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FULL STORY Verizon, SBC
Lose TV Fight
With Texas Bill

By PETER GRANT, AMY SCHATZ and DIONNE SEARCEY
Staff Reporters of THE WALL STREET JOURNAL


Two U.S. phone companies lost a major showdown with cable-TV rivals over telecommunications legislation in Texas, setting a precedent that is likely to slow their efforts to roll out television service across the country. SBC Communications Inc. and Verizon Communications Inc., the two largest phone companies in number of lines, had lobbied aggressively to win new rules in Texas that would help them accelerate the rollout of TV service to millions of households. State legislators over the weekend failed to act on a bill allowing phone companies to seek statewide -- instead of local -- approval to offer TV programming. The Texas Legislature has ended its session, and phone companies now face the lengthy and expensive process of gaining permission to offer TV from hundreds of individual municipalities.

Phone companies are hoping to get similar legislation passed in numerous states, many of which are likely to look at the Texas decision as a model. The phone companies' loss gives cable companies a head start in the race to offer the most attractive packages of phone, TV and high-speed Internet service.

The unusual defeat by the two Bells, in SBC's home state, now increases the stakes on Capitol Hill, where phone companies have been advocating a major overhaul to the country's telecommunications laws. Those laws were revamped in 1996 but the phone industry has been arguing that they haven't kept pace with advances in technology that have enabled cable companies to offer phone service, cellular companies to become competitive with landlines, TV signals to be sent using Internet technology and high-speed Internet service to go mass market.

Cable companies such as Time Warner Inc. and Comcast Corp. are capitalizing on these technological advances by mounting major drives into phone service. They also are in talks with wireless companies to offer some form of cell service. The expansion by phone companies into TV service increasingly looks as though it is going to get tripped up by laws requiring them to get permission from local governments in the form of franchises before they can offer the service, just as cable companies have had to do for decades.

Both Verizon and SBC plan to launch television service on upgraded networks within the next year. The need to win local franchises from thousands of cities, towns and counties could stretch out this process for years. Phone companies have tried to persuade state legislatures to loosen these requirements, arguing that the new investment will benefit the state and the added competition will benefit consumers. Cable companies have beaten back these arguments partly by accusing the Bells of trying to avoid franchises so they could sell service only in affluent areas.

Rep. Phil King, the Texas bill's sponsor, blames the defeat on the success by the cable lobby in convincing local governments that they would be hurt if they lost the power to issue the franchises. "When all the members start hearing from their city councils, that's a pretty powerful lobby," he says. The bill had passed in the Texas House, but it died in the Senate over the weekend. The legislature is out of session until January 2007.

The failure of the Texas Legislature to act is particularly telling given SBC's clout in the state, where it employs more than one lobbyist for every two state lawmakers. "If they can't get it here, I think it's going to be a hard fight for them," says Kathy Grant, the executive director of the Texas state cable association.

Phone companies are going to continue the fight in state capitals. The next battle will likely be in New Jersey, where legislation backed by Verizon is expected to be introduced within the next few weeks. Both sides already have mounted aggressive lobbying campaigns but it remains a question how effective the phone companies' lobby efforts will be: In Texas, SBC Chief Executive Edward Whitacre Jr. paid a visit to the Austin Statehouse last week and negotiations lasted until close to midnight Saturday, shortly before the close of the state legislative session.

Given their poor record on the state level so far, major phone companies also are pursuing other strategies to deal with franchising requirements. Verizon, which plans to offer a cable-like television service on fiber-optic wires connected directly to homes, has gone through the lengthy process of obtaining franchises from a handful of cities and applying for dozens of others. SBC, which isn't stringing fiber-optic lines to homes and is planning to transmit TV signals using Internet technology, has maintained that it doesn't legally need to obtain cable franchises.

James Epperson Jr., an SBC senior vice president, says the setback in Texas won't slow SBC's plans to offer its TV service to 18 million households within three years. "The old rules that applied during the monopoly era of cable do not apply for new entrants and do not apply to technology that uses the Internet," he says.

Verizon and SBC also have been turning up the volume on their lobbying effort in Washington, D.C. For two years, the phone industry has been running a national advertising campaign in favor of changing the telecommunications laws. The campaign, which includes TV spots in numerous cities and ads on buses in Washington, points out how far telecommunications technology has advanced since the 1996 Telecom Act was passed. ("When telecom law was written a blackberry was a fruit," one of the ads states.)

Phone companies, which are more highly regulated than cable companies, have a long list of changes they would like to see in telecommunications law, including the elimination of rate regulations. High on their list is franchise requirements, and they are hoping that their loss in Texas will spotlight this issue. "Cable will go to great lengths to protect the lock it has on the market," Mr. Epperson says. "That was clearly the message that was delivered in Texas."

Until now, though, the likelihood of a federal telecommunications revamping taking place soon has been dim. Congress was able to pass the last major phone legislation in 1996 because all major industries -- cable, long-distance companies, wireless companies and the Bells -- wanted change. Today, some of the players have as much to lose as to gain from a massive telecommunications overhaul. For example, many cable executives are wary because any measure might include new rules about decency in programming and how much of the cable industry any one company could control.

Cable companies may warm up to changes, however, if the Supreme Court rules against them in a pending case involving the high-speed Internet networks that have become their largest engine of growth. The decision, which is expected sometime in the next month, might mean that cable companies have to open their networks to all Internet-service providers, such as Earthlink Inc. and Time Warner's America Online unit. A loss by the cable industry also could mean that their new phones services that use Internet technology would be more heavily regulated.

"It may be appropriate that Congress affirm that these kinds of services be dealt with a very light economic regulatory touch," says Kyle McSlarrow, chief executive of the National Cable & Telecommunications Association.

Write to Peter Grant at peter.grant@wsj.com, Amy Schatz at Amy.Schatz@wsj.com and Dionne Searcey at dionne.searcey@wsj.com