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What the Verizon Deal Does -- and Doesn't -- Do

by Joshua Breitbart, May 30, 2008
 
Verizon Rollout Schedule
Photo (cc) Eric Hauser

New York City has moved quickly to seal a deal with Verizon to offer cable service throughout the five boroughs. The Franchise and Concession Review Commission waited only four business days after one unpublicized public hearing before voting on May 27 to approve the plan. The franchise still needs final authorization from the state Public Service Commission.

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The contract is 59 pages long with 74 pages of appendices, plus side agreements with the community access organizations in each borough. Verizon and the city Department of Information Technology and Telecommunications hammered out the details in 18 months of secret negotiations.

A deal of this magnitude deserves more than a passing glance from the public and our elected officials. It will determine how we watch TV, make phone calls and use the Internet in New York City for at least the next 20 years. Below is a summary of key points in the agreement.

(If you'd like to read the whole thing, you can request a copy from information technology or download it from my blog, here. For background onVerizon's fiber optic service, known as FiOS, see last month's column, "Fiber Optics: Bringing the Next Big Thing to New York.")

What Verizon Will Do

Verizon Rollout Schedule
The Cable Franchise Agreement between New York City and Verizon New York requires that Verizon's fiber optic network cover the entire city by June3, 2014. It sets targets along the way, giving the company more time to serve apartment buildings because of the challenges of running the wires in them. (All dates refer to December 31 of the year indicated, except for 2014, which refers to June 30.)

Under the terms of the agreement, Verizon promises to build a fiber-to-the-premises (FTTP) network, the gold standard of modern telecommunications that brings the highest capacity wires right up to every doorstep. Even if the cable companies were to replace all of their coaxial wires with fiber optics, the peer-to-peer architecture of the phone network (as opposed to the one-to-many broadcast architecture of the cable companies) makes the fiber-to-the-premises network faster, especially on upload speeds.

There are no government subsidies in this franchise agreement. Verizon will pay for the upgrade to its copper network and recoup all costs from subscribers. Other cities are considering investing hundreds of millions of dollars in a similar fiber network. The advantage of New York's arrangement is that it saves the city money. On the other hand, the network will be Verizon's alone. The other cities would have an open access network, allowing any number of companies to compete to offer services.

Verizon is paying the maximum franchise fee of 5 percent of gross revenue in exchange for use of the city's streets and other areas, usually referred to as rights-of-way. The network will be citywide, marking the first time a single provider will offer cable service to all city residents. Time Warner and Cablevision currently divide the city between them.

Once Verizon's network is complete, consumers will have two choices for cable service: their current cable provider and Verizon. Residents of most other major cities still have only one choice. A duopoly is not true competition, but it's an improvement from a monopoly.

The buildout schedule for the new service is actually pretty fast. A lot of people have criticized the uneven pace of deployment. Staten Island and Manhattan will be complete long before Brooklyn, Queens, and the Bronx. (See chart, below.) However, this is more of a reflection of how quickly the network will cover those two boroughs, than of excessive slowness in the other three.

On the other hand, there are no meaningful penalties if Verizon ignores the buildout schedule, which, according to Bruce Kushnick's research, they have a track record of doing.

The administration has made much of the fact that the deal is for service citywide and Verizon has said it will not discriminate against poorer neighborhoods. While the company has to meet benchmarks in extending service to particular boroughs, it has full discretion about which neighborhoods to wire first within each borough. The deal explicitly allows Verizon to deploy in wealthier neighborhoods first and then extend service to other areas once it has garnered enough subscribers. These official delays are called "Checkpoint Extensions."

The franchise requires Verizon to post a $50 million performance bond, but that goes down to $35 million at the end of this year, when Queens, Brooklyn and the Bronx will have barely any service. The amount continues to drop each year. Even the starting sum of $50 million is a drop in the estimated $6-billion bucket Verizon will spend on deployment or the tens of billions the company stands to make in revenue.

There is a requirement that the households Verizon reaches cannot all be high income, but the mandate is fairly lenient. The agreement says, "The estimated median household income of all homes passed shall not be greater than the average household income of all households in New York City." But comparing a median to an average is the statistical equivalent of comparing apples to pineapples. As it's written, a household with an income of $70,000 is below the threshold. If it compared the median household income of households passed to the median of the city, rather than the average, Verizon would need to serve households with incomes of $45,000 and less in order to make the benchmark.

The Public Good

As part of its deal, Verizon negotiated a number of side agreement with the community access organizations, more commonly known as public access centers, in each borough. I have not been able to review them but am told each of the centers will receive a decent payment per subscriber per month. Of course, most Verizon subscribers will be switching from Time Warner or Cablevision, which already provide a community access charge, so this will not be a huge new source of revenue for the organizations, just a guarantee that they will not lose out.

While the funding for community access organizations is good, Verizon is not required to offer high-definition or video-on-demand services for any public, educational or government channels, though the company says it will offer this "enhanced digital platform" over time.

As part of the franchise, Verizon will pay into a Technology and Education Fund. The payment, though, is only $4 million over seven years, which comes to something like 8 cents per person per year.

The idea for this fund comes out of the city's Broadband Advisory Committee and a report from the consultant hired by the Economic Development Corporation. It represents a key part of a strategy to close the digital divide, though launching a new city agency with this money could add a new layer of bureaucracy without increasing the effectiveness of existing community technology programs. The city is going to have to augment significantly the money from Verizon if it wants to have an impact. And all of the computer skills training will be for naught if the city can't reign in broadband prices or if wealthy residents move up to high-speed fiber optics while others are left with DSL or cable modems.

Buyer Beware?

The deal lists numerous consumer protection standards and requires the completion of an annual cable consumer report card, though not until all of the cable companies have been subject to this requirement for a full calendar year. The first report card might not appear until February 2010.

The deal lowers the consumer protection standards codified in the existing franchises. Most notably, the proposed franchise would significantly reduce the established penalty for a cable company missing a scheduled installation or repair appointment. Currently, the penalty for a missed appointment - the appointment is not for a precise time, but for a four-hour window - is free installation (for an installation call) and one month's credit based on the preceding month's bill. The Verizon franchise reduces this to a $25 credit.

Verizon apparently raised this in negotiations, pushing hard for the flat amount. According to the information technology department, it then became a matter of agreeing on how much that amount would be, but it's hard to imagine how it could be lower: Did Verizon originally propose a $5 credit?

The administration says that penalties are less crucial than they once were because consumers will now have a choice of cable providers. If Verizon's customer service is unsatisfactory, people can opt for Time Warner or Cablevision. But the lower standard will be written into the competitors' franchises when they are renewed this year, immediately putting them into effect citywide, while Verizon's competition will roll out slowly and unevenly. Huge portions of the Bronx, Brooklyn and Queens will have no competition and weaker protections for the next four to nine years.

The competition may also spur the providers to lock subscribers in to extended contracts with the kind of early termination fees that cell phone companies have used. The Daily News reported last month that Verizon was planning to impose a penalty of $199 on subscribers who cancel service. When Manhattan Borough President Scott Stringer questioned Verizon on this issue, company officials acknowledged they might impose it on special introductory rates or on package deals like the common "triple play" of Internet, phone and cable service combined.

It costs an estimated $1,000 to $1,200 to install FiOS in a home. Once in place, fiber optics requires much less repair and upkeep than copper or coaxial wires so they are less expensive to maintain. But Verizon needs customers to keep the service for a year to recoup that installation cost. This is one of the reasons Verizon likes to pull out the old copper wires when it installs the fiber optics, since it means the customer loses the option of downgrading to the cheaper service. A company representative said, however, that its current practice in New York is to leave the copper in place unless the customer requests the wires' removal.

Other Issues

The provisions for non-English speakers are vague, simply saying that Verizon should provide service in a language spoken by a "substantial" number of its subscribers. This is of little use to potential subscribers who do not speak English, unless Verizon decides there are enough customers to make it profitable to offer services in their langue. Further, the open-ended language raises the concern that this franchise is more of a gentlemen's agreement than a service contract. The franchise could specify what languages Verizon must provide service in.

There has not been enough public disclosure. The deal was worked out behind closed doors and it seems as thought the department of information technology wants to conduct all of its oversight in private, as well. The agreement makes frequent reference to the confidentiality of information that Verizon will provide to the city, but the presumption should be on disclosure, not secrecy.

The Bottom Line

Overall, the deal is very favorable to Verizon, which, pending Public Service Commission approval, now has access to the largest cable market in the country. It permits the company to build to areas of the city in the order it wants and allows for delays if its services do not attract enough subscribers early on. There are no repercussions for further delays or for poor customer service.

New Yorkers will benefit from having a fully fiber optic network and a choice of cable TV providers. According to Consumers Union, the existence of a second choice in cable providers tends to lower prices by as much as 15 percent. But the lowered customer service standards suggest we may see the phone company sink to the level of the cable companies rather than see the cable companies rise to the level of the phone company. This deal is the beginning of the end of competition for Internet or phone service in New York. Rather than choosing among multiple providers for each service, you will choose between two packages of all of your communication needs - TV, phone, Internet.

There are certainly enough red flags in the deal to have warranted further review from the franchise review commission. Now that the arrangement seems almost certain to be approved, it will be up to the department of information technology to provide reliable oversight and report regularly to the public on how well Verizon is living up to the agreement. As part of that, the department should maintain an up-to-date buildout calendar on its Web site and release the reports that Verizon is required to file with them. The city will have to make good on the initial $4 million Technology Education Fund by finding additional money. And local consumer and public interest groups will have plenty to keep them busy in this area for years to come.

 


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