Cities’ clout in cable talks questioned as merger looms

Keeping the local Comcast customer service store in town is a top priority of Loveland officials as they hash out a new franchise agreement with the cable television giant.

Multiple cities on the Northern Front Range are in the midst of renegotiating agreements with Comcast. The problem is that cities don’t have a lot of leverage in such negotiations. Additionally, the pending merger between Comcast and Time Warner might well only tip the scales further in favor of the cable company in future negotiations.

The contracts allow the cable company access to city rights of way for servicing its infrastructure while providing the cities with much-needed revenue for their general funds. By law, cities can charge cable television providers up to 5 percent of the companies’ gross revenue generated within their borders. The agreements mean anywhere from $250,000 in annual revenue for a town such as Louisville to more than $1 million for cities such as Fort Collins and Boulder.

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No city officials contacted for this story said they were concerned that the Comcast-Time Warner merger would have much of an effect on current franchise negotiations. Analysts warn, however, that taking a major player such as Time Warner out of the marketplace, even if Time Warner doesn’t have a presence in this area, could negatively affect subscribers and the cities served by Comcast.

“Potential competition will be eliminated to the detriment of the consumers,” said Sanjai Bhagat, a finance professor at the University of Colorado. “Sometimes potential competition is almost as effective as actual competition.”

Since announcing the planned merger earlier this year, Comcast has maintained that it would be pro-consumer and pro-competition, accelerating subscribers’ access to new products and improving high-speed Internet quality. Comcast would have 30 million subscribers if the federal government determines that the merger complies with anti-trust regulations. That’s nearly a third of the cable television and broadband Internet markets in the United States.

Despite Comcast’s assertions, Bhagat said such major mergers historically have resulted in customers paying more for the same level or even lesser service.

In their franchise agreements, cities are restricted by law from negotiating the pricing and packages residents are offered. That’s part of the reason local cities don’t expect the merger to have much effect on their negotiations.

“Of those things we can work on, we don’t anticipate any gigantic controversy,” said Carl Castillo, policy adviser for the city of Boulder.

In Boulder, the city is working with Comcast on setting a baseline for customer service standards, such as how responsive the company must be to subscribers’ issues before the city potentially could levy fines against the company. Now active in negotiations, the city is also trying to get Comcast to make its government access station, Channel 8, a high-definition channel to spruce up airing of things such as city council meetings.

Fort Collins officials are in the process of reaching out to residents to see what issues are important to them as the city gets ready to start renegotiating its agreement, which began in 2006 and expires next year. Louisville, too, is still formulating the points it wants to emphasize but, like Loveland, is also trying to get a local customer service store for residents. Comcast closed its Louisville store a couple of years ago.

“We don’t know what that will cost, and we’re sure they’ll pass that cost along to us,” Louisville public relations manager Meredyth Muth said.

Loveland’s current franchise deal originally was a five-year agreement that began in 2008 and included language that required Comcast to maintain a customer service store within the city limits. The latest contract proposed by Comcast, however, does not include the same requirement. Loveland’s city council voted unanimously in November to reject that franchise offer, and in January extended the current agreement for a second time, through June, to allow for further negotiations.

Loveland last year pulled in about $600,000 in revenue for its general fund from its franchise agreement with Comcast, plus about $70,000 in fee money from Comcast to help support the town’s public education and government channels.

Cindy Parsons, vice president of public relations for Comcast in Denver, said the company works collaboratively with every city throughout the franchise renewal process. The company has renewed franchise agreements in several metro-area cities in recent months, including Denver, Aurora, Lakewood and Westminster, with 12 to 13 more nearing completion, according to Parsons.

Parsons said the reason for the shift in the Loveland franchise agreement proposal is that the company is looking for some regulatory flexibility. More subscribers, she said, are interacting with Comcast on customer-service issues and services through online channels. As a result, the company is shifting to more of a regional model for its stores.

Comcast also is morphing its stores into more of a retail-type format.

“The stores will really be more of a cool new high-tech way to interact with the products and services and understand all of the features a product may have,” Parsons said.

Comcast’s store in Loveland was damaged severely during the September flood, Parsons said, and the company is operating in a temporary location. Despite city officials’ worries about the company closing its local store altogether, Parsons said Comcast is actively looking for a new store location in the Loveland area. While that might mean the store is outside the city limits, she said it would remain in “close proximity.”

Loveland city officials might not have much recourse regardless. Ken Fellman, the attorney representing Loveland in its negotiations with Comcast, said the federal law that governs cable television franchise agreements gives cable operators “the presumption that they will get renewed.”

A city doesn’t have to renew a franchise if a cable company has a track record of non-compliance with an existing agreement or if it’s not willing to sign an agreement that takes into account the future needs of the community. But Fellman, who also has represented Denver, Aurora, Timnath, Wellington, Lafayette and Longmont in their negotiations with Comcast, said a lot of gray area – and cost – are involved.

“In order for a city to exercise the rights that they do have, it’s pretty expensive,” Fellman said. “It could lead to litigation.”

Local city officials acknowledge that more competition in the cable realm would be nice. Muth said it would help put pressure on Comcast to be more accommodating to cities’ wishes and to provide greater customer service in a quest to retain subscribers. But it’s expensive for cable operators to enter a new market where a major player already is entrenched, and Muth admitted that other companies aren’t “beating doors down” to enter the Louisville market right now.

While cities are not allowed to charge franchise fees for broadband Internet or phone service, Longmont will soon be providing some competition of its own for Comcast. The city is in the process of building out a fiber optic network that by 2017 will offer all residents access to Internet with download speeds of 1 gigabit per second.

Fellman said Longmont is nearing finalization of its new TV franchise with Comcast. To Comcast’s credit, he said, Longmont’s plans to compete didn’t affect the franchise negotiations.

Tony Lenoir, a media and communications analyst for SNL Kagan, said cable companies have been bleeding television customers so rapidly in recent years that they’re unlikely to implement a lot of drastic changes in that area.

Lenoir noted, however, that with such a large subscriber base Comcast could leverage its relationship with programmers to limit the flow of high-quality content to streaming services such as Netflix and Amazon Prime.

That starts getting into another issue of net neutrality, or the idea that Internet providers could play favorites with certain content on their networks or charge fees to companies such as Netflix and Amazon Prime to ensure smooth delivery of their content.

“Once they go down that route with Netflix and Comcast,” Lenoir said, “what’s to stop them from charging all businesses that rely on heavy broadband delivery for whatever they do?”

Bhagat, the CU finance professor, said net neutrality is an issue regardless of whether Comcast and Time Warner merge. The bigger issue with the merger, he said, is the removal of a provider from an industry that has only a handful of major players nationwide.

The main winners in a merger, Bhagat said, would be Time Warner shareholders and Comcast senior management. Comcast, of course, believes their subscribers win, too.

“I do not think that,” Bhagat said. “I think they’re the losers.”