The final chapter for cable and Congress

STEPHEN N. BROWN

Yes, Virginia, a cable-TV operator can go bankrupt. Nearly a year ago, the Maryland Cable Corp. defaulted on $162 million worth of bonds and filed for Chapter 11 protection, which allowed the company to fend off creditors and reorganize under a new name, "Newco." The default was the first in the cable business and a surprise when it happened because the company was operating in one of the wealthiest areas in the country--the Washington, DC, suburban area of Prince George`s County, MD. The cable corporation built its coaxial-cable network to maximize the number of potential households that could be served. From 1988 to 1994, the potential number of customers grew from 128,000 to 150,000. That equates to a possible annual revenue increase of $4 million--enough to meet debt obligations if the customers were to take basic cable service. The company failed on the marketing side of its business. Subscribership grew too slowly and few customers bought pay-per-view, a potentially lucrative service where customers tell the cable company what movie they want to see. Poor performance in these two categories meant the company could not make its scheduled bond payments, making bankruptcy inevitable.

The company`s failure occurred in the absence of competition. Imagine what may happen in a decade when local telephone companies offer alternative video services! For the time being, the cable industry appears healthy. Basic service subscribership continues to grow, and capital budgets are expanding at such larger operators as Tele-Communications Inc. and Time Warner. No competition is expected from the telephone companies` video dial-tone service for at least three years.

The cable industry has a strong vested interest in the outcome of telecommunications reform legislation. So does the telephone industry because its video dial-tone networks are aimed at taking market share from the cable systems. Thus, the telephone industry began a public campaign to stop or slow down the Federal Communications Commission`s rule-making for video dial-tone services. Believing such rules would make it harder for these networks to compete with cable companies, Bell Atlantic Vice President James Cullen recently stated: "I call upon the FCC to reverse its course on additional [video dial-tone] rule-making. ...This is not just a question of Bell Atlantic`s corporate self-interest. ...I don`t believe that this outcome is in anybody`s best interest--not consumers, not programmers, not policy-makers--nor do I think it optimizes the fantastic potential of fiber-optic, interactive networks to transform the way Americans work, play and learn."

Narrowband systems

The development of interactive-TV platforms is one way to expand the fiber-optics business, but capacity without content is not a salable commodity. Instead of focusing on cable and telephone broadband systems, US West Inc.`s Interactive Video Enterprises cut back staff and shifted its efforts toward narrowband, computer-based platforms. The interactive markets appear to be switching to narrowband alternatives to access personal computer markets. Thus, the link between video dial-tone networks and fiber optics still appears tenuous.

The survival of broadband interactive platforms ultimately depends on the reconciliation of the two reform bills passed by Congress--Senate Bill 652 and House Bill 1555. Both are cable-friendly, but they have to be reconciled in a House/Senate conference committee. The final chapter in the reform effort began just after Labor Day and will end sometime this month: The outcome is not predictable. The visible battles that occurred in both the Senate and the House last summer now occur behind closed doors. All the protagonists are again at each other, only this time it`s being done with silencers and in the shadows. Roy Neel, a longtime aide to Vice President Al Gore and now president of the United States Telephone Association, said, "The bill will, in effect, be written in conference." Unlike the open debates in committees and on the House and Senate floors, the process "moves to the back rooms," according to Neel. The conference normally ratifies the privately arranged compromises that have been agreed to by the parties, but nothing can be taken for granted.

House/Senate conference committees are the opposite of open government. This fact is not lost on the industries, which understand that they must keep wooing the politicians until the bills become law. And woo they must because of the power brokers who make the final decisions. The Senate delegation to the conference committee is headed by Senate Commerce Committee chairman Larry Pressler (R-SD), selected by presidential hopeful Sen. Bob Dole (R-KS). The House delegation is headed by Commerce Committee chairman Rep. Thomas Bliley (R-VA), a self-declared "friend of business" and a hand-picked appointment of House Speaker Newt Gingrich (R-GA).

Both men have a continuing courtship with the cable and telephone industries. Sen. Pressler`s fund-raising ability continues to astonish Washington insiders. According to a published source, from January to June, the senator raised more than $461,000 in contributions, including $125,000 from cable and telephone companies. An August fund-raising dinner, hosted by Fox Network owner Rupert Murdoch, raised approximately $50,000 for Pressler. Several Viacom executives attended, including President Frank Biondi. Sen. Pressler`s most recent direct service to Murdoch occurred when the Australian media tycoon and Fox were being investigated by the FCC for violation of foreign ownership rules. Current law limits such ownership to 25% of a video or radio broadcast company. Murdoch`s ownership of Fox was found to be a "technical" violation of the law, but one of no consequence. During the investigation, Pressler sent FCC Chairman Reed Hundt a strongly worded letter complaining of "distress and dissatisfaction" with FCC`s scrutiny of Fox.

Like the senator, Chairman Bliley has been responsive to the needs of business. His financial links to the telephone and cable industries were recently examined by Congressional Quarterly. In a carefully worded story, the publication emphasized that Bliley sometimes took positions that opposed the interests of companies whose stock he owns. The magazine noted that Bliley owns stock in Media General Inc., whose properties include several newspapers and cable companies in Virginia. He also owns $15,000 to $50,000 worth of GTE stock. It was Bliley who, after a meeting with GTE`s lobbyists, included a provision in H.R. 1555, the Communications Act of 1995 (the House of Representatives` version of telecommunications reform), to overturn a 1984 court decree that prevented GTE from offering long-distance telephone service. Apparently feeling some discomfort from the media`s attention, his office issued a statement: "Never have Chairman Bliley`s decisions been motivated by a desire on his part for personal gain, and at no time has any appreciable gain occurred because of actions on his part."

Telecommunications policy

No one accuses Bliley or Pressler of any wrongdoing. The larger issue here is what can be expected of their collective leadership when they decide the lasting fate of the country`s telecommunications policy. The decision will be made "in the back rooms" of the House/Senate Conference committee by august men who give the appearance of being financial wards of the cable and telephone industries. Bliley has already shown that he can be turned around in midstream. Last May, he led H.R. 1555 through his subcommittee by a vote of 38 to 5. Two months later, he abandoned his original wording and said he did not really understand it or what it would do. When his version met opposition, he said he "checked with communications lawyers to find out" why. Bliley then concluded, "What seemed like an innocuous thing is not so innocuous." Thus he abandoned his own independent judgment and accepted the contrivances of his peers. If that happens in an open forum, the cozy privacy of a conference committee may open the flood gates.

With just a few artful changes in key phrases and sentences the committee could easily redirect the bill`s meaning and impact, tilting the advantage to the cable industry or the regional Bell holding companies. All of it could be accomplished without the slightest fear or trace of public debate. The only thing preventing that outcome is the Administration`s veto threat, even though it is dismissed as empty rhetoric by industry observers. They point to the Senate`s vote of 81 to 18 and the House`s vote of 305 to 117 and suggest these are veto-proof margins. They are not because senators and representatives, once they see their own opposition as futile, switch their votes from "no" to "yes" at the last moment. Everything would change if the Clinton Administration carried out its threat. Forty-four democrats in the Senate are enough to prevent an override of the President`s veto. When the House bill passed late August, Bliley said he expected that some changes would result from the House/Senate conference committee. The chairman also appeared overconfident, saying, "I fully expect Mr. Clinton will sign the bill." He also made it clear that the House would not alter the most important provisions objected to by the President and said Clinton`s veto threat was "kind of strange." Perhaps it sounded strange because Bliley cannot fathom not getting what he wants. He and Pressler need to put the shoe on the other foot and give Clinton and Gore what they want. Otherwise, a final confrontation will delay the legislation until early 1997. Nothing will happen in 1996 because the presidential race starts in January, and Congress will only have time for re-election campaigns.

To ensure presidential approval of the bill next month, Pressler and Bliley have to deal with Vice President Gore this month. His disgust with the House legislation is apparent: "The telecommunications reform legislation being considered by the House of Representatives is abhorrent to the public interest and our national economic well-being." Gore`s position has been consistent for years--in work and play. Earlier this summer, he was playing basketball with Rep. Jack Fields (R-TX). Fields reportedly said, "I`ll shoot you for a veto," but the Vice President was not in a betting mood that day.

More in Earnings Statements