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Internet Choice in Apartment Buildings

DEK: San Francisco is considering legislative changes to increase apartment dwellers’ choices of internet providers. Unfortunately, this type of ordinance is likely to give renters fewer choices rather than more.

By Carl E. Kandutsch,  Kandutsch Law Office

Read this article as published on the BBC.

                  In October 2016, Mark Farrell, a member of the San Francisco Board of Supervisors, proposed an ordinance called “Choice of Communications Services Providers in Multiple Occupancy Buildings.” The proposed ordinance is intended to increase resident choice, and many broadband activists, in San Francisco and beyond, have welcomed and supported it.

                  The purpose of such initiatives is laudable. It is undeniable that some owners of multiple-dwelling-unit buildings[1] (MDUs), for the primary purpose of lining their pockets, have historically made – and still make – access deals with cable and broadband service providers that restrict or foreclose the entry of competing service providers. The result is that residents have fewer service provider cable and broadband service options than their neighbors living in single-family homes.

It is also true, however, that many property owners already recognize that over the long term, providing residents with choice adds more value to a multifamily real estate asset than can possibly be generated by way of service provider door fees.

                  Nonetheless, I strongly believe that if the proposed ordinance becomes the law in San Francisco, it will have exactly the opposite of its intended effect. In particular, the ordinance will effectively reduce rather than increase competition by forcing smaller competitive service providers out of markets within its jurisdiction, lower the quality of broadband services and technology available to MDU residents, reduce the incentives for investment by both MDU owners and service providers in advanced broadband infrastructure such as fiber to the unit and have a disproportionately negative and discriminatory impact on residents of shared living properties (including students, the elderly and the infirm) and on lower-income people generally.

Background and Context

                  The proposed San Francisco ordinance is loosely based on “mandatory access” laws for cable television services that are currently on the books in 19 states as well as numerous localities. Mandatory access laws prohibit a landlord from interfering with the right of an MDU tenant to receive cable television service from a service provider that holds a cable franchise in the applicable area. However, the San Francisco ordinance goes considerably further. For one thing, it applies to not just to franchised cable operators but also to any “communications services provider” that is licensed to provide communications (including broadband) services within the state of California.

                  In addition, the drafters of the ordinance recognize that in general, cable mandatory access laws do not remove the need for a competitive service provider to negotiate the terms and conditions of access to an MDU. For example, a typical mandatory access law does not force an MDU owner to simply allow the franchised cable company to install a signal distribution system at the property or to use existing in-building wiring serving particular customer-occupied units. Even in a state with a mandatory access law, the landlord can still function as a gatekeeper between the competitive service provider and its prospective customers.

                  The San Francisco ordinance goes one step further and removes the gatekeeper function of the MDU owner altogether. In particular, the ordinance bars a landlord from interfering with competitive access and defines the term “interfere” to include refusing to allow a competitive provider to “use any existing wiring” that is “owned or controlled by a property owner”[2] – provided that the service provider seeking access pays “just and reasonable compensation” to the owner and agrees to comply with “reasonable conditions” relating to the “safety, functioning and appearance of the property.”

Upon receiving at least one request from a tenant at the property, the service provider must deliver notice of its intent to access the building at least 14 days prior to the proposed installation date. The notice includes the proposed amount of “just and reasonable compensation” to be paid to the owner. The owner then has until five days prior to the installation date to notify the service provider of any objections to the system installation plan, including objections relating to the amount of “just and reasonable compensation,” physical limitations at the property that would preclude installation of the system and/or conditions relating to the “safety, functioning, and appearance of the property and the convenience and well-being of the occupants.” A property owner found to have prohibited access to a building in contravention of the ordinance would be liable for a civil penalty of up to $500.00 per day.

                  By virtually eliminating the “gatekeeper” role of the property owner, the proposed San Francisco ordinance will also eliminate what have historically been privately negotiated agreements between service providers and owners relating to the terms and conditions of access to MDUs. Therefore, the question is how the free negotiation of access agreements affect competition among service providers, consumer choice and quality of broadband services for MDU residents. I believe that overall, all concerned parties, including especially consumers, are better served by allowing access agreements to be negotiated than by eliminating such agreements altogether or by transferring the forum for negotiations away from the market and into the courtroom.

Effect on Competition

                  The likely effect of the San Francisco ordinance on cable and broadband competition cannot be assessed without first determining who competes in MDU markets. In San Francisco (as in most other areas in the United States) there are usually two large incumbent service providers offering video, data and voice services, including a telephone company such as AT&T and a franchised cable operator such as Comcast. In some areas, particularly lower-income neighborhoods, there is only one option for service.

                  There are several reasons for the lack of competition, but one is that the large incumbent carriers, for the most part, don’t want to compete against one another. Thus, they choose to build out their networks in areas that have not already been built out by their rivals. This lack of competition is unlikely to improve                 The fact that there is only very limited competition among the large incumbents means that what competition there is comes from smaller, independent companies. Although these independent broadband service providers vary widely in size, they share one common characteristic: Lacking the huge cash reserves possessed by the deep pockets of the huge incumbents, independent competitors must secure financial funding for MDU property buildouts on a project-by-project basis. The Kandutsch Law Office has represented (in addition to real estate interests) dozens of small entrepreneurial cable and broadband service providers for many years, and to the best of our knowledge, every one of those service providers depends on bank loans or lines of credit secured on a project-by-project basis.

                  The fundamental condition for securing funding is always the existence of an enforceable access and service agreement with the property owner, which agreement must grant to the service provider protected and undisturbed use of wiring inside the building or some other set of legal rights (such as bulk billing, discussed below), enforceable over time, that ensure the likelihood of a return on investment for the project. It follows that if the competitive service provider cannot demonstrate to the lender the existence of legal rights (secured in an enforceable access agreement) that ensure the likelihood of success, the project will not be funded at all.                 

                  If the ordinance becomes law, no service provider in San Francisco will be able to secure an undisturbed use of existing inside wiring. It follows that smaller, competitive service providers will not be able to secure funding to construct on-site networks, and if they can’t secure funding, they will abandon the San Francisco market altogether. Furthermore, if the approach taken in the ordinance concept spreads and is adopted in other parts of the country, it is very likely that the smaller, independent providers would simply cease to exist. Since those independent providers offer the only real competition to the huge incumbents, consumers living in MDUs will be left without any alternative at all.

Effect on the Elderly, the Infirm, the Poor and Students

                  Typically, property owners and service providers use bulk billing arrangements to provide affordable cable and broadband services to shared-living environments, such as retirement and nursing homes and student housing, and to lower- or fixed-income residents of apartment buildings. Without bulk billing, it makes no economic sense for a service provider to invest in a shared-living or lower-income MDU.

                  Under a bulk billing arrangement, the service provider agrees to provide service to 100 percent of the residential units in the MDU, and the owner of the building pays a monthly bulk service fee to the provider at a small fraction of the retail cost of programming and broadband services. The owner then recovers a pro rata share of the bulk service fee from each resident in the form of rent (or, in the case of a condominium, in the form of association fees). The key to a bulk arrangement isthat, because the service provider is providing service to all units, it can access deeply discounted programming costs and afford to sell that service at a significantly discounted rate, usually at least 50 percent less than what a consumer would pay for the same service in a single-family home.

In a 2010 order affirming the legality and benefits of bulk billing arrangements, the FCC described such arrangements as follows: “Bulk billing arrangements require the [service provider] to offer service to every resident of the MDU, and the MDU owner to pay for service to all residents, although typically at a significantly discounted rate.”[3] The FCC went on to describe the benefits of bulk billing arrangements:

In the large majority of cases, bulk billing appears to lower prices, increase the volume and variety of programming, encourage high quality and innovation, and bring video, voice, and data services to MDU residents.[4]

[Service providers, real estate interests and some consumers] point out that bulk billing enables lower income tenants to avoid cable rate increases (if it provides for steady prices for several years); these tenants also avoid high deposits and the limitations imposed by their own imperfect credit histories. In these ways, bulk billing can make MVPD services available to some MDU residents who otherwise would not be able to afford them.[5]

… it would be a disservice to the public interest if, in order to benefit a few residents, we prohibited bulk billing, because so doing would result in higher MVPD service charges for the vast majority of MDU residents who are content with such arrangements. Based on the evidence in the record before us, we choose not to take action that would raise prices for most MDU residents who are subject to bulk billing. Accordingly, we will allow bulk billing by all MVPDs to continue because, under current marketplace conditions, it is clear that it has significant pro-consumer effects.[6]

                  If the ordinance becomes law, bulk billing arrangements will cease to exist in the city of San Francisco.That is because service providers are prohibited from offering bulk-discounted services if the services are not being sold to 100 percent of the units at a property. Under the ordinance, this basic premise for bulk billing would disappear in a heartbeat. As a result, enactment of the ordinance will cause consumers living in MDUs to lose the benefits of bulk billing – principally, the possibility of receiving high-quality services at significantly lower costs. If bulk billing ceases to be an option, those consumers who most depend on such arrangements – namely, the elderly, the infirm, students and others on fixed incomes – will likely receive severely limited service or no service at all.

                  In addition, the contractual right to deliver services to an entire MDU property under a bulk billing arrangement is a key assurance (like protected and undisturbed use of existing inside wiring, discussed above) that smaller competitive providers can offer to their lenders to secure funding for a project.[7] Therefore, if bulk billing arrangements disappear, so will competition.

Effect on Quality of Service and Technology

                  Large incumbent cable and telco incumbent carriers typically do not commit to a service-level agreement (SLA) in their access agreements. A typical SLA includes mandatory time deadlines for repairing service interruptions and outages and completing installations, as well as enforceable standards for maintaining minimum bandwidth to a property. Because the incumbents don’t, most competitive providers do agree to SLAs – such customer service commitments are an effective method by which independent operators can distinguish themselves from the incumbent cable and broadband Goliaths. The benefits of having an enforceable SLA are obvious: Consumers are guaranteed a minimum level of customer service.

                  The San Francisco ordinance will eliminate SLAs. That is because most service interruptions in MDUs are caused by wiring-related issues. However, even a small competitive provider will commit to an SLA only if that provider has protected and undisturbed control over the wiring being used to deliver the service to the end user. If the wiring must be shared with another provider, the uncertainty over which provider is responsible for maintenance and repair will preclude any operator from agreeing to an SLA. The result of that will be lower quality of service for MDU residents.

                  Furthermore, the ordinance will result in reduced investment in advanced broadband technology in MDUs, both in existing buildings and in new construction projects. Advanced technology such as fiber to the unit costs money. In a typical new construction project, the service provider agrees to pay for the fiber; it is owned by the MDU owner and the service provider is granted secure, protected use of the wire. But if any service provider has a legal right to use that wire, the incentive to invest in more expensive infrastructure is removed.

                  In an existing project, the service provider agrees to upgrade existing wiring in exchange for the right of secure and undisturbed use over an extended term. Again, indiscriminate wiring access rights will remove the incentive for incumbent providers to invest in network upgrades. As a result, the ordinance will cause MDU residents to fall behind their single-family home neighbors in their access to advanced broadband platforms and applications.

                  Other problems likely to appear as unintended effects of the ordinance include the increased likelihood of vandalism in MDUs (due to the ordinance’s failure to address the location of the demarcation point that separates service provider infrastructure from owner wiring), quality-of-service issues relating to multiple Wi-Fi access points in a building the possible effects of the ordinance on the owner’s ability to lease rooftop space to service providers, and practical issues relating to multiple provider requests for access to wiring. Nor does this article address another certain effect of the ordinance – the birth of a new area of litigation relating to what constitutes “just and reasonable compensation” for use of inside wiring and what constitutes a “reasonable condition” for access under the Ordinance. Suffice it to say that enactment of the San Francisco ordinance will result in a gold mine for lawyers and a nightmare for everyone else, especially consumers.

Conclusion

There is no doubting the worthy intentions of the San Francisco Board of Supervisors in considering the proposed ordinance. However, in my opinion, the ordinance is likely to undermine rather than achieve that goal. Consider for example the fact that the ordinance applies only to existing wiring that is owned by the MDU owner. Property owners and incumbent providers therefore have every incentive to avoid application of the ordinance simply by transferring ownership of in-building wiring to the incumbent provider.  Ownership of in-building wiring infrastructure will give incumbents more not less control over the competitive options available to MDU residents – again, the precise opposite of the ordinance’s stated goal.

In my view, the best available way to enhance competition in MDU buildings is for property owners to control essential on-site infrastructure, and to negotiate access agreements that allow the property owner maintain flexibility over its use by multiple service providers. Thoughtful MDU owners (including homeowners’ associations) realize that the value of their assets is increased over the long term by facilitating rather than suppressing consumer choice.

The same logic applies to communities larger than MDUs, cities and towns for example. Local communities like Rio Blanco County in Colorado are taking control over their own economic destinies be managing their own fiber networks and structuring their relations with service providers to maximize the high-quality options available to residents. MDU owners may find inspiration in this sort of example and discover that when it comes to broadband, their own interests are aligned with the interests of their residents.

                  Carl Kandutsch, J.D., Ph.D., a former FCC attorney, is in private practice representing MDU property owners and broadband service providers on broadband communications and related real estate matters. Dr. Kandutsch serves on the Board of Directors of the Multifamily Broadband Council (which filed comments opposing the San Francisco ordinance), and  may be contacted through his website (www.kandutsch.com), via email ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it ) or by telephone (mobile: 207-659-6247; office: 214-427-5354).


[1] It should be noted that the ordinance applies to commercial as well as residential buildings. This article does not address problems with that application, except to point out that the ordinance defines “Existing wiring” by reference to the FCC’s definitions of “home run wiring” and “cable home wiring”. The problem is that the FCC terms apply only to wiring in residential buildings, not in commercial buildings. Therefore, it is not at all clear how the ordinance could apply to commercial buildings.

[2] The definition of “Existing wiring” includes “cable home wiring” as defined by the FCC, meaning the wiring within an individual residential unit. In a condominium, that wiring is owned not by a landlord or a homeowners’ association but by the owner of the individual unit. The ordinance does not address the many practical problems associated with the payment of “just and reasonable compensation” to each individual owner of a unit within a condominium property, or the legal problems associated with how the ordinance would work in concert with the Federal rules governing the disposition of “cable home wiring”, found at 47 C.F.R. §76.802, especially in light of the FCC’s 2007 “Sheet Rock Order”. See my article on this topic at http://www.kandutsch.com/articles/cable-home-wiring-rules-and-cable-competition.

[3]Exclusive Service Contracts for Provision of Video Services in Multiple Dwelling Units & Other Real Estate Developments, Second Report and Order, MB Docket No. 07-51, March 2, 2010, ¶ 6.

[4]Id., ¶ 9.

[5]Id., ¶ 18.

[6]Id., ¶ 28.

[7] In the Second Report and Order previously cited, the FCC took notice of the importance of bulk billing for the funding of competitive service providers. Footnote 23 says: “Boca Raton Comments at 3 (“upstart” new entrants cannot obtain financing to wire buildings with fiber without the “reliable, long term revenue stream” that bulk billing ensures); Camden Property Trust Comments at 4; CSI Comments at 3, 8; Home Town Comments at 1 (“Bulk discount agreements are the only means by which HTC can finance . . . construction to compete with the incumbent[s]”); id at 6 (financing to build fiber networks requires “reliable . . . long-term revenue streams, such as through a bulk services agreement”; otherwise, financing would be doubtful); Shentel Comments at 22; Wilco Comments at 6 (Wilco “depends upon a bulk billing agreement to continue the operations of its business and service its customers”); id. at 19 (noting the special financing difficulties of minority-owned PCOs); WorldNet Comments at 3, 9.”

 

All articles published in Broadband Communities magazine (www.bbpmag.com)

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