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MDU Access in a Nonexclusive World

The FCC's ban on exclusive-access agreements still leaves MDU owners with some bargaining chips.   August 2010

A few years ago, when the Federal Communications Commission (FCC) was still debating whether to prohibit exclusive access agreements between multichannel video providers and MDU owners, the real estate industry intervened strenuously in the debate, based on the principle of private property. Private property consists in a bundle of rights, most prominently the right to exclude others from one's property. The right to exclude others implies the right to select who is granted the right to enter one's property, and on what conditions – and this right has value.

Ultimately, of course, the FCC did decide to prohibit the retroactive enforcement of exclusive access provisions in existing agreements, as well as the prospective use of new exclusive access agreements, for all video providers other than satellite providers and their private cable partners (PCOs). By impairing a property owner's right to enforce exclusive access agreements, the FCC's regulatory action threatened the value associated with private property generally. Nonetheless, even though the MDU world has largely become a world of nonexclusive access, there remain ways in which building access may be converted into value, and the world may have changed a little less than MDU owners realize.

Competition Creates Value

In a world of nonexclusive access, competition is king, at least in theory. Competition among service providers with regard to building access can be converted into value for MDU owners in two principal areas: tenant retention and ancillary income. Competition produces value in these areas for MDU owners who fully understand how to use the negotiating leverage they already possess and can think creatively about the ways in which access may be conditioned rather than denied.

Numerous surveys over the past few years confirm that MDU residents increasingly view choice among digital communications providers and services as an essential amenity. In the age of convergence, when each provider can offer an array of communications services over a single set of wires, intercarrier competition offers consumers a sometimes dizzying array of services and price options in a variety of combinations, from à la carte video programming selections through tiered Internet connectivity speeds to bundled triple-play packages. Apartment and condominium communities that are flexible enough to understand and meet their residents' rapidly evolving digital needs and desires are best poised to attract and retain a reliable resident base in a mobile population. Because consumer choice follows from competition, the goal of tenant retention is best served by facilitating competition among providers.

On the other hand, cable and telephone behemoths tend to avoid genuine competition whenever possible, especially in MDU markets, where the relationship between providers and residents is mediated by the MDU owner (or the condominium owners' association). Passivity and complacence on the part of MDU owners only encourages cable incumbents to behave as if they were still the only game in town.

Franchised cable companies operate in a surprising number of apartment communities without any written agreement, under an expired agreement or under an old exclusive or perpetual-access agreement that may be unenforceable in whole or in part. The owner may simply take it for granted that the cable company is there, tenants are stuck with mediocre service and there's nothing that can be done to alter the status quo. In fact, some apartment owners may feel too intimidated to even discuss an upgrade for fear that the cable company holds all the cards and, if provoked, will pack up and leave at a moment's notice, abandoning the complex to satellite-dish hell.

Sit Up and Take Notice

The first step for an MDU owner in this circumstance is to sit up, take notice and figure out the lay of the competitive landscape. Are residents satisfied with the incumbent's services? Are individual satellite dishes proliferating on tenant balconies, reducing the marketability of units? Is there a written agreement with the incumbent cable company? If so, what exactly does it say, especially on the subjects of on-site marketing rights and ownership of inside wiring? Is the incumbent in compliance with each material provision of the agreement? Does the contract contain an "auto-renewal" clause? What exactly must the owner do, and within what time-frame, to prevent the contract from automatically renewing? If the cable company has been paying a share of its revenue to the owner pursuant to agreement, do the revenue shares being paid accurately reflect the agreement between the parties and have the payments been adequately documented?

What competitive alternatives are available? Is the complex in an area served by AT&T's U-verse or Verizon's FiOS networks? Are other buildings in the area served by a high-quality private cable operator delivering satellite television and other services? Is the complex in an area where a cable mandatory access law is in effect? If so, what exactly does the law say (and not say)? These are just some of the questions that ought be asked when scrutinizing a portfolio of MDU properties for additional sources of value.

The next step is to realize that control over essential infrastructure – especially inside wiring and common areas – provides the MDU owner with inherent leverage for reopening negotiations with incumbent providers. If the cable company is in the building without a written agreement, or under an agreement that does not specifically address ownership of inside wiring, the chances are good that the wiring is considered a fixture of the real estate under state law, and therefore the legal property of the owner, not the cable company. Arguably, this is true even if the cable company installed the wiring in the first instance and even if the property is subject to a mandatory access law that prevents the owner from blocking the cable company's access to tenants.

At any rate, owners should presume that in-building wiring not explicitly owned by the cable company per a written agreement is a fixture of the building and the property of the owner. Ownership of the wiring places the owner in a position to exact concessions from the cable company in exchange for use of the wiring, either on an exclusive or (in the event a second provider is desired and available) a nonexclusive basis – because without the right to access, interconnect with and utilize the existing coaxial cable wiring, the cable company cannot provide services to the building.

Those concessions may take the form of meaningful – that is, measurable – and enforceable customer service commitments (service level agreements, or SLAs), payment of owner compensation (per door, as a percentage of recurring revenue, or both), or other commitments appropriate to the property in question.

Leverage for MDU Owners

If, on the other hand, the incumbent cable company explicitly reserves ownership of the inside wiring in a written agreement and an alternative provider is willing to invest in the building, it may be presumed that the wiring is subject to the FCC's inside wiring rules, which allow the owner to gain control over home-run wiring to make it available for use by a competitor on either a building wide or a unit-by-unit basis. Although the FCC rules are often ignored, they do exist, and their specific purpose is to empower MDU owners to facilitate competition in exactly this circumstance.

Another source of leverage is the building owner's control over common areas of the property and the uses that may be made of those areas in marketing a provider's services. Where more than one provider of video or Internet services serves an MDU community, the right to use common areas to market those services is a valuable right over which providers will compete and for which the owner ought to be compensated. Even in buildings that are centrally served by only one provider, the sole provider must still compete with satellite television delivered by means of individual dish antennas on residents' balconies under the FCC's Over-the-Air-Reception Device (OTARD) rule, and for that reason, on-site marketing rights are a negotiable business term.

The term "marketing rights" encompasses many different options – everything from the right to have provider telephone numbers listed on leasing materials distributed to tenants to active promotion of the preferred provider's services by leasing staff (who may earn extra compensation from the provider) to uses of common areas such as leasing or management offices for signage, distribution of marketing materials or provider-hosted promotional events. The more expansive the marketing rights or assistance granted, the more these rights are worth to the provider – and the owner should be compensated accordingly.

For a time during the FCC's rulemaking on exclusive MDU access agreements, an owner's right to enter into exclusive marketing arrangements was in doubt because that issue, along with bulk billing arrangements, was on the Commission's agenda. However, in March 2010, the Commission endorsed exclusive marketing arrangements as a benefit both to the provider (because it increases subscriber penetration and revenue) and to MDU owners (for whom it functions as a bargaining chip with which to extract beneficial concessions from the provider on behalf of residents).

If the cable company is operating without an agreement, or under an agreement that does not explicitly grant marketing rights, it may be presumed that the cable company has no right to use common areas for marketing its services. In that case, marketing rights for each service (video, data and telephone) may be granted to the provider in exchange for various commitments – for example, service level agreements, revenue share or marketing incentive payments, or a combination of these. The extent of those commitments may be maximized by inviting other available providers to bid competitively for equal or superior marketing rights.

The loss of exclusive access by regulatory fiat requires an adjustment of business models for both providers and MDU owners. Because the ban on exclusivity disrupts the status quo, it provides an opening for owners to renegotiate existing contractual and business arrangements to their own advantage on behalf of MDU residents. The government has created an opportunity for owners who are savvy enough to understand the value that still attaches to building access in a nonexclusive world – specifically the value associated with ownership and control over essential infrastructure – and to maximize that value by facilitating competition among alternative providers and platforms.

 

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

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