Broadband Cable Association of Pennsylvania

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November 25, 2013

A West Virginia Internet service provider wants a review of Frontier Communications' fiber-optic statewide cable construction project and is asking state officials to suspend payments to Frontier.

Bridgeport-based Citynet CEO Jim Martin asked the state government's chief technology officer in a letter to halt the payments and conduct an audit of the construction project, which is part of a $126 million federal stimulus grant the state received to expand high-speed Internet across West Virginia. The state allocated $42 million to run fiber cable to schools, libraries, county courthouses, jails, health clinics and other public facilities. Frontier, which is owed about $26 million, installed 675 miles of fiber cable.

Martin's letter to technology officer Gale Given alleges Frontier executives have misled state officials about the project. The letter recommends the inspection of more than 600 public facilities where Frontier installed fiber and requests copies of Frontier's invoices. Frontier spokesman Dan Page said he hasn't received a copy of Martin's letter. "If the letter requires a response," Page said, "we'll communicate with those who received it."

State lawmakers last week raised questions about Frontier's construction costs. Frontier is charging about $62,000 for each mile of fiber, or about double the cost of similar projects elsewhere in the state. The Charleston Gazette reports company officials blamed the higher costs on legal fees and a federal requirement to pay union wages to construction workers. Martin, whose company operates an 8,000-mile fiber network, released photos last week showing Frontier's fiber cable spooled up atop a telephone pole at a site in Harrison County. "A physical review of every site should be undertaken to measure the actual length of fiber and ensure that the large coils that have been placed both inside and outside the (facilities) are not counted as part of the actual build," Martin said. "Counting the coils would clearly inflate the number of miles constructed."

Martin's letter also seeks the release of detailed maps, which Frontier senior vice president Dana Waldo said have been turned over to the state Office of Technology. Martin's letter also was sent to Gov. Earl Ray Tomblin, legislative leaders and U.S. Sens. Joe Manchin and Jay Rockefeller. The governor's office said it is reviewing the letter. Waldo told lawmakers last week that Frontier built an "open-access" network that other telecommunications firms, such as Citynet, could use to serve business and residential customers. Frontier had inherited the fiber contract from Verizon. But Martin said it's not economically or technically feasible for Frontier's competitors to make use of the fiber network. Associated Press

U.S. cable giants appear to be maneuvering for control of Time Warner Cable Inc., the country's second-biggest cable firm, setting up a possible takeover fight that could reshape America's television landscape. Comcast Corp. , the nation's biggest cable operator, is weighing whether to jump into the battle for Time Warner Cable, which is already being pursued by Charter Communications Inc. and Charter's largest shareholder, John Malone's Liberty Media Corp.

Time Warner Cable approached Comcast about a combination in recent months, say people familiar with the situation, in hopes of heading off a Charter offer. But Comcast may end up being more foe than ally of Time Warner Cable: while Comcast is contemplating making a bid on its own, it has also discussed working with Charter on a deal in some form, say people familiar with the situation. Analysts suggest the companies could divide Time Warner Cable's systems between them. On Friday, Time Warner Cable shares surged 10% amid reports of cable rivals jockeying for the company, while Comcast shares were up 4.4%. Charter shares rose 6%.

It isn't clear how serious Comcast is about pursuing a deal for Time Warner Cable, and one of the people cautioned that Comcast may opt out of the deal-making altogether. The obstacles to any bid are considerable. If Comcast were successful in buying all or part of Time Warner Cable, it would enhance its already formidable power as the biggest media and entertainment company in the U.S. Comcast not only serves nearly 22 million television subscribers, about a fifth of the country, but through its NBCUniversal entertainment unit owns a major film studio, the NBC broadcast network and some of the biggest cable channels, such as USA.

Comcast, with a market capitalization of $130 billion, could much more easily afford to buy Time Warner Cable, a $38 billion company that dwarfs its existing suitor, Charter, which is little more than a third of its size. Still, people in the cable industry question whether Comcast could get regulatory approval to buy Time Warner Cable, or even whether Comcast Chief Executive Brian Roberts has the inclination to undergo another long antitrust review that could end with regulators imposing more restrictions on the company. Comcast went through a yearlong review of its NBCUniversal purchase in 2010. But lawyers and analysts in Washington say such a deal could get approved, with conditions. Cable operators don't directly compete with each other, but operating in discrete geographic areas.

As a result, "the Justice Department and the Federal Trade Commission generally haven't opposed mergers between cable companies," said Washington lawyer Seth Bloom, the former general counsel of a U.S. Senate antitrust subcommittee. A key question for the Justice Department and the Federal Communications Commission would be whether a combination of Comcast and Time Warner Cable would be so powerful that it would have too much leverage over content providers, said a former U.S. official familiar with past government reviews of cable transactions.

At a minimum, the person said, a Comcast-Time Warner Cable deal would likely be subject to many of the same types of restrictions imposed on Comcast's NBCU acquisition, which included conditions aimed at preventing it from discriminating against content providers on its broadband service. Just how interested Comcast is in buying Time Warner Cable may be the biggest uncertainty. In recent years Comcast executives have stated repeatedly that the company wants to expand in content rather than by buying more cable systems. Comcast's finance chief, Mike Angelakis, said at an investor conference in September that Comcast already believes it has "meaningful scale on the distribution side" and doesn't "particularly believe that adding a couple million more customers to our footprint is going to change dynamics around content costs."

Industry executives suggest, however, that Mr. Malone's re-emergence in the U.S. cable industry earlier this year may have swayed Mr. Roberts' thinking. Messrs. Roberts, 54 years old, and Malone, 72, have a tangled history. Mr. Malone was seen as an industry leader until he sold his cable firm Tele-Communications Inc. in 1999, switching his attention to his content investment firm Liberty Media. TCI systems ended up being part of Comcast through a series of acquisitions that made Mr. Roberts the unrivaled leader of the cable industry. Earlier this year, however, Liberty jumped back into the U.S. cable industry when it bought 27% of Charter. Mr. Malone quickly proclaimed that Charter could be a vehicle for consolidating the cable industry. If Charter were successful in buying Time Warner Cable, the combined company would have nearly 16 million total television subscribers, still smaller than Comcast. But an enlarged Charter-Time Warner Cable could close the gap through another deal.

Mr. Malone has strongly made the case for cable operators to work together more collaboratively, at one point derisively describing the current shape of the industry as "Snow White and the seven dwarfs." Some have interpreted his comments as critical of the cable industry's existing leadership and, by implication, Comcast. Through a spokeswoman, Mr. Malone said: "Brian has been a true industry leader but given today's realities of national players, wireless, over-the-top and changing technologies we need to redouble our efforts to work together to build scale and cooperation. We appreciate Comcast's technology investments and their willingness to share them with the industry."

Signs that Comcast was paying close attention to the Time Warner Cable battle have increased in recent weeks. Mr. Roberts engaged in a long conversation with Time Warner Cable's chief operating officer Rob Marcus, who is scheduled to succeed CEO Glenn Britt at year's end, at the sidelines of a cable industry dinner on Oct. 9. A joint bid by Charter and Comcast offers a number of advantages for both companies. While Charter is close to lining up debt financing for a Time Warner Cable bid with a number of banks, The Wall Street Journal reported on Thursday night, it would likely need to raise cash from other sources to ensure its offer had enough cash to be attractive to Time Warner Cable shareholders. Comcast could provide that extra cash.

Analysts said a joint Comcast-Charter bid for Time Warner Cable would make sense, considering the many different markets that are split between Comcast or Charter and Time Warner Cable. Analysts said an obvious example is the New York City metropolitan area, where Comcast has cable operations in New Jersey and Connecticut while Time Warner Cable serves customers in Manhattan. Comcast could take control of the whole New York market, for instance, and Charter could take control of the Los Angeles market, where its service area runs adjacent to Time Warner Cable's. With a joint bid, "Comcast can get some of what it wants" without too much regulatory scrutiny, and Charter could "offload some of the financial burden" of making a bid on its own for Time Warner Cable, said Craig Moffett, analyst at MoffettNathanson LLC. Wall Street Journal more in Los Angeles Times

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