LUS Files Complaint: Cox and NCTC Limit Competition

Lafayette Utilities System has filed a complaint with the FCC following what seems to be a rather arbitrary decision by the National Cable Television Cooperative (NCTC) to deny Lafayette as a member. This is a crucial issue for communities that want to build fiber-optic networks, so we will dig in and offer an in-depth explanation.

It all starts with the business model. Fiber-optic networks are fantastically expensive and are expected to be financed entirely with revenues from subscribers. Though communities typically want fiber-optic networks for the broadband capacity, they find themselves having to offer cable television services also to ensure they will attract enough subscribers to make the debt payments on the network.

Unfortunately, cable television services are the most difficult and expensive part of the triple-play (broadband, telephone, cable tv). A community network has to sign deals with different content providers in order to put together its channel lineup. Even a community network with 100,000 subscribers has little power over the companies with channels like ESPN, the Disney Channel, Discovery, MTV, Food Network, and others. Thus, it will have to pay more for those channels than massive networks like Comcast that have many millions of subscribers and therefore a stronger negotiating position. LUS has noted that video programming is the "largest single on-going cost" it incurs in the network.

Enter the NCTC. By forming a cooperative, many small providers (public and private) were able to gain negotiating power over content owners and even hardware manufacturers to cut costs to members by buying in bulk. In recent years, the size of NCTC rivaled that of major national providers like Charter and Cox cable. All three parties stood to gain by bringing Cox and Charter into NCTC in 2009. The addition grew NCTC significantly -- only Comcast has more subscribers currently.

The advantages of NCTC are quite significant and worth reiterating because it is a reminder of the ways in which massive private companies have the playing field tilted in their direction. Without access to NCTC, communities have to pay more for the same content and equipment (NCTC savings may start at 15%-20%. From the complaint:

NCTC market power also enables it to obtain much bigger, better, more flexible, and less costly packages, than any individual small cable operator or any smaller buying group can obtain. Video programming distributors typically dictate terms to small cable operators on a take-it-or-leave-it basis. Aside from the price per channel, these terms often dictate the tying of related channels to the ones the operator wants, requiring mixes of standard and high-definition channels, placing channels at specified positions in the line-up, and locating channels in the most popular basic and expanded basic programming tiers. In other words, in order to get the “must-have” video programming that they need to be competitive, small cable operators must typically pay for many channels they do not want, incur substantial costs for extra equipment to support these unwanted channels, and pay fees based on the number of subscribers in the largest programming tiers, rather than in smaller tiers based on subscriber interests and preferences. NCTC has the clout to negotiate much more flexibility for its members in all of these areas.

NCTC also provides its members another advantage over non-members: they do not have to negotiate individual arrangements with 300 or more video programming distributors. Since each such arrangement involves multiple issues, the time, burden, and cost involved in individual, one-on-one negotiations is enormous. Moreover, this assumes that the programming distributors are willing to deal with small cable operators one-on-one on a timely basis. Often they are not.

Communities that are denied entrance to the NCTC have a much harder road when it comes to competing with massive entrenched incumbents. Philip Dampier of Stop the Cap! wrote about this issue, noting that NCTC has strayed from its original purpose:

As someone who personally was involved in the passage of that legislation [1992 Cable Act], the ironic part is we were fighting -for- the NCTC back then. Of course, those days the cooperative was made up of wireless cable providers, utility co-ops, municipal co-ops, and other independent cable systems that were constantly facing outright refusals for access to cable programming or discriminatory pricing. Satellite dish-owners were also regularly targeted. NCTC was a friendly group in the early 1990s but has since become dominated with larger corporate cable operators, especially Cox Cable and Charter Communications.

Recently, NCTC began discriminating against publicly owned networks, refusing to let Wilson (North Carolina), Chattanooga (Tennessee), and Lafayette join NCTC. There was no explanation for the discrimination against muni networks, so LUS is asking the FCC to force the NCTC to admit them.

The specifics may be found in the Official Complaint:

LUS alleges that the Defendants are violating Section 628 of the Communications Act, 47 U.S.C. § 548, and the Commission’s implementing rules, 47 C.F.R § 76.1001 et seq., by engaging in unfair, deceptive, and anticompetitive conduct that has the purpose and effect of preventing LUS from becoming a member of NCTC and thereby obtaining the huge quantity discounts, and other benefits that NCTC negotiates for its members. These discounts and benefits total millions of dollars annually.

The TeleCompetitor coverage of this lawsuit notes NCTC has been selective in the past with membership:

This type of charge is no news to some IPTV operators, many of whom claim access to NCTC has also been denied to them. NCTC, a traditionally closed-lip organization, has never offered any official response to these claims. In my communication with them, they’ve always said they’ve never blocked any company from joining because of who they may compete with. But they do admit to a selective admission process, reviewing each applicant individually to ensure they meet NCTC ‘criteria’ before offering membership. That criteria is a ‘gray area’ to say the least. There is also a pretty significant membership fee to join – a fee that some operators claim is an additional barrier to entry.

However, NCTC has specifically noted it has concerns relating to municipalities. Despite opening itself to new members, it ignored the applications of Chattanooga, Wilson, and Lafayette for months at a time. When rejecting their applications eventually, it offered no explanation.

After NCTC was notified that Chattanooga and Wilson would be joining the LUS complaint for this anti-competitive behavior, NCTC decided to admit both Wilson and Chattanooga but not Lafayette. The only discernible difference between LUS and the others? Wilson and Chattanooga compete with Time Warner and Comcast (respectively) and neither is a member of NCTC. Lafayette competes with Cox, the single largest member of NCTC.

So long as massive scale is rewarded in broadband and cable networks, competition will be elusive. Only by ensuring small providers can join groups like NCTC can competition even have a chance. If the FCC wants to encourage competition, it will quickly require NCTC to admit LUS on fair terms.

A local editorial notes the LUS has already spurred competition locally: