Moving the Boundaries of Technology: Cable Monopolies May Be Toppled By Installation of New Fiber-Optic Systems.

The cable TV monopolies that have existed in Los Angeles for decades, and that have been the bane of countless TV viewers, appear headed for extinction.

Two companies have applied with the city to install new fiber-optic networks throughout L.A. that for the first time would bring competition to the industry.

If approved, the new systems -- each of which would cost more than $1 billion to install -- would bring L.A. residents better digital television and Internet service, and probably at a lower price.

On the down side, residents would face considerable commuting disruptions when streets are ripped up during the five to seven years that it would take the new high-capacity systems to be installed and existing ones upgraded.

"We looked at this as a matter of providing choice for the consumer," said Rojit Shukla, one of the members of the city's Information Technology Agency, which gave preliminary approval to Princeton, N.J.-based RCN Corp.'s bid for franchises in five of the 13 cable franchise areas ringing the central city. "Everywhere we go, we hear the refrain: 'Why can't we have competition?' There is so much frustration Out there with the cable company monopolies."

RCN officials are now in negotiations with the City Council over terms of a final agreement, which council officials say is likely sometime next month.

Meanwhile, Denver based Western Integrated Networks LLC has applied for the right to build fiber optic networks in all 13 of the city's franchise areas. The Information Technology Agency is still reviewing that application, which was submitted in August.

Both of these companies, commonly referred to as "overbuilders" because they build over the established cable and phone networks, are taking a big gamble. They are betting that once they get permission and invest their hundreds of millions of dollars, there will be enough demand for high-speed Internet access, digital television and interactive services, and digital telephone service to justify their costs.

"The big question right now is, what is the market demand for these overbuild networks?" said Sharon Armbrust, senior analyst with Carmel-based Paul Kagan Associates, a cable market consulting firm. "They can build these networks that are superior in capacity and quality to the conventional or even upgraded cable networks. But their business model isn't filled out yet."

Race to upgrade

This burgeoning competition between the current cable television franchise holders and newcomers RCN and Western Integrated Networks is part of a larger trend towards deregulation of the telecommunications industry. Cable firms, phone companies, satellite television providers and fiber-optic network companies are all scrambling to wire homes and businesses for digital services.

To date, much of the debate at L.A. City Hall over telecom deregulation has been around the issue of "open access," or requiring cable companies to open up their networks to Internet service providers and other telecom companies that want to lease their lines. For the last 18 months, both sides have spent millions of dollars on lobbyists, either in support of requiring open access or against requiring it.

However, last spring the matter was largely taken out of the L.A. City Council's hands when the Ninth Circuit Court of Appeals in San Francisco ruled that only the federal government could require cable companies to open up their lines. Nonetheless, the City Council last month did pass a policy ordinance in support of open access.

Now the telecom battle heads into a new phase at City Hall, as cable companies and the fiber overbuilders battle it out.

The existing cable companies will complete upgrades of their systems well before the overbuilders finish wiring L.A.

Nonetheless, both RCN and Western Integrated Networks are pushing ahead with their bids, eager to gain a foothold in the nation s second-largest media market.

And, according to some observers, that has sparked a furious lobbying response from the incumbent cable franchise holders fearful of losing market share.

"The cable companies were pretty hot under the collar during the debate at our commission," said the Information Technology Agency's Shukla, who is also president and chief executive of the Los Angeles Regional Technology Alliance (LARTA).

Spokespeople from two of the local cable companies, Adelphia Communications Corp. and AT&T Broadband, denied putting pressure on the city to slow down the granting of these franchises, saying they welcome the competition.

The war got started in earnest this past July, when RCN submitted its application to the city's Information Technology Agency. RCN applied for the right to operate in three Adelphia franchise areas: West L.A./Pacific Palisades, Eagle Rock/Highland Park, and the east San Fernando Valley. It also applied for franchises in areas now held by AT&T Broadband (Westchester) and Time-Warner Inc. (the west San Fernando Valley).

"We look at a specific market from a density standpoint, where we stand the greatest chance of gaining market share," said RCN spokeswoman Nancy Bavec. "This is especially important when you're trying to build a network from scratch, as we are."

It's no coincidence that three of these five franchise areas are held by Adelphia. Cable industry observers noted that Adelphia's predecessor company, Century Communications, was very slow to upgrade its lines, forcing Adelphia to play catch-up with its rivals since it purchased Century 18 months ago.

Big price tag

Bavec would not say how much it would cost RCN to build out its network over the next several years. Previous press reports have put the cost of building out a regional network in L.A. County at around $1.4 billion.

She did say that RCN has capital reserves of $2.6 billion -- $1.65 billion of that from billionaire Paul Allen, who owns the Charter Communications Corp. cable firm. RCN already has franchises in New York, Chicago, Philadelphia, San Francisco, Boston, and Washington, D.C., she said.

And Bavec said that a crucial difference between RCN and the current cable franchise holders is that RCN's lines would have higher capacity to handle more types of digital services. What's more, she said, each community connection point, or node, would serve 150 homes, not the 500 or so homes served by cable company nodes. This is crucial for high speed Internet access, where the more people that simultaneously use the lines radiating out from each node, the slower the service becomes.

Last March, RCN signed an agreement with Rosemead-based Edison International's Southern California Edison subsidiary to lease some of Edison's fiber-optic network. Edison serves most of the L.A. County area outside of the city of L.A., which is served by the Los Angeles Department of Water & Power.

Even though the city technology agency's preliminary approval was unanimous, Shukla said the commissioners still have some concerns. Chief among them: the extent of disruption that would be caused by RCN, cable and phone companies all digging up city streets to build out or upgrade their networks.

"The city has to get the franchise holders to work together, so they can do the trenching work all at the same time," Shukla said. "Otherwise, it will be complete chaos out there."

And the City Council is also seeking to attach conditions to the deal, conditions that are now the subject of intense negotiations between council staff and RCN.

"The real issue now is the extent of fiber-optic sharing between RCN and the city," said Councilman Alex Padilla, who chairs the council's Information Technology Committee.

Fiber swap

The city has been seeking to lease out part of its existing fiber network (mostly built by the DWP) for years to companies like RCN; meanwhile, there are other areas where the city lacks fiber facilities and would like to lease fiber from overbuilders. Padilla said some sort of fiber swap could emerge; he noted that RCN and the city of San Francisco reached a similar swap arrangement.

Padilla also wants RCN to agree to set up jobs programs in communities now plagued by unemployment or underemployment; much of Padilla's northeast San Fernando Valley district consists of such communities.

"It's an issue of corporate responsibility and a chance for RCN to be a true partner with the city," Padilla said.

RCN spokeswoman Bavec said the company does not comment on specific negotiating items.

Nonetheless, Padilla said he believes the negotiations can be wrapped up sometime in mid-January and a deal presented to Padilla's council committee. Full council consideration is not likely to come until February.

Western Integrated Networks, meanwhile, is taking a totally different tack. Rather than focusing on certain high-density areas of the city, it is applying for what is in effect a citywide franchise.

"Our approach is to go for the entire city, which then becomes the core for a regionwide network," said William Mahon, senior vice president with Western Integrated Networks in Denver.

Mahon said that Western Integrated's capitalization is roughly $850 million, which he said is not enough to finance the building of an entire fiber-optic network in Southern California. While he would not specify a cost estimate for a regional fiber network, he said it was "well north" of $1 billion.

"We expect to increase our capitalization dramatically in coming months," Mahon said. "Given that the buildout in L.A. will take several years, we don't see a problem there.

He noted that Western Integrated Network already has franchises in Houston, Dallas, San Antonio, Austin, Portland, Sacramento and San Diego.

Nonetheless, Mahon said that company officials are concerned about RCN' s more targeted bid.

"We're taking a hard look at RCN's bid," he said. "We don't want other companies to use the approval process to get to certain areas first, especially areas with expected higher penetration."

He would not say whether Western Integrated would pare down its bid.

However, Mahon did say that Western Integrated's network offers one significant advantage over rival RCN's: Users wouldn't have to share lines with each other. "We connect each home one-to-one with a node," he said.

ITA board commissioner Shukla said he, too, has some concerns about a citywide bid.

"I doubt any single company has the wherewithal to pursue all of the franchise areas simultaneously," Shukla said.

He also pointed to another potential problem for both RCN and Western Integrated Networks: convincing landlords of multifamily units (apartments, townhomes and condominium complexes) to break their exclusive agreements with existing cable companies.

"Undoing those agreements is much more difficult than you would imagine, and I would guess that's going to be a real hard nut for them to crack," he said.

If so, that would pose a huge problem, since more than half of all residents in the city of L.A. live in multifamily units.