.

1. Debates Regarding Cable Indecency Continue

A case is now pending before the Michigan Court of Appeals regarding a man convicted of indecent exposure on a local cable program. In March of 2000, an individual aired a one-half hour show on a Grand Rapids, Michigan public access channel which featured a penis with a face painted on it telling jokes. Prosecutors did not seek to enforce obscenity or indecency laws against the program’s producer but rather argued that the program constituted a violation of the state’s indecent-exposure law. Lower courts convicted the producer concluding that the local public access channel was a public place and thus the exposure was “conduct” as opposed to “speech” therefore not protected by the First Amendment. The case is being carefully watched by public access producers nationwide given the increased scrutiny regarding controversial and indecent programming on cable generally.

At the federal level the FCC’s aggressive enforcement of indecency standards on public broadcasters may now also be extended to cable television. Recently, Senate Commerce Committee Chair Ted Stevens as well as Chairman Barton of the House Energy and Commerce Committee both concurred that they were open to exploring the application of indecency standards to cable channels. Chairman Barton stated that “if you buy basic cable or basic satellite, you expect that programming to be family value programming.” With FCC Chairman Powell stepping down it is not clear how aggressive the FCC will be in enforcing indecency standards. However, issues regarding indecency, many of which gained heightened scrutiny as a result of Janet Jackson’s wardrobe malfunction during the 2004 Super Bowl, do not appear to be subsiding.

2. System Consolidations Back in vogue in 2005

With the pending sale of Adelphia Communications and recent announcements by other major MSOs 2005 may see the nation’s largest cable operators further increase their subscriber numbers. Published reports suggest that Comcast and Time Warner have submitted a joint bid for substantial portions of Adelphia’s 5 million cable subscribers spread over 31 states. In addition, Cox Communications, the third largest cable operator, which recently spent $8.5 billion taking the company private, is now considering selling systems serving over 900,000 subscribers in six states.

Since the acquisition of AT&T Broadband by Comcast, cable industry transfers have slowed significantly. However, the acquisition of Adelphia will likely result not only in transfer of control proceedings for Adelphia held systems but may also lead to further system swaps and exchanges as the nations largest cable operators seek to further consolidate their holdings into large regional clusters.

Franchising authorities should pay particular attention to documents requesting the proposed transfer of the cable system franchise to ensure that all existing franchise requirements have been complied with. Particular attention should be directed toward audits to ensure franchise fee payments are fully paid and to ensure that any new cable operator agrees to comply with the existing terms and requirements of the franchise. Visit www.municipalcommunicationslaw.com for further information on cable transfers and procedures to follow.

3. FCC Report on Competition and Cable Industry Prices

On February 4, 2005 the FCC released its 11^th Annual Report on competition in the delivery of video programming. The report is based on information collected from cable operators from June 2003 through June 2004. During this most recent reporting period the FCC found that cable subscriber growth was less than 1% while DBS subscribers grew nearly 18%. As a result cable operators’ share of the overall cable marketplace continues to decrease. In June 1993, cable operators controlled 95% of the marketplace with DBS controlling just 3%. In June 2004, cable operators controlled 72% of the marketplace with DBS controlling 25%. The FCC attributes DBS growth in part to the Satellite Home Viewer Act of 1999 which permitted DBS providers to carry local broadcast television stations.

Despite cable operators’ anemic subscriber growth rate industry revenue continues to grow. From June 2003 through June 2004 cable operators’ revenue increased 11%. This growth was driven in part by cable operators’ increasing share of high-speed Internet access subscribers. Cable operators now serve over 19 million cable modem subscribers. In 1998 cable operators derived a mere 12% of total revenue from non-video sources. In 2004, cable operators derived 27% of their revenue from non-video sources (i.e. high-speed cable modems, telephony).

With respect to cable rates the FCC’s survey found that the average monthly rate for cable service increased by 5.4% from $42.99 to $45.32 for the 12 months ending January 1, 2004. In 2004, the average price per channel increased to $.66. In comparison, the Bureau of Labor Statistics which publishes the Consumer Price Index measured inflation related to all goods and services for all urban consumers at 1.1% over the same 12 months. The FCC also measured cable rate increases for communities subject to competition and found that cable rates were, on average, $3.00 less or about $.06 less per channel in competitive markets.

The FCC also determined that the cable industry has nearly completed its cable system upgrades and now almost 91% of all cable systems are served by 750 MHz of capacity or higher. This capacity permits cable operators to provide increased channel offerings and add new services including video-on-demand, home networking, in addition to high-speed access and telephony.

4. Franchise Fee Audits

Franchising authorities around the country continue to be surprised with the results of franchise fee audits from a variety of cable operators. Systems as small as 1,000 subscribers and as large as 100,000 subscribers or more have conducted reviews and/or audits regarding the payments which their cable operators make in the form of franchise fees as compensation for use of the city’s public rights-of-way. Some of the fee audits have discovered 1) inconsistencies in the manner in which the cable operators allocate revenue, 2) failure to properly report advertising revenue, 3) improper calculation of fee on fee requirements and 4) inconsistent geographic coding. By way of example, some cable operators have been found to have improperly coded subscriber addresses so that franchise fee payments are incorrectly being paid to the wrong jurisdiction resulting in tens of thousands of dollars of franchise fee underpayments in some cases.

Franchising authorities should consider whether an audit or review of their cable operator’s books and records is necessary to verify that all payments have been properly made. If you would like more information regarding the procedure to be undertaken for such franchise fee audits or if you have questions regarding the authority in your franchise to conduct such an audit please feel free to contact us.

5. IP-Enabled Services

On November 12, 2004, the FCC held that VOIP telecommunications provider, Vonage is not subject to state regulations governing telephone companies. The FCC concluded that it has the power to preempt state regulations that impede federal authority over interstate communications. The FCC concluded that VOIP service should not be subject to dual state and federal regulatory regimes. State and local authorities have expressed concern with the FCC’s finding that state regulations were inconsistent with the FCC’s deregulatory policies. The FCC held that preemption was consistent with federal law and policies intended to promote the continued deployment of the Internet, broadband and interactive services. Divergence in state rules, regulations and licensing requirements, the FCC held, could impede the roll-out of such services that benefit consumers by providing them with more choice, competition and innovation.

The FCC also has an IP-enabled services proceeding underway to address issues such as universal service, inter-carrier compensation, Section 251 obligations and emergency 911 requirements.

Particularly troubling for municipalities is the fact that this same regulatory approach may also be argued to apply to IP delivered video. Many telephone carriers including SBC have argued that IP based switched digital video should not be subject to state or local franchising requirements as they believe it should be classified as an information service subject only to FCC regulations. However, both SBC and Verizon have been pursuing local cable franchises as each company pushes for “regulatory reform” at the state and federal levels.

6. In Brief

Time Warner – Time Warner reported solid fourth quarter revenues up 10% for the year ending 2004 over the same period one year ago. Time Warner reported a 24% increase in high-speed data revenues and a 25% increase in enhanced digital video service revenues. Time Warner also reported a slight loss of cable subscribers during the fourth quarter ending the year with 10.9 million basic subscribers in systems which it owns and manages.

Insight – Insight Communications’ cofounders, Sidney Knafel and Michael Willner, together with other investors are seeking to take Insight private. Following in the footsteps of Cox Communications which recently spent over $8.5 billions taking its company private, Insight would be valued at about $650 million or $10.70 per share. The impact of such a transaction on Insight’s ability to continue capital expenditures in local markets is not yet known.

Charter – Charter Communications reported a fourth quarter loss of $340 million for the year ended 2004 as compared with a $58 million loss for the same period in 2003. Revenue was up 5% which was attributed largely to growth in high-speed data revenue although Charter lost more than 83,000 basic subscribers. Charter also announced that its co-chief financial officer, Derek Chang, will leave the company in April. Chang’s departure follows on the heels of chief executive and president, Carl Vogel, who resigned in January. Charter also lost its chief administrative officer, Steven Schumm, in January, after his position was eliminated. Charter’s debt has swelled to over $19 billion as of the end of 2004.

Mediacom – Mediacom ended the fourth quarter of 2004 losing 3,000 basic customers, an improvement over analysts’ expectations. Mediacom’s fourth quarter 2004 revenue increased 2.5% although its profit declined to $2 million as compared to net income of $7.1 million in the year ago period. For the full year 2004, Mediacom’s revenues increased 5.2% over 2003 and the company had total outstanding debt of just over $3 billion as of the end of 2004.

Comcast - For the year ended December 31, 2004, Comcast reported a 10.4% increase in revenue from the same period in 2003 with video revenue increasing 6.5% and the addition of 8,000 basic customers during 2004. Comcast’s high-speed Internet service revenue increased 38.6% in 2004 bringing in over $3 billion in revenue. Comcast also reported 1.7 million new high-speed subscribers. Comcast now serves 21.5 million basic cable customers making it the largest cable operator in the country.

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Brian T. Grogan is a shareholder with the Minneapolis law firm of Moss & Barnett practicing in the areas of telecommunications and cable television law. Brian represents entities throughout the country on franchise renewals, transfers of ownership, competitive franchising, rate regulation and effective competition proceedings, telecommunications planning, right-of-way management, first amendment issues, tower siting, leasing and zoning, litigation and other related communication matters. He is a frequent presenter at state and national conferences regarding communications law and he is a member of the American Bar Association (Forum Committee on Communications Law), National Association of Telecommunications Officers and Advisors, International Municipal Lawyers Association (Contracts, Franchises and Technology Section), and is past chair of the Communications Law Section of the Minnesota State Bar Association.

Brian Grogan at Moss & Barnett, 4800 Wells Fargo Center, 90 South Seventh Street, Minneapolis, MN 55402, phone: (612) 347-0340 or via email at groganb@moss-barnett.com. Web site: Please visit www.municipalcommunicationslaw.com for additional updates on communications law issues of interest to municipalities.

The materials in this Communications Law Update have been complied from a variety of sources and address only a portion of the relevant issues contained within hundreds of pages of regulations and decisions. We have not addressed many important points that may apply to your situation. You should consult with legal counsel before taking any action on matters covered by this Communications Law Update.

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