Open video systems to supplant video dial tone

Open video systems to supplant video dial tone

BART TAYLOR

Open video systems (OVS) is an option given for the regulatory treatment of a video delivery system. Currently, there are four potential forms of regulatory status for such a system: cable TV, common carrier, wireless and OVS. The Telecommunications Act of 1996 defines OVS in one of its sections, and the Federal Communications Commission (FCC) has established rules that define OVS treatment.

OVS status must be applied for and granted or denied on a fast-track schedule, as outlined by the Act. Previous FCC rules for a common carrier type of regulation, known as video dial tone, were done away with in the legislation that created OVS. In short, OVS is a hybrid of cable-TV-type regulations that contain capacity-based requirements. It is expected to promote the build-out of systems with higher capacity than present ones.

The idea behind this new form of regulation is to create a framework of regulatory treatment as incentives for entrants. These players include the telephone companies, which cannot immediately merge with in-region cable operators, and electrical utilities, competitive access providers, and others who might want to get into video-program delivery, popularly known as broadband.

The pro-competitive Telecom Act has been beneficial for the fiber-optics communications industry. However, the economics of a stand-alone switched-digital video platform are questionable, especially if the incentives are not strong enough for those building the systems.

Broadband projects that rely heavily on fiber to achieve new capacity levels are also beneficial for the fiber industry. However, current broadband alternatives, such as multipoint, multidirectional distribution system (Mmds) and direct broadcast satellite, are wireless competitors to cable. OVS would represent an all-out, landline-facilities-based assault on cable`s native markets. Though allegiances cut both ways, in the end, competition and investment mean more deployed fiber. High-capacity, digitally switched systems represent a continuation of fiber`s current growth.

For the most part, the shape of the OVS rules is outlined in the Telecom Act. However, issues of interpreting and implementing the statute give the FCC leeway in deciding how best to instill OVS investment in broadband. The initial rules for OVS requirements and cost allocations exist as of this month.

The OVS formula

OVS has the potential to succeed, whereas video dial tone does not. The premise is similar. Initially, outright in-region mergers between incumbent local exchange carriers and cable-TV operators will remain barred, in most cases. Designed to encourage overbuilds that will provide high-capacity broadband systems to deliver video to homes, the new OVS formulation is a hybrid of cable and common carrier styles of regulation.

Under OVS, franchise equivalency fees are imposed in lieu of the contracts cable companies must make with municipalities. But only by creating sufficient system channel capacity can OVS system operators escape certain common-carrier-type restrictions.

If they fail to create enough capacity, the rules limit operator-affiliated program carriage channels to one-third the level of total system capacity. Similar to cable regulations are OVS content provisions, such as must-carry/retransmission consent and program-distribution bargaining safeguards, which prevent total exclusivity in OVS-affiliate deals.

More capacity going to every home in America is probably good for equipment demand. As for the appropriate technology, switched-digital TV is most likely the eventual goal.

Clearly, digital compression of channels bestows OVS operators with ample capacity. But for the near term, technologies such as Asynchronous Transfer Mode will not go into full broadband video deployment to homes across the country. That will see refinement in other markets, where application demand is proven.

Interconnection cost agreements

The most complex issue is managing the collective set of cost-allocation rules. As market restrictions fall, concerns over cross subsidies always get raised; OVS is not unique in this respect.

This fall, interconnection agreements should continue to be negotiated. Soon, regional Bell operating companies will begin meeting the threshold tests required to enter the long-distance business, and even the proverbial ostrich realizes things have changed. As the Bells, interexchange carriers, cable-TV companies, competitive access providers and others complete deals that will change their core businesses forever, they are scrambling to patch together attractive packages that offer subscribers everything--local with long distance, equipment, wireless service, Internet access--for one monthly payment

Predicting all effects of the deals is difficult; it is likely that cost allocation will require monitoring on an ongoing basis. As the markets change, consumer demand will move forward, and new technologies will appear. In turn, the need to resolve new interconnection and cost issues will also appear. The FCC, individual states and competitors, themselves, all have their own views on what is fair in preventing cross-subsidies and encouraging investment.

Video program distributors and broadband operators are not exceptions. Under the old video dial-tone regime, cable operators shouted "unfair" due to fears that telephone companies would cross-subsidize by fueling their adventures in cable with massive local-loop revenue streams.

Now, with interconnection and packaged deals becoming a reality, the same fear re-emerges as the OVS sequel. In this case, there is more cause for optimism. Video dial tone was an ad hoc solution; OVS has been designed with the failures of video dial tone in mind.

Incentives this time?

For the most part, the shape of the OVS rules is outlined in the Telecom Act. However, issues of interpreting and implementing the statute give the FCC some leeway in deciding how best to promote investment in broadband--that is, OVS. The initial rules for OVS requirements and cost allocations exist. Even more important is what kinds of incentives are provided. The FCC has decided that it will interpret a non-OVS section of the Telecom Act statute as enumerating methods of encouraging development of switched broadband networks, and it will apply these separate provisions to the OVS rules. This policy of allowing case-by-case regulatory forbearance could breath life into OVS investment. Price-cap regulation, tax breaks and other perks are appealing to an overbuilder; politically, they are risky and contentious.

On the other hand, the policy of prohibiting in-region mergers and simultaneously guarding against cross-subsidies could prove unrealistic in the short-term. For cable-TV and telephone companies, which will be difficult to distinguish in the future, the real challenges are the technology and the markets.

Even seemingly isolated issues, such as rights-of-way and powering costs, could alter the prospects for build-outs and cause investment to wither. If technology poses its own challenges, though, it will undoubtedly help solve other problems.

Integrated solutions are likely. For example, low-cost wireless technologies are expected to spur growth even in wireline-communications markets.

By far the biggest difference this time around is that electrical utilities are imbued with great potential to become players. The Telecom Act has cleared the way for them to enter telecommunications. While their own markets head for a round of deregulation and new ways of doing business, they may begin seriously by pursuing greener pastures elsewhere in video. q

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