise Cable Regulatory Ordinance Separate Letter Agreement 4

6 Why Can t We Put the Cable Franchise Up For Competitive Bid? Cable Act prohibits a City from denying a cable operator s request for franchise renewal Just because another operator may be willing to agree to more favorable franchise terms Under the Cable Act an operator can only be denied franchise renewal for one of the following four reasons: 1. Operator s failure to comply with existing franchise 2. Quality of operator s service 3. Operator s legal, technical and financial qualifications 4. Reasonableness of operator s proposal to meet the City s assessment of needs and interests - Taking into consideration associated costs 5

favorable franchise terms Under the Cable Act an operator can only be denied franchise renewal for one of the following four reasons: 1.

7 Should We Conduct Informal or Formal Renewal Process? Short answer prepare for both Operator must request renewal 3 years prior to franchise expiration. Request triggers the formal protections Failure to request renewal Loss of Cable Act formal protections Request will also ask for informal negotiations City has 6 months to initiate renewal If you chose to proceed informally - Be careful not to paint yourself in a corner 6

Request triggers the formal protections Failure to request renewal Loss of Cable Act formal protections

8 Informal Process 1. Most franchises are negotiated informally 2. Still need to know local needs/interests - Needs Assessment remains crucial 3. Be careful not to get backed into a corner a. Nowhere to go must accept poor proposal b. What if operator changes deal at 11th hour - What is City s recourse? 4. Renewal is like buying a new car a. Make certain you have a plan B b. Be prepared to walk if price is too high 5. Preparation for formal a. Provides City with options b. Allows for successful negotiations 7

Nowhere to go must accept poor proposal b. What if operator changes deal at 11th hour - What is City s recourse? 4.

9 How Can a City Maximize Franchise Fee Payments? Cable Act provides : during any 12 month period the franchise fees paid by the cable operator with respect to any cable system shall not exceed 5% of the operator s gross revenues derived in such period from the operation of the cable system to provide cable services 47 U.S.C. 542 Key in franchise negotiations is how the parties define gross revenues 8

respect to any cable system shall not exceed 5% of the operator s gross revenues derived in such

10 Defining Gross Revenues Simplest definition = Any and all revenue in any way derived, directly or indirectly, by the Grantee or any affiliated entity from the operation of the cable system to provide cable services in the City. Listing revenue categories is fine, however Watch for operator requested exclusions: Fee on fee Late fees Bundling Advertising revenue GAAP exclusions Other non-subscriber revenues 9

11 Can Operators Itemize Fees on Subscriber Bills? Yes Subscriber bill itemization - Cable Act 622(c) [542(c)] Each cable operator may identify as a separate line item on each regular bill of each subscriber: 1. The amount of the total bill assessed as a franchise fee - And the identity of the LFA (City) to which the fee is paid 2. Franchise imposed support for PEG channels or the use of such channels 3. The amount of any other fee, tax, assessment - Imposed by any governmental authority - On transaction between the operator and subscriber 10

12 Yes Can City Obtain PEG Support Beyond The 5% 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 U.S.C. 542 Operators oppose PEG fees Operators argue: Makes them less competitive than Direct TV / Dish Use your franchise fees, that s what they re for Why do you want raise taxes; Mayor won t like that? Nobody watches PEG anyway No other cities ask for PEG fees We never pay PEG fees corporate policy 11

public, educational, or governmental access facilities. - 47 U.S.C.

13 What Are The Key PEG Issues to Consider? Start with the four C s 1. Channels - Identify needed PEG channels a. Analog/digital migration (HDTV) b. Location, location, location c. Transmission compatibility 2. Connectivity with origination facilities a. Two-way connections b. I-Net obligations 3. Cash - capital and operational support a. Capital - equipment and facilities = depreciable life b. Operator will argue against operational support 4. Content who will program the channels - City, Schools, Colleges, Non-profit, public users 12

Connectivity with origination facilities a. Two-way connections b. I-Net obligations 3. Cash - capital and operational support a.

14 What Is An Institutional Network? The term Institutional Network I-Net means: Cable Act 611(f) [531(f)] A communication network which is constructed or operated by the cable operator Generally available only to subscribers who are not residential subscribers 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 want to convert I-Nets to: Commercial services contracts to increase profits 13

by the cable operator Generally available only to subscribers who are not residential subscribers In practice an I-Net is

15 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. 14

restricting, or conditioning the provision of a telecommunications service by a cable operator or an affiliate thereof.

16 Can City s Still Regulate Customer Service? 1. FCC standards: a. Office hours and telephone available b. Installations, outages, and service calls c. Comm. b/t operators and subscribers d. Billing, refunds, and credits e. Local office - Look to both 47 C.F.R and (notices) 1. Reporting/enforcement not in FCC regs - Specify in franchise 2. Operator may argue - competitive disadvantage - May want relief if FCC amends regs 3. City can adopt separate Customer Service Ordinance - Part of City Code 15

Local office - Look to both 47 C.F.R. 76.309 and 76.1601-1604 (notices) 1.

17 Is a Level Playing Field Provision Mandatory in Renewal? No Operator will demand LPF language Nothing in federal law requires such a provision Check state law for state obligation Why should the City agree to any language more burdensome than state or federal law? Issues to watch for in proposed language Opt-out provisions that allow operator to avoid franchise obligations Line item veto - allows the operator to unilaterally modify franchise if different than competing franchise See paper for sample language 16

should the City agree to any language more burdensome than state or federal law?

18 Thank You Brian T. Grogan, Esq. Moss & Barnett, A Professional Association 4800 Wells Fargo Center, 90 South Seventh Street Minneapolis, MN (612) phone / (612) facsimile GroganB@moss-barnett.com Website: municipalcommunicationslaw.com 17

90 South Seventh Street Minneapolis, MN 55402-4129 (612) 877-5340

CABLE TELEVISION RENEWALS IN AN IP ERA

National Association of Telecommunications Officers and Advisors enatoa April 8, 2014 CABLE TELEVISION RENEWALS IN AN IP ERA Brian T. Grogan, Esq., Moss & Barnett 4800 Wells Fargo Center, 90 South Seventh