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from: Business Week

December 21, 2006

Why the New FCC Rules May Bring Lawsuits

With its vote to relax TV licensing regulations for the major telecoms, the FCC passed rules that only a trial lawyer could love.

by Steve Rosenbush

During the last few years, cable TV operators like Cablevision (CVC) and Comcast (CMCSA) have offered high-tech Internet-based phone services along with their core digital TV and high-speed Internet access products. As a result, phone rivals such as AT&T (T) and Verizon Communications (VZ) have embarked on massive network upgrades so that they can offer TV along with voice and Internet access (see BusinessWeek.com, 10/25/06, "Telecom: Bulking Up to Take on Cable").

Bowing to pressure from the telecom companies, the Federal Communications Commission on Dec. 20 tried to streamline TV licensing procedures. The telecom companies need approval at the local level before they can offer TV service in a given market, a process which is costly and time-consuming.

Trumping Local Regulators

The FCC tried to make it easier for the phone companies by requiring local regulators to vote within 90 days on TV franchise applications. It also said the local regulators can't impose "unreasonable" requirements on the telecom companies. That essentially means that local cable TV regulators can't force telecom companies to construct high-speed networks capable of carrying TV across their entire phone networks. The telecom companies want the freedom to upgrade their networks when and where they choose.

The 3-2 vote that emerged from the FCC was split along party lines. While the Republican majority tried its best to appease the cable operators that compete with the telecom companies, they still managed to infuriate Democrats in Congress and on the FCC, not to mention countless local regulators who say their power is being usurped by Washington. It now appears that the FCC's decision will be challenged in the courts. "We believe there is significant litigation risk," regulatory analyst Blair Levin of Stifel & Co. wrote in a note after the vote.

Emotions over the issue are running high. For decades, telecom and cable companies have been required to build their networks for the entire community, not just the most lucrative and affluent sections. "We are confounded by today's decision by the Federal Communications Commission that would systematically block the ability of local governments to protect their citizens, local assets, and revenues," the National League of Cities said in response to the decision.

Opposition Likely

Those local rules were written during years of regulated monopolies, though. The monopoly era is ending, and companies such as Verizon and AT&T, which are investing billions in their new networks, want to know they can make a return on their investment in an era of competition and technological change (see BusinessWeek.com, 8/1/06, "Verizon, Vonage Fight Off Cable's Threat").

The FCC's order solves nothing, and will probably lead to a huge legal battle. "The simple fact is that today's order doesn't provide a level playing field, a concept that has been universally supported up until now at federal, state, and local levels," said Kyle McSlarrow, president of the National Cable & Telecommunications Assn., a cable TV trade group. "We don't believe the commission has the legal authority to establish separate regimes for incumbents and new entrants in today's highly competitive marketplace," he said.

The telecom industry was roiled by regulatory and legal battles during the late 1990s. The last few years have been mercifully free of such battles, and cable and telecom operators have unleashed a wave of new services, from cheaper and faster broadband service to next-generation fiber networks. The FCC order runs the risk of sparking an expensive and distracting legal battle that creates uncertainty and slows investment in new services.

Strategy May Backfire

A good case can be made for streamlining the entire regulatory process governing TV franchises. Monopoly-era regulations aren't necessary now that competition is becoming a reality (see BusinessWeek.com, 2/7/06, "Cisco on IPTV: 'When, Not If'"). But the rules probably should have come from Congress, not the FCC, and they should have applied to the entire communications industry. They also must account for parts of the U.S. where competition is much slower to take root.

A poorly conceived fix is worse than none at all. It wasn't necessary, either. For all its flaws, the current regulatory regime is working well enough. It may be difficult for Verizon and AT&T to win approval in one local market after another, but they are getting the job done.

Now a huge legal battle looms. "This order will enable us to reach agreements with local franchise authorities more quickly, so we can deliver the benefits of competition to consumers faster," said Susanne Guyer, senior vice-president for federal regulatory affairs at Verizon. That may be possible in some communities, but it's quite likely that many agreements will be put on hold while the issue is resolved in the courts. And the uncertainty that emerges from this mess won't encourage investment either.

Rosenbush is a senior writer for BusinessWeek.com in New York.