Part II – MTE Access Reform According to INCOMPAS

This is Part II of an extended entry to this blog on MTE Access Reform. Originally, I planned to make Part II a summary of filings by reform proponents in the FCC’s Notice of Inquiry (the “NOI”) in the Improving Competitive Broadband Access to Multiple Tenant Environments proceeding, with Part III a summary of filings by reform opponents, and so on. However, upon reading the filings by reform proponent INCOMPAS, the plan has evolved, because I believe that comments filed by INCOMPAS deserve particular attention. The plan will continue to evolve as we move forward.

INCOMPAS is a trade association whose members include some of the largest Internet companies in the world, such as Amazon, BT, Cogent, Facebook, Level 3, Netflix, Microsoft, Twitter and Google Fiber. As of the date of this writing, INCOMPAS has filed several sets of comments urging policy changes concerning competitive access to MTE buildings, including an ex parte letter[1] (the “INCOMPAS Letter”) dated February 13, 2017 in the Enabling Competitive Broadband proceeding, and Comments[2] (“INCOMPAS Comments”) dated July 24, 2017 in the NOI proceeding. Both the INCOMPAS Letter and the INCOMPAS Comments focus on three contractual practices which, according to INCOMPAS, block competitive access by broadband providers to MTE properties: compensation paid by service providers to MTE owners, exclusive marketing arrangements, and agreements that grant a selected provider exclusive use of inside wiring. The INCOMPAS Comments also include an oblique attack on bulk billing arrangements (endorsed by the FCC in 2007). Part II of this blog entry addresses INCOMPAS’s comments on contractual clauses that grant a particular service provider exclusive access to existing in-building wiring. It should be noted that the primary purpose and effect of San Francisco Ordinance Article 52 is to prohibit the enforcement of such exclusive wiring clauses both prospectively and retroactively.

INCOMPAS Letter

Regarding exclusive wiring arrangements, the INCOMPAS Letter shows some confusion. For example, the Letter asserts agreements granting exclusive use of existing inside wiring to one service provider violate the FCC’s Inside Wiring Rules (citing 47 C.F.R. § 76.802 (a)) which, according to INCOMPAS, state that “the incumbent provider is required by law to make either the wiring available to another MVPD or remove it”. There are several errors in this claim.

First, INCOMPAS cites the wrong provision of the Inside Wiring Rules. The FCC’s inside wiring rules are divided into two parts. INCOMPAS claims that exclusive wiring agreements violate Section 76.802, deals with the “cable home wiring” located within an individual residential unit in a MDU building. INCOMPAS does not cite section 76.804 which deals with the “cable home run wiring” that extends from the IDF location to the demarcation point located approximately 12 inches outside of the unit.[3] But exclusive wiring provisions in MTE contracts relate to use of cable home run wiring, not cable home wiring. That’s because according to Section 76.802 and the FCC’s OTARD rule, the wiring within a subscriber’s unit is controlled by the occupant of the unit, not the landlord. Therefore, even if a service provider tried to monopolize in-unit wiring by means of a contract with the property owner, that effort would be inconsistent with Federal law. To the extent that a MTE contract prevents a competitive provider from accessing existing in-building wiring needed to deliver service to a MTE resident, it is the “cable home run wiring” leading to the unit (governed by section 76.804) that is inaccessible, not the in-unit wiring (governed by section 76.802).

Second, there is no obvious conflict between the FCC’s Inside Wiring Rules and exclusive wiring-usage provisions in MTE contracts because the Inside Wiring Rules apply only to wiring that is owned by the incumbent cable operator. By contrast, exclusive wiring-usage agreements relate to wiring that is owned by the MTE owner, and do not affect the wiring that subject to the FCC rules. (Why would a service provider demand a contractual provision granting exclusive access to wiring that it already owns and controls?) Therefore, there is no clear contradiction between the FCC’s Inside Wiring rules and exclusive wiring-usage agreements. One could argue (as I have) that exclusive wiring arrangements violate the spirit of the FCC Rules because, by allocating ownership of wiring to the property owner, such arrangements circumvent application of the FCC Rules, thus defeating their purpose. But it is incorrect to suggest that exclusive wiring agreements constitute a per se violation of the FCC rules. Furthermore, the mere fact that exclusive wiring clauses are used to circumvent FCC rules does not in itself imply that simply outlawing such clauses would be a good idea. When it comes to complex public policy matters, the question is always whether the benefits of one course of action outweigh the harms that would like accompany the action in question. Sometimes we are left with a policy that is preferable simply because it is less harmful than the alternatives. (With respect to exclusive wiring clauses, there is the additional question, not addressed here, of whether in fact the FCC could regulate the disposition of inside wiring owned by the MTE owner, because the Commission does not have legal authority to regulate the real estate industry.)

Third, the letter states that the FCC rules require that the incumbent provider “either make the wiring available to another MVPD or remove it”, and that a contractual provision granting exclusive use of wiring to a certain provider conflicts with the FCC rules. This is a misstatement of the law. The FCC Inside Wiring Rules allow an MTE owner to force the incumbent cable operator to remove, sell or abandon wiring that is owned by the cable operator but is no longer being used to deliver the incumbent’s cable television service. The rules do not require that a cable company “make [inside wiring] available” to a competitor. Furthermore, exclusive wiring usage agreements do not clearly conflict with the FCC rules because, as discussed above, such agreements apply only to wiring that is owned by the property owner, and the FCC Rules do not apply to that wiring.

Finally, in footnote 11, the INCOMPAS Letter states that “comparable laws pertaining to cable providers have been passed in 18 different states and a number of municipalities”, and such mandatory is access laws “have helped promote choice and level the playing field in the cable space …” However, for the most part state and local mandatory access laws do not deal with inside wiring at all, and for that reason are not “comparable to” the FCC’s inside wiring rules. Most mandatory access laws simply say (in one form or another) that a MDU owner may not prohibit or interfere with a competitive MVPD’s ability to provide its cable television service to a tenant who wants that service. This is a far cry from requiring that the owner of inside wiring (whether it be the incumbent MVPD or the property owner) make the wiring available for use by any provider that wants to use it. In other words, state mandatory access laws do not purport to eliminate the need for the cable operator to strike a deal with the MTE owner concerning terms and conditions of access, such as use of existing wiring, conduit, closets and other building infrastructure. In this sense, the access reform initiatives being proposed (and in the case of San Francisco Article 52, enacted) go far beyond what is currently on the books in most jurisdictions.

INCOMPAS Comments

One might wonder why exclusive wiring usage clauses in MTE access agreements are of such importance. The answer is that while it is true (as I have pointed out on this blog – see, for example, “Exclusive Use of Inside Wiring Clauses in Cable ROE Agreements”, http://www.kandutsch.com/blog/exclusive-use-of-inside-wiring-clauses-in-cable-roe-agreements) that such clauses are used to circumvent application of the FCC’s Inside Wiring Rules, a rule banning their use altogether would create a host of new problems of which access reform proponents are either unaware or simply ignore. For example, the recently passed San Francisco ordinance (referred to as “Article 52”) makes exclusive wiring-usage agreements unlawful, thereby creating a host of new problems that its proponents have not considered. (Some of these problems are summarized in my article, “Internet Choice in Apartment Buildings”, available at http://www.kandutsch.com/articles/internet-choice-in-apartment-buildings.) Therefore, it’s worth examining INCOMPAS’s comments on this issue in some detail.

On page 12 of its Comments, INCOMPAS says that although bulk billing arrangements are an “imperfect practice”, they should be allowed “for residential service only and when [they] are not otherwise used to exclude competitive options.” In particular, INCOMPAS is worried (Comments, page 12) that bulk arrangements “are regularly paired with other features that undermine overall competitive benefits” – such as (per footnote 31) exclusive wiring-usage agreements.

According to INCOMPAS’s framing of the issue, service providers engage in anti-competitive contact by “pairing” bulk service with exclusive wiring requirements. Bulk service agreements are one thing (not great but OK) and exclusive wiring agreements are another thing (bad). INCOMPAS implies that service providers illegitimately require, as a condition of agreeing to provide bulk service, that the owner promise not to allow any other provider to use any of the in-building wiring. Accordingly, INCOMPAS requests that the Commission de-link bulk billing from exclusive access to wiring: providers should not “be allowed to pair bulk billing with other anti-competitive arrangements – namely, wiring exclusivity…” (INCOMPAS Comments, p. 12.)

This way of framing the issue distorts reality by ignoring the link between bulk service arrangements and exclusive wiring agreements. It’s not that bulk billing arrangements are arbitrarily and illegitimately “paired” with exclusive wiring agreements – it’s that there cannot be a bulk billing arrangement without an exclusive wiring agreement. Eliminate exclusive wiring arrangements (as San Francisco’s Article 52 does) and you thereby eliminate bulk billing arrangements. To see why this is true, one need only consider what a bulk billing arrangement actually does.

Under a bulk billing arrangement, the property owner (or HOA) agrees to pay the service provider a monthly bulk service fee, and in return the service provider agrees to deliver the bulk service to 100 % of the units at the MTE property. The owner (or HOA) recovers its costs by means of rent or other fee charged each resident of the building. The property owner (and MTE residents) benefit by receiving cable and/or Internet services at a cost that is, on a per-unit basis, much lower than what a single-family home owner would pay for the same service(s). The service provider benefits from the certainty of having a guaranteed revenue stream of the term of the bulk service agreement. If the MTE owner does not pay the bulk service fee for all the units, the owner is in breach of the bulk service agreement. Since the property owner is obligated to pay the bulk service fee for all units, it the owner must be able to recover a pro-rata portion of its costs from each and every unit at the property. If the owner cannot recover those costs, the bulk service arrangement makes no sense. Here is an example of what will happen to bulk billing arrangements if exclusive wiring agreements are banned, as they are under San Francisco Article 52.

Example 1: Suppose you own a 300-unit apartment building (and the in-building wiring) in the City of San Francisco, where Article 52 is the law, making exclusive wiring-usage agreements illegal. Service Provider X offers bulk cable television and Internet services at a per-unit rate that is more than 50 % less than the rate charged to residents of single-family homes. Since your residents are not high-income, part of the value of your apartment building consists in your ability to offer actual and prospective residents the benefit of discounted bulk services. You also know, however, that under Article 52, if at any time at least one tenant (referred to as “Unit A”) requests the cable or Internet service of Provider Y, then you must make the existing home run wiring serving that tenant’s unit available for use by Provider Y. You can also anticipate that the occupant of Unit A, who has requested the services of Provider Y, will refuse to pay that portion of his or her rent that represents Unit A’s share of your overall monthly bulk service fee obligation. When (not if) that happens, you will be stuck with the obligation to continue to pay the full bulk service fee on 100 % of the units in the building, even though you will not able to recover the cost of providing the bulk service to Unit A. it follows that if you are a rational human being, you will not sign a bulk service agreement with Provider X. (Similarly, if Provider X is rational, it will not even offer to provide bulk services at your building, because the entire purpose of a bulk billing arrangement is to provide discounted services in exchange for a guaranteed revenue stream, and under Article 52, there are no guarantees.)

As Example 1 shows, it is impossible to envision a legal regime that prohibits exclusive wiring agreements without also in effect prohibiting bulk billing arrangements. But if bulk billing arrangements become unfeasible, what will happen to those communities that depend on them? Which communities depend on the availability of bulk billing arrangement? Answer: communities comprised of people who cannot afford to purchase cable and broadband services at their regular retail rates – namely, government assisted housing, senior living facilities and student housing. In other words, those consumers who have the greatest, most compelling need for affordable cable and broadband services are those who are put at the highest risk of not receiving services under the access reform regime being proposed and implemented in San Francisco. It is for this reason that INCOMPAS carefully avoids any detailed discussion of bulk billing in either the INCOMPAS Letter or the INCOMPAS Comments. 

INCOMPAS’s Comments also demonstrate a remarkable degree of naivete in their dismissal of concerns over quality-of-service (“QoS”) if wiring exclusivity clauses are disallowed. On page 15: “Though some landlords and service providers argue that exclusive wiring arrangements somehow tied to providers’ ability to provide high-quality service, this is a false nexus and the Commission should reject these arguments. There is no legitimate reason why good service presupposes exclusive wiring – for instance, one of our members, Google Fiber, has the highest consumer satisfaction in the market.” (Footnote 42 adds: “In fact, to our knowledge, INCOMPAS members do not engage in these exclusive wiring arrangements.”)

It is quite obvious that the shared use of inside wiring leads to QoS problems, and there is plenty of real-world experience to confirm this point. One reason is that multiple signals carried over a single wire tend to interfere with each other. The real question is not how might shared use of wiring create QoS problems, but how could it not?

Once again, a few simple examples illustrate the point.

Example 2: Assume that Provider X delivers video and data services to Unit A via wiring owned by the property owner. The occupant of Unit A, relying on San Francisco’s Article 52, wishes to retain Provider X’s video service, but wants Provider Y’s Internet service. Under Article 52, the property owner must allow Provider Y satisfy Unit A’s request for Internet service. Provider Y installs its signal distribution system at the property and connects the system to the home run wiring serving Unit A for the purpose of delivering Internet access service. First of all, it is clear that in order to avoid interference, Provider X’s video service must use a different frequency band than does Provider Y’s Internet service. In fact, there must be a clear demarcation and a frequency buffer zone between the two frequency bands in order for either Provider X’s video or Provider Y’s data service to function. But many systems even today do not possess sufficient bandwidth capacity to carry the signals of multiple service providers on separate frequency bands. This is why the FCC itself has considered and rejected the proposal to mandate the shared use of home run cable wiring. All the way back in 1997, in the course of the FCC’s Inside Wiring proceeding, DIRECTV requested that the Commission establish a “virtual” demarcation point from which an alternative provider could share wiring simultaneously with the incumbent cable operator.[4] While acknowledging that the concept deserved further exploration, the Commission declined to grant DIRECTV’s request, due to the existence of multiple technical problems surrounding its implementation.

Now let’s assume that the home run cable serving Unit A does possess sufficient capacity to carry both Provider X’s video signal and Provider Y’s data signal. The QoS issue is not necessarily solved.

Example 2.1: Suppose that the occupant of Unit A experiences interruptions of either or both video and Internet service, and the interruptions are in fact caused by interference caused by the shared use of the same home run wire. Who does the occupant call – Provider X, Provider Y or the landlord? It’s easy to imagine the response of both providers to the customer’s call – namely, to disclaim responsibility for fixing the problem, for the simple reason that it’s next to impossible to determine the cause of the service interruption, and if the cause is traced to interference, Provider X will blame Provider Y and vice-versa. And if it’s likely that both Provider X and Provider Y would disclaim responsibility for fixing customer service problems, it’s even more unlikely that either provider would accept legal responsibility for resolving wiring-related service issues. To say that neither provider would accept legal responsibility for resolving customer-service problems relating to interference is to say that service-level commitments (“SLAs”) are likely to become a thing of the past, meaning that while the resident of Unit A would have the benefit of choosing his or her service provider, neither provider would commit to specific QoS standards.

But wait, there’s more!

If no one provider may be given exclusive access to existing inside wiring, it follows that access must be granted to any provider who requests access to the wiring, as is the case under San Francisco Article 52. This raises the question of who will settle disputes inter-carrier disputes over wiring access and usage.

Example 2.2: Assume that Unit A wishes to terminate Provider X’s cable and data service and switch to Provider Y. Provider Y sends its technician to the property to accomplish the switch-over. The technician enters the telecom closet or other IDF location and finds a locked box where home run wires are connected to Provider X’s system. Because Article 52 gives Provider Y the legal right to access and use the home run cable, the technician pries open the lockbox disconnects the wire serving Unit A from Provider X’s system and re-routes it to Provider Y’s system. (Or, if the wiring serving Unit A is fiber terminating at a smart panel in the closet of Unit A, Provider Y’s technician might open the cover of the smart panel in order to get at the in-unit wiring.) But the lockbox is the personal property of Provider X (as is the smart panel in the fiber installation). Provider X accuses Provider Y of vandalism and Provider Y says that the technician was only exercising Provider Y’s legal rights under Article 52. Who is right? What is the owner’s role in this kind of dispute? Who settles it?

In the real world, disputes over access to in-building wire and related facilities are common today where a MTE building is occupied by multiple service providers, even though such access is nominally governed by contractual provisions. To the extent that access reform entails shared access to inside wiring (including both home run wiring and cable home wiring), such disputes are likely to become even more common – and that is a QoS problem.

The INCOMPAS Comments contain other misleading or unsupported claims, including the following:

INCOMPAS cites Google Fiber – which “has the highest customer satisfaction in the market” – as an example to illustrate the proposition that shared access to wiring does not lead to QoS problems. However, the standard Google Fiber access agreement provides that when Google Fiber installs fiber in a MTE building, Google Fiber pays for and owns that fiber.  There is no clause in the agreement allowing another service provider to access or use Google Fiber’s fiber, and it can be presumed that if a second provider were to confiscate and use any of Google Fiber’s equipment, including in-building fiber, Google Fiber would object. Therefore, Google Fiber’s high customer satisfaction rating does not constitute evidence that mandatory wire-sharing is unrelated to QoS issues.

Near the end of its argument attacking wiring exclusivity clauses (page 16), INCOMPAS quotes paragraph 28 of the FCC’s 2007 Exclusive Contracts Order[5]: “… there is no evidence in the record, other than generalities and anecdotes, that incumbent MVPD providers couple exclusivity clauses with significant new investments …” But in paragraph 28 of that Order, the phrase “exclusivity clauses” refers to exclusive access clauses that prevent the MTE owner from allowing a second provider to provider services within the MTE property. The phrase does not refer to clauses that grant exclusive access to existing inside wiring, and to suggest otherwise is deliberately misleading.

This misleading reference makes a difference because, in that same paragraph 28, the 2007 Exclusive Contracts Order goes on to say this: “Finally, other agreements between incumbent MVPDs and MDU owners, perhaps providing for marketing exclusivity or bulk discounts, can provide benefits similar to those alleged for exclusivity clauses without causing the latter clauses’ entry-foreclosing harms to consumers.” In other words, even if exclusive access agreements are banned, providers may rely on other types of exclusive rights – such as exclusive marketing rights or exclusive wiring usage rights – to ensure recovery of the provider’s investment in wiring a building. But the entire thrust of INCOMPAS’s comments is to attack precisely those “other agreements” cited by the FCC as ameliorating the effect of its ban on exclusive access.

In the 2007 Exclusive Contracts Order, the Commission was careful to point out that the ban on exclusive access agreements does not amount to a Federal mandatory access law that would force property owners to allow access to MTE buildings without the need to negotiate an agreement. For example, paragraph 28 of the Order, cited by INCOMPAS, includes footnote 92, which says: “Nothing herein … imposes a duty or rule on a MDU owner to allow multiple MVPD providers within its premises.”[6] But the explicit purpose of San Francisco Article 52 and of the reforms urged by INCOMPAS is exactly to “impose a duty or rule on a MDU owner to allow multiple MVPD providers within its premises” – in part, by allowing multiple MVPD providers to access existing inside wiring[7]. Imposing a rule on MDU owners that allows multiple MVPD providers with access to the property and the in-building wiring is tantamount to eliminating the access deal that is negotiated between the provider and the property owner. As indicated in Part I, the benefits of eliminating that deal from the equation must be weighed against its costs. INCOMPAS has not acknowledged the costs, and therefore INCOMPAS has not provided a realistic analysis of the reforms it advocates.

There is much more to say about INCOMPAS’s position on Article 52 and the NOI, but I will conclude this entry with some final thoughts. Providing advanced broadband services to residents of MTE buildings is a goal shared by all interested parties, including the FCC. But delivering advanced services requires advanced infrastructure including wiring, and someone has to pay for that infrastructure. The cost of broadband infrastructure must be paid by either the MTE owner or the service provider, or a combination of the two. In the market as currently constituted, these costs are usually absorbed by the service provider, and not the property owner. If the law is changed to mandate equal and cost-free access to owner-owned infrastructure by any and all service providers, then it can be expected that the service provider that installs the wiring will either: (a) insist on owning the wiring in order to avoid having to share it with competitors, or (b) force the property owner to pay for and maintain the wiring.

Under (b), it is likely that most property owners (i.e., all but the wealthiest and tech-savvy) will only finance the installation of low-cost basic wiring that is not capable of delivering the bandwidth needed to deliver advanced services and applications. After all, equal and cost-free access to a resource necessarily dilutes the value of that resource; to the extent that broadband infrastructure is devalued, the quality of services delivered by means of that infrastructure is correspondingly degraded.

On the other hand, if as proposed under heading (a), service providers take back ownership of in-building wiring in order to preserve exclusivity, history will have taken a step backward. One of the purposes of the Telecommunications Act of 1996 was to put into place mechanisms that would prevent large incumbent service providers from leveraging control over essential infrastructure into monopoly power in the market. The new mechanisms included giving property owners more control over the wiring inside installed in MTE properties. For example, the Inside Wiring Order issued in 1997 (cited in footnote 4) allowed the MTE owner to gain control over in-building wiring that is owned by the incumbent cable operator. The result was that cable operators revised their access agreements to vest ownership over in-building wiring in the property owner. If regulatory regimes like that of Article 52 become the law, incumbent cable operators will take back ownership of in-building wiring in order to avoid the effects of the regulations. In other words, the net effect of proponents’ reform efforts will be to set the entire industry back by a few decades, undoing the beneficial effects of the 1996 Act and restoring the same monopoly conditions that led to its passage in the first place.