Getting a Fair Shake from the Cable Industry

1
Getting a Fair Shake from the Cable Industry

• Communications Workers of AmericaInternational
  Brotherhood of Electrical Workers
• Spring 2004

2
The Franchise Right Is the Foundationfor All
Cable Revenues

• Cities provide cable companies with their most
  valuable asset . . . the franchise

Voice

• Based on that franchise, companies have bought
  and sold and created giant corporations. These
  corporations have a responsibility to the city to
  provide good quality service and jobs. However,
  cable regulatory law restricts our ability to
  demand a fair share.
• We must do three things
• understand better the nature of the cable
  industry
• demand quality service and jobs for our
  communities
• change the rules to even the playing field.

High-speed Internet
Local ads
Pay-per-view
Premium tiers
Basic cable
Cable franchise rights
3
Cable Companies Power Has Increased with Their
Size

• As cable companies have grown larger and
  increased their geographic reach, theyve gained
  more resources and power when they negotiate with
  a single city or choose to raise prices

• Comcast is the largest of the cable companies,
  with an enterprise value of 91 billion
• Time Warners value includes major non-cable
  holdings such as AOL, publishing, etc.

Enterprise Value (as of March 2004)
in billions
Enterprise value total equity (a.k.a. market
cap) the total debt and measures the total
capital of the company.
4
Franchise Rights Granted by Municipalities Are
Companies Most Valuable Asset

• The franchise right is the largest asset on a
  cable companys books
• At Comcast, the franchise right represents 43 of
  the companys assets.

The franchise right the city grants is the most
important asset of the cable company and the city
should insist on fair value for it.
5
Cable Subscribers Are Valued at 3,820 Each

• The average value per cable subscriber (total
  enterprise value divided by the number of cable
  subscribers) is about 3,820.

• This is the value that company owns because the
  municipality has granted it the franchise right.

6
Today, Cable Services Are 88 of Revenues

• In exchange for the franchise right, the city is
  entitled to 5 of cable service revenues
• Cable services include basic advanced tiers,
  premium tiers, pay per view and digital. Today,
  these services make up 88 of cable revenues

2003 51.3 B
Basic Advanced Tiers
56
High-Speed Internet
12
7
Digital
6
10
6
Misc. (Advanced analog, equipment, shopping,
installation, voice, new services)
Premium Tiers
Pay Per View 2
Local Ads
Many cities have found it necessary to perform
audits to ensure that they receive their fair
share the cost of such audits should be built
into the franchise agreements
Cable companies also collect franchise fees
from their customers as revenue. They do not
generally report these, but Comcasts figure for
2003 was 3.
Sources FCC, 10th Annual Report on Competition
in Video Markets, Table 4, Jan. 2004 (6/03 data)
CWA forecast
7
By 2011, Only 60 Will Be Cable Services
2011 109 B

• Cable companies are developing new services --
  like high speed internet and voice services --
  which are not subject to the automatic 5
  franchise fee
• Cable companies value will skyrocket, but the
  portion of cable revenue subject to the 5
  franchise fee will shrink to 60.
• Negotiating for these revenues to be covered will
  be tough, but cities and citizens should receive
  some value for them as well.
• Without the franchise right, the cable company
  could not provide these services.

Basic, CPST, Digital
Premium Tiers
38
6
Pay Per View 1
14
12
Voice
Local Ads
27
Misc. 3(Advanced analog, equipment, shopping,
installation)
High-Speed Internet
Sources FCC, 10th Annual Report, Table 4 CWA
forecast
8
Less Revenue Will Be Captured by Franchise Fees

• Cable company revenues will rise but less and
  less will benefit cities
• By 2011, only 60 of cable revenues will be
  subject to city fees, even though 100 of those
  revenues are still dependent on the cable
  franchise right granted by the city
• Currently, Comcast takes in 815 per subscriber
  annually and pays franchise fees of 28 per
  subscriber (or 3.48)

Sources FCC, 10th Annual Report, Table 4 CWA
forecast
9
Cable Labor Costs 20 Below Industry Standard

• Wages in cable lag behind similar work in
  converging industries (telephone, high-speed
  internet, VoIP, satellite TV deals, etc.)
• Cable companies chose the low road route keep
  wages low, use lots of contractors, pressure
  employees to meet quantitative standards while
  only giving lip service to quality

Technician and Service Rep Pay and Benefits

• Cable companies have not created the kinds of
  stable jobs that can build our community
• Also, most cable companies fight workers who try
  to organize a union. Comcast in particular has
  declared it is waging war against the CWA.

Sources Technicians - Survey data. Service reps
Cornell-Rutgers Telecommunications Project,
Telecommunications 2000 Strategy HR Practices
Performance. Pay includes base wage, overtime,
and commissions.
10
Cutting Corners on Service and Safety
There is no need for poor quality in the network.
Yet, various technical audits from around the
country indicate the cable companies have been
cutting corners on service and safety
P.G. County, MD
Detroit
The County temporarily suspended inspection
activity . . . pending resolution of the
thousands of outstanding violations accumulated
since 2000 without repair action or response from
Comcast.
. . . the number of subscriber drops not
grounded or not meeting all of the NEC Section
820 requirements exceeds 40 of all currently and
formerly served addresses, and will require a
significant amount of time to bring into
compliance.
Los Angeles

• 40 of service drops found deficient
• Many of the deficiencies raise significant
  safety concerns. . . . in numerous cases, the
  drop cables were not adequately grounded,
  presenting an electrical hazard to subscribers,
  as well as Operator personnel.
• . . . problems were plainly visible from City
  streets, and should have been corrected by the
  Operators as part of routine maintenance of their
  cable systems.

Sources Columbia Telecommunications Corporation
(CTC), Technical Inspection of Physical Plant,
City of Los Angeles Cable Television Systems,
March 6, 2002 Kramer Firm, Inc., Plant Safety
Evaluation of Comcast Cable in the City of
Detroit, Michigan, Dec. 10-12, 2003 CTC, Prince
Georges County, MD Cable Television Subscriber
Network and Testing Report, JulySept. 2003
William Pohts, Technical Audit of Comcast Cable
Television System Serving Baltimore, MD, March
2003. All reports available at www.comcastwatch.co
m.
11
The Cable Companies ClaimTheres No Money in
the System
12
Cable Companies Report Accounting Losses But Make
Real Profits
When asked to make repairs or justify rate
increases, cable companies often say they are
broke. Yet Wall Street has kept their stock
prices high. Whats going on?
Cable companies say theyre barely making a
profit . . .
. . . but the real story -- the story they tell
Wall Street, and that they use to calculate
executives compensation -- is in the operating
cash flow margin
Source Company financial statements. For
Adelphia, figures are for 18 months ending 12/03
all others for year 2003. Time Warner net profit
for entire company operating cash flow for cable
operations only.
13
We Spent 75 Billion on Upgrades

• Of the purported 75 billion, 59 (44 billion)
  was spent on maintenance and consumer equipment
  like set top boxes. These are routine costs of
  doing business, not real investment in the
  network.
• Despite the money spent, service and safety
  violations continue throughout the systems

• Redlining of underserved communities

Cable industry accounting rules currently allow
maintenance, set-top boxes, and some programming
expenses to be listed as capital investment, not
operating expenses. This policy is under
review.Sources U.S. PIRG, Failure of Cable
Deregulation, Aug. 2003, p. 20 U.S. Government
Accounting Office (GAO), Issues Related to
Competition and Subscriber Rates in the Cable
Television Industry, Oct. 2003.
14
Companies Are Already Recouping Costs
Companies incurred costs for the plant upgrade .
. .
but increased revenues from Internet services
alone almost cover those costs . . .
. . . and cable companies are also reaping
increased revenues from services such as digital
cable and telephony.
While cable companies describe upgrade costs as
400-800 per subscriber, they annualize the cost
through depreciation at 80 per subscriber.
Source Consumers Union and Consumer Federation
of America, The Continuing Abuse of Market Power
by the Cable Industry, Feb. 2004, p. 10, citing
GAO data.
15
Programming Costs Keep Rising

• Programming costs have risen, but increases in ad
  revenues have outpaced programming cost increases
  by 2.6 billion

16
Nine of the Worlds Richest People Got Their
Fortunes from Cable
Source Forbes, March 2004
17
Cable Deals Have Paid Off for Execs
Sources Changes At the Top, CableWorld, June
9, 2003 Rewarding Comcast Officers,
Philadelphia Inquirer, May 6, 2003
18
Community Issues
19
Cable Prices Are Rising at Three Times the Rate
of Inflation
Cable Rates
Inflation
Source U.S. Bureau of Labor Statistics
20
Cable Companies Use Monopoly Power

• Rates for most services offered by cable
  operators are deregulated, and rates have been
  soaring as operators take advantage of their
  power in the marketplace
• Competition was supposed to keep prices down, but
  in markets where 98 of Americans live, a single
  cable operator has market share of more than 80
• Satellite TV doesnt keep prices down satellite
  competes with high-end digital programming, not
  basic and enhanced services
• FCC data also confirm that DBS, while growing
  in subscribers . . . is unable to restrain
  cables prices.
• Programming bundles are used to force consumers
  to pay for higher tiers
• The only effective competition has been a
  wireline overbuild cable prices are 15 lower
  where theres an overbuild

Sources GAO report, p. 7 CU CFA report, p.
iv U.S. PIRG report, p. 1.
21
Cable Operators Own Significant Content

• Cable operators are 64 more likely to carry the
  programming in which they have a majority
  ownership stake
• Comcast and other cable companies own regional
  sports teams, which they use to control viewers
• 86 of must have regional sports programming is
  vertically integrated
• E.g., Comcast owns the 76ers and the Flyers
  Cablevision owns the Knicks, the Rangers, and the
  N.Y. Liberty
• To launch a new channel, programmers need
  distribution on MVPDs that cover 40-60 of
  subscribers

Sources FCC, 10th Annual Report U.S. PIRG
report, pp. 3-4 CU CFA report, p. 8 Statement
of Chairman Pitofsky, and Commissioners Steiger
and Varney, In the Matter of Time Warner
Inc./Turner Broadcasting System Inc., Docket No.
C-3709, Feb 3, 1997, before the Federal Trade
Commission
22
Cable Operators Not Addressing the Digital Divide

• Providing broadband connections is critical to
  the future of all Americans. Our policies dont
  encourage broadband expansion, and America is
  falling behind countries like South Korea, Canada
  and Japan.
• There are significant disparities in which of our
  citizens are connected to the internet. The less
  you earn, the less likely it is that you will be
  connected. African-Americans and Hispanics are
  two times less likely to be connected.

We need to invest in a modern infrastructure
in remote and poor areas. While lower wages in
India and China may be a fact of life, why should
we ever be outpaced because there is better
broadband in Bangalore than Buffalo? Gene
Sperling, A New Consensus on Free Trade,
Washington Post, March 1, 2004
23
Remedies

• Cities must negotiate hard and must be prepared
  to fight to protect their interests -- just as
  hard as the industry is fighting to protect
  itself
• Cities should join movement to re-regulate cable
  prices
• Franchise agreements should capture new revenue
  growth areas high-speed internet, voice
• Cities must insist on universal deployment
• Build-out/deployment timetables for low-income
  areas
• High service quality and safety standards and
  funds to audit
• Community wage standards
• E.g., St. Paul cable franchise renewal agreement
  The wages and benefits paid to the occupational
  groups utilized by the company or its contractors
  or subcontractors in the construction, operation,
  or maintenance of the cable system shall not be
  less than the wages or fringe benefits paid to
  comparable positions in the classified civil
  service system.