Broadband Cable Association of Pennsylvania


October 2, 2012

To entice Google Inc. to build its ultra-high-speed fiber network there, Kansas City, Kan., and Kansas City, Mo., offered the Internet company sweeteners including several free or discounted city services. Now, Time Warner Cable Inc. and AT&T Inc., the incumbent Internet and TV providers in town, are angling to get the same deal.

Among the sweeteners granted Google by both cities are free office space and free power for Google's equipment, according to the agreement on file with the cities. The company also gets the use of all the cities' "assets and infrastructure"-including fiber, buildings, land and computer tools, for no charge. Both cities are even providing Google a team of government employees "dedicated to the project." For the past few months, Time Warner Cable has been negotiating with Kansas City, Kan.,to get a "parity agreement" granting it the same concessions as Google got, the city and the company says. Time Warner Cable has already signed such a deal with Kansas City, Mo.

AT&T also has approached Kansas City, Mo., for the same deal, according to a person familiar with the matter. "There are certain portions of the agreement between Google and Kansas City, Kan., that put them at a competitive advantage compared with not just us but also the other competitors in the field," said Alex Dudley, a Time Warner Cable spokesman. "We're happy to compete with Google, but we'd just like an even playing field." AT&T declined to comment on any negotiations but said, "It's time to modernize our industry's rules and all consumers benefit from fair and equal competition."

Google is building a fiber network in the Kansas City area that will offer pay-TV and Internet at extremely fast speeds of one gigabit per second-a speed that the company boasts would allow a person to download a season of "30 Rock" in 30 seconds. The Internet company chose Kansas City from more than 1,100 cities in the U.S. that had expressed interest in having the Google Fibert network built in their areas. Google plans to start providing service in the first neighborhood, Hanover Heights, later this month.

The Google Fiber project was so desired that the local governments rolled out the red carpet. In Kansas City, Mo., for instance, the city is allowing Google to construct "fiberhuts," small buildings that house equipment on city land at no cost, according to a person familiar with the matter. The cities are discounting other services, as well. For the right to attach its cables to city utility poles, Google is paying Kansas City, Kan., only $10 per pole per year-compared with the $18.95 Time Warner Cable pays. Both cities have also waived permit and inspection fees for Google. The cities are even helping Google market its fiber build-out. And both are implementing city-managed marketing and education programs about the gigabit network that will, among other things, include direct mailings and community meetings.

Several cable executives complain that the cities also gave Google the unusual right to start its fiber project only in neighborhoods guaranteeing high demand for the service through pre-registrations. Most cable and phone companies were required by franchise agreements with regional governments to build out most of the markets they entered, regardless of demand. The concessions made by the Kansas cities raise an unnerving question for existing pay-TV and Internet providers: whether other cities across the country could offer similarly sweet deals that could encourage Google to expand its Fiber build-out. Jenna Wandres, a Google Fiber spokeswoman, affirmed Monday that "right now we're focused on Kansas City, but we hope to expand to other communities in the future."

Google's rights "appear to be significantly more favorable than those cable, Verizon or any other fiber overbuilders achieved when striking deals with local governments in the past," said Goldman Sachs analyst Jason Armstrong. "We're surprised Time Warner Cable hasn't been more vocal in its opposition." Already, the situation has given the cities new bargaining power. The Kansas cities are asking Time Warner Cable and AT&T to promise new, improved community services comparable to the ones Google has offered-which include hundreds of free connections to government-picked locations-before they'll give them a deal like Google's.

As part of its new "parity" deal with Kansas City, Mo., Time Warner Cable said it will make certain improvements in its services still to be finalized. The city has brought up speed and performance improvements to the network, for instance, according to a person familiar with the matter. In exchange, the cable operator will be getting Google's discounts and a refund for the difference it paid the city in fees between March 2012 and August, the new agreement shows. Similar discussions are under way with Kansas City, Kan. "Our goal is to encourage innovation. Whether that is Google or an existing provider or someone else, we want to help this to happen over and over again," says Kansas City, Kan., Mayor Joe Reardon.

Cable executives defend their current Internet offerings by pointing out that most Web applications don't yet require gigabit-speed Internet, and the residential market isn't demanding such offerings. As one top cable executive recently put it, Google Fiber is just "an expensive PR stunt." Google dismissed that criticism. Kansas City government officials also disagree. "Google has completely disrupted [Internet service] business models," says Rick Usher, assistant city manager of Kansas City, Mo. "Our citizens are more aware than ever before of what's available out there." Wall Street Journal

Cablevision Systems Corp. founder Charles Dolan testified on Monday that it was "quite a reversal" when Dish Network Corp. abruptly ended their contract for high-definition programming, a dispute at the center of a long-running legal feud between the two pay-TV providers. Dolan, Cablevision's billionaire chairman, was the first witness in the trial in New York State Supreme Court in Manhattan. Voom HD, a former Cablevision unit, sued Dish in 2008, saying Dish violated a 15-year deal to carry HD programming and should pay $2.4 billion in damages. Dish has countered that Cablevision did not invest the $100 million per year in the service it had promised.

Voom HD is now a part of AMC Networks, which Cablevision spun out last year. Dish blocked AMC, the company behind critically acclaimed shows such as "Mad Men" and "Breaking Bad," as well as the IFC, WE and Sundance channels from its 14 million customers in July. Media analysts say the trial's outcome could decide whether Dish ever carries the channels again. Dolan, who turns 86 this month and rarely speaks in public, testified that he was not aware of Dish being anything less than satisfied with Cablevision's Voom HD programming package. He said he could recall only one criticism that Dish Network chairman Charlie Ergen had with the programming: He did not like a channel called "Rave" that played rock concerts. Dolan said it was known that Ergen dislikes rock music, so this did not surprise anyone at Cablevision. Reuters

Has TiVo, the DVR pioneer, become little more than a patent play? Last week's $250 million deal with Verizon Communications to license its patents was a shot in the arm. But, including other legal settlement payments and tax losses, TiVo is still worth little more than the cash on its balance sheet.

Add the Verizon payment to $300 million that TiVo is due from previous deals with Dish Network and AT&T as well as its $407 million in net cash, and the total is $957 million. With $197 million in accrued net operating losses that TiVo could use to offset taxes if it makes a profit, it isn't far off its $1.3 billion market value. This doesn't include the result of litigation with Google's Motorola Mobility and Time Warner Cable, as well as a legal battle with Time Warner and Cisco Systems. It has a good chance of winning both. TiVo has recognized part of each settlement immediately-about $65 million in Verizon's case, Evercore estimates-before treating the rest as future license revenue. The deals run until 2018, when TiVo's core 389 DVR patent expires.

There is also TiVo's push for new license deals with other pay-TV operators. Early patent agreements with DirecTV and Comcast weren't very lucrative as they were signed before its patents were tested in court. TiVo has since done better deals with small U.S. cable operators like RCN and Suddenlink and European operators like Virgin Media, which pay per subscriber for TiVo's software interface and patents. Total customers using TiVo's interface grew 41% year-over-year in the second quarter to 2.7 million, and quarterly revenue rose 7% to $65.3 million.

Still, TiVo has struggled. Excluding litigation costs, it lost $15.8 million before interest, taxes, depreciation and amortization in the second quarter. TiVo's interface is relatively advanced. It lets users view Netflix and Hulu as well as recorded shows and video-on-demand. TiVo's patents, including battle-tested 389, could also make it attractive for an acquirer like Apple or Samsung. But operators are developing rival interfaces, including Comcast with its X1 and Liberty Global in Europe with its Horizon set-top box. Any acquirer would likely pay less to license TiVo's technology than buy the company. Moreover, with the 389 expiring in 2018, and more TVs connected to the Internet, the need for a physical device to save and view programs may fade. Another court victory or two will likely push play on the shares. But with a 2018 patent cliff ahead, the race is on for TiVo to reinvent itself. Wall Street Journal