Question of the Day #4: What is a “bulk” service agreement and how does it differ from other access agreements?

A bulk service agreement differs from a non-bulk or “retail” agreement (also known as an “access agreement” or a “right of entry agreement”) in that under the former it is the property owner (or, in the case of a condominium or other common interest development, the homeowners’ association (“HOA”)) – and not the individual subscribing resident – that receives and pays the monthly invoice from the service provider. The service provider agrees to provide a basic package of services (video and/or high-speed Internet access) to every unit at the property, and the owner agrees to pay a monthly bulk service fee for the service. The owner typically recovers the cost of the bulk service by means of an add-on to each resident’s monthly rent (or HOA fee).

The obvious question is: Why would a MDU property owner want to take on the obligation to pay for cable and broadband services that are being used by individual residents?

The answer is twofold: First, the owner may decide to take on this obligation for the same reason he or she decides to pay for certain utility services (e.g., waste disposal) or for certain amenity services (e.g., swimming pool, community and fitness facilities) that benefit residents collectively – including “free” services as an amenity provided to residents increases the rentability (or in the case of a condominium, the marketability) of each living unit, and therefore, of the asset overall. Second, like some other goods, communications services purchased in bulk may come at a lower per-unit price. In other words, considered at a per-unit cost, bulk communications services are provided to residents at a significant discount. In general, bulk cable and internet services cost at least 50% less than what a single-family homeowner would pay for the same services by means of an individual subscription. The benefits of a bulk arrangement flow to both to MDU community (which purchases the bulk service at a significant discount), and to the service provider (which is guaranteed 100% penetration of the mini-market that is the MDU property).

What then are the burdens associated with bulk MDU agreements?

There are several burdens from the MDU owner’s perspective.

First of all, the owner may not be willing to assume the legal obligation to pay for services provided to residents over a multi-year term. Indeed, the decision to enter into a bulk agreement only makes financial sense if the added value of making cable and/or broadband services available to residents exceeds the cost of paying for the bulk service.

Whether the added value exceeds the cost in any particular case depends on a variety of considerations. These considerations are all related to the fact that a bulk service agreement is in effect an exclusive agreement with respect to the service or services being provided on a bulk basis. If either video or data services is delivered to residents as a bulk amenity, there will be no second provider of that service or services because a second provider is unlikely to invest in a property where residents are in effect forced to pay for the service of bulk provider. In other words, when services are being provided in bulk, the resident will not have a choice among service providers.

In some communities, the lack of choice (i.e., competition) does not present a problem. For example, choice among service providers is often less important to elderly residents than it is to a younger, tech-savvy population. And for a resident population that lacks expendable income, having a choice is less important than having a discount on services. Thus, bulk agreements tend to be used at elderly housing and low-income housing facilities. In addition, bulk agreements often make sense for condominium communities (as opposed to rental properties) because governance of a condominium community is more democratic than management of an apartment of an apartment complex. A tenant paying monthly rent may rebel (e.g., by moving out or refusing to pay rent) at the prospect of being forced to pay for services he or she doesn’t want, while the owner of a condominium unit has (presumably) participated in the democratic process that lead to execution of the bulk agreement for the entire community. Finally, bulk agreements simply make logical and practical sense for a transient community such as student housing because residents are unable to commit to the one- or two-year subscription term normally required by cable and broadband companies for individual customers.

Another pertinent consideration relates to technology. As multi-channel video programming services migrate away from tradition cable systems to online platforms, cable television is quickly becoming an anachronism. The question is not if the traditional cable television model becomes extinct but when. For that reason, it is unwise for an MDU owner to commit to paying for bulk cable television over a relatively long term. By the same token, having a choice among broadband providers is (or should be) less important to consumers than having a choice among video providers. After all, Internet services is essentially just connectivity – bandwidth. As long as the connection to the public Internet is fast, and the service is reliable, it doesn’t really matter what company is providing it; broadband is a generic commodity. Therefore, a longer-term bulk agreement for broadband service may make sense – due to the price discount – where a bulk agreement for cable television does not.

In summary, when considering a bulk service agreement, the first step for a MDU owner is to make an educated decision, based on characteristics of the MDU community in question, whether the benefits of entering into a bulk arrangement outweigh the burdens. If it is determined that a bulk agreement is appropriate, the next step is to negotiate the very best possible deal in terms of the service or services to be provided and the monthly bulk rate. Although multiple factors affect such a negotiation, it can be safely said that the service providers initial bulk service proposal is not the very best possible deal.

If you have questions about Bulk Service Agreements, please contact the Kandutsch Law Office for a free consultation.