Cable TV industry gets wake-up call.

State legislation that would rewire the cable TV industry by allowing telephone companies to offer television services could lower prices for consumers, but it's also raising questions about whether the newcomers would enjoy an unfair advantage.

The proposed law, AB 2987, passed the California Assembly by a final vote of 77 to zero. Under the proposed rules, telephone companies could transmit pay TV service to consumers, allowing telecoms to offer a triple package of phone, TV, and Internet service.

That would match cable companies, which have offered such packages for years.

"People have seen in the communications marketplace that competition works for consumers, and that's what's behind cable reform legislation in a number of states," said Tim McCallion, western region president of telecom provider Verizon Communications Inc.

Texas, New Jersey, Virginia and Indiana have passed bills similar to AB 2987, while a federal bill to help phone companies get into the television business passed the House of Representatives on June 8 by a margin 321 to 101.

Currently, cable companies operate local monopolies through franchise agreements with municipal governments. Under most agreements, the cable company must provide service to all residents in the jurisdiction, as well as pay the local government for the right to run cable under the streets.

By ending the cable monopoly, the new law would lower prices and bring new services, according to advocates.

A study by UC Berkeley professor Yale Braunstein sponsored by AT&T Inc. quantified the potential impact on California consumers. He calculated annual savings between $690 million and $1 billion. In Los Angeles, Braunstein found the city had the highest average cable cost ($58.29 per household) among the four largest metro markets in the state. He estimated new competition will save L.A. consumers $320 to $470 million per year.

And a study in Texas by the American Consumer Institute found the average cable subscription price dropped $20 per month after similar legislation passed there.

"The rates for cable have increased 86 percent in the last 10 years, while every other telephone service--long distance, wireless, Internet access--has gone down," said Gordon Diamond, a spokesman for AT&T Inc. "This bill is good for consumers who haven't had much of a choice."

'Opposed unless amended'

Cable operators oppose the law, but given the unanimous approval in the California Assembly, they don't expect to defeat it outright.

Dennis Mangers, president of the California Cable & Telecommunications Association (CCTA), a trade organization for cable TV franchise holders, said the bill as currently written would give telephone companies an unfair advantage.

"Our official position is 'opposed unless amended.' We are working with consultants trying to find amendments that would make the bill work for cable," he said "We take the position that we could support change as long as the bill supports a level playing field."

First, the phone companies will only need one license from the state, rather than negotiating franchise deals with individual cities like the cable companies. Second, the new law allows phone companies to selectively pick the customers they market to, rather than requiring them to serve all customers as in cable franchise agreements.

To secure agreements from local governments, cable companies often provide free service to schools and other benefits similar to a public utility. Some of these agreements stretch 20 years into the future. By changing the rules, the new law "traps cable providers in their franchise agreements until they expire," said Mangers. "What's at issue is that all providers are playing by the same rules so they can compete on price and service, not because government chose a winner and loser."

To correct this, the CCTA wants an amendment to the bill that would allow them to opt out of their deals with local governments. Regulatory oversight would come from the California State Department of Corporations under the new law.

Besides cable operators, cities figure as the main opponents to the current bill for both economic and political reasons.

Los Angeles Mayor Antonio Villaraigosa wrote a letter to Assembly Speaker Fabian Nunez, the bill's main sponsor, noting that the city has 14 television franchise agreements that generate $24 million per year in city revenues. Villaraigosa asked for amendments to "ensure there is no financial harm to the City of Los Angeles."

The letter hints at the political issue--namely that the bill is a power grab by the state. Villaraigosa stated that L.A.'s cable agreements lapsed in August 2005, and service continues on a month-by-month basis while the city and cable operators negotiate. But "with the introduction of AB 2987, the cable operators have absolutely no incentive to continue negotiation discussions," the letter stated.

However, the telecom industry denies the bill would harm local governments, highlighting its requirement that telephone companies pay the same right-of-way fees that cable companies pay. But the state would collect the money and give it to the cities, and based on similar arrangements in the past, municipalities doubt they'll ever see that money.

Cherry picking customers

The second issue deals with ability of phone companies to cherry pick the most affluent neighborhoods rather than offering the same service to all consumers, a clause built into most cable agreements.

Verizon expects to string optical fiber cables "to the premises" in the areas where it will offer TV service. According to Diamond, AT&T will put fiber optic cables to within about 5,000 feet of every customer, with the signal traveling into the home or office on old-fashioned copper wire. That suffices to carry a TV signal because unlike cable TV, which sends many channels to a home even though only one is watched, telephone video works on an Internet protocol system. This allows only a maximum of four channels requested by the viewer to travel down the wire.

Local video hubs would send the signal to the consumer. For example, national programming feeds would travel to Verizon's hub in Pomona, where the company can add local content such as over-the-air stations and public government channels. Best of all for businesses, local advertising could be controlled at the hub.

"I can't say we would get it down to the individual household, but we are talking about a very small targeted area," said Jon Davies, a spokesman for Verizon. "That's the beauty of doing it with a digital broadband network."