Telecom contracts: money on the table: it is an owner's best interest to administer and monitor lucrative telecom revenue sharing agreements.

Cable companies and other telecom service providers aggressively continue to seek access to the country's 15.6 million MDUs (multiple dwelling units) in the United States served by property owners. These companies typically offer a percentage of subscriber revenue to real estate investment trusts (REITs) and other MDU owners in return for access to their residents.

Now that most companies are bundling a broad array of services, including digital television, broadband Internet and telephone service, the potential revenue from these units can represent more than an ancillary revenue opportunity for both the property owner and the service provider While many property owners have reached service agreements with companies, such as Comcast, Time Warner, Cox or Charter, they may not be receiving the full compensation under their current arrangements or they may be missing opportunities represented by these new revenue streams.

Industry statistics spotlight the dramatic increases in cable and telecom revenue over the past decade. In 1995, the average monthly price to the consumer for expanded basic cable service was $23.07, according to the National Cable & Telecommunications Association (NCTA). Customers who also received a premium channel paid an additional $8 or more.

Fast-forward 10 years to today and many cable companies are offering digital cable, high-definition television (HDTV), video-on-demand, broadband Internet access and Internet telephony. Today's cable bill can run as high as $150 to $200 per month, based on current pricing, compared to $30 in 1995.

Using the example of a cable TV operator that is contractually obligated to remit 10 percent of the revenues derived from its bundled service offerings on an annual basis, a $180 monthly cable TV bill will generate $216 in revenue per apartment per year for the MDU property owner.

Assuming that the majority of the country's 15.6 million apartments are receiving those services, the MDU market is generating more than $750 million annually in consumer revenues. In today's market, there is nothing "ancillary" about this revenue stream. And this is only the beginning.

For example, there were about 5.6 million high-speed Internet customers served by cable operators in 2001 and there are currently more than 24.3 million. Additionally, the number of households that also receive telephone service from their cable companies has nearly doubled in the past two years, from 2.6 million in 2003 to more than 4.5 million today. And digital cable customers have grown from 12.2 million in 2001 to 26.3 million. In a U.S. television household base of about 100 million, the overall penetration levels for those new services are still relatively low, ranging from 5 percent to 25 percent. Moreover, cable's U.S. household penetration is only about 67 percent, leaving enormous growth opportunities for these new services. This represents a $1 billion business in the MDU universe alone.

Returning to the ancillary revenue question cited previously, the answer's roots are firmly planted in two concepts: the honor system and ancillary income.

The Honor System

Cable TV revenues in 2006 will exceed $69 billion, according to NCTA. A significant part of that revenue stream flows back to the cable networks as license fees. Without the aid of auditing, networks must rely on cable operators to accurately report subscriptions and apply the correct contract terms. However, cable operators typically do not provide enough information on their remittance backup to accurately validate the monthly license fee payments to cable networks. This is the honor system.

REITs and other MDU property owners are facing a similar situation. When payments are received, there is rarely enough information to evaluate the accuracy of such payments. This can be unsettling to CFOs, who now face the task of complying with the Sarbanes-Oxley Act by demonstrating that their companies have sufficient internal controls in place to address the revenue recognition process. How can a CFO of a major publicly traded REIT certify its financial statements with so little information available? What internal financial controls are in place to ensure contract compliance?

The sales and marketing of the new services offered by cable operators during the past several years have been frenetic. Unfortunately, the administrative side of this industry has been woefully understaffed and overworked. Contract compliance and administrative support have not kept pace with this dramatic growth. This has led to significant compliance issues, which in turn, have created the need for stronger controls and third-party auditing experience.

In addition to the property owner's fiduciary responsibility to shareholders and Sarbanes-Oxley compliance, increased cash flow and improved market property value are compelling masons for greater oversight of these revenue streams.

Ancillary Revenue

In a recent discussion with the management group of a REIT, Cable Audit Associates (CAA) learned that responsibility for the management of the cable revenue sharing agreements fell within a group that categorized these agreements in a profits and loss account called "Ancillary Revenues."

Webster's Dictionary defines ancillary as "subordinate." That says it all. With an estimated $1 billion in cable revenues associated with MDU properties, the answer is that there's nothing ancillary about this revenue stream. As the average consumer's cable bill rises with the increase in the number of services offered, and as potentially more consumers begin to migrate to cable broadband from dial-up, and from local telephone service to cable telephony, the potential pool of revenue sharing dollars will rise dramatically. As the revenue per apartment increases in response to the growth of new cable services offerings, these new dollars must be audited to ensure that the MDU owner is receiving its contractual share of the revenue.

This brings into question a REIT's reliance on the honor system for these revenues. In a recent audit conducted by CAA for several metropolitan markets, encompassing more than 10,000 apartment units, the auditor was challenged by a program distributor that could not support remittance calculations, provided no supporting detail, forgot to pay for cable telephony and cable broadband and misinterpreted the contract terms. It is difficult to understand how the apartment industry, as consumers, can pay monthly bills for cable services but, at the same time, fail to implement a reliable process to account for and calculate royalty payments.

Much of the source data for telecom audits resides in billing systems, such as CSG and CableData. MSOs would not be able to activate consumer accounts, bill consumers or manage network or property license fees without these types of systems. It is these massive and complex data repositories managed by CableData and CSG that have become the focus of audit programs and can reveal the missed revenue sharing income.

Unless MDU owners and REITs begin to address these issues, cable operators will not have incentive to address these problems. It is in an owner's interest to administer and monitor those lucrative revenue sharing agreements. The ultimate beneficiary will be the consumer, as both the REITs and cable operators will realize additional profits by bundling new and innovative cable services to the resident.

Bruce N. Lazarus is CEO of Cable Audit Associates (CAA), an independent company that offers subscriber and contract compliance audits on behalf of cable networks. With more than 150 national and regional sports networks participating in its audit program, CAA audits contract compliance for more than $10 billion annually in license fee payments that flow from cable operators to the cable networks.