MDU Access Reform – Part I

Preface: This is Part I of an extended blog post concerning recent efforts to reform rules and policies pertaining to broadband service providers’ access to Multi-Tenant Environments (“MTEs”). Part I introduces the topic in a general way. Part II summarizes the position of those advocating MTE access reform, and Part III summarizes the position of those opposing reform. In Part IV we will attempt to summarize any conclusions that follow from the earlier discussion.

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On June 23, 2017, the FCC released a Notice of Inquiry (the “NOI”) entitled “Improving Competitive Broadband Access to Multiple Tenant Environments” (GN Docket No. 17-143). The NOI seeks comments “on ways to facilitate greater consumer choice and enhance broadband deployment in multiple tenant environments (MTEs)” for the purpose of accelerating “the deployment of next-generation networks and services and better enable innovation and competition in the market for high-speed Internet access.”

The NOI was apparently issued in response to two communications from trade associations representing ISPs and Internet companies. First, an ex parte letter dated February 13, 2017 from a trade association called INCOMPAS (the internet and competitive networks association (formerly COMPTEL)), filed in the Enabling Competitive Broadband proceeding (WT Docket No. 16-138); and second, the Multifamily Broadband Council’s (“MBC”) Petition Seeking Preemption of Article 52 of the San Francisco Police Code (MB Docket No. 17-91) filed February 24, 2017. (The MBC petition is intended to prevent enforcement of San Francisco Police Code Article 52, which was passed by the City Council in January. See my article on that subject, “Internet Choice in Apartment Buildings” at http://www.kandutsch.com/articles/internet-choice-in-apartment-buildings.) In general, ICOMPAS argues that access policy reform is needed because various contractual arrangements between carriers and MTE building owners prevent competitive ISPs from deploying their networks and reaching consumers who happen to reside or lease space in MTEs. On the other hand, MBC argues that the kind of access reform embodied in the San Francisco Ordinance will actually suppress competitive and favor large incumbent providers at the expense of consumers. The political and policy-related allegiances represented in the two trade associations are complicated and ironic, since the membership of INCOMPAS (the party arguing for access reform) includes some of the largest and richest Internet companies in the world, while the membership of MBC (arguing against access reform) is composed of small, independent ISPs that provide the only available competition in MTEs. Why are large Internet companies such as Google Fiber and Facebook advocating access reform, while competitive ISPs oppose it? As is often the case when it comes to public policy debates, there is a lot more going on here than meets the eye.

The NOI seeks comment on the following contractual practices that are widespread in MTEs: (a) compensation paid by service providers to MTE owners, including both recurring revenue-sharing arrangements (based on a percentage of the provider’s gross revenue from resident-subscribers at the property) and one-time “door fee” payments; (b) exclusive wiring arrangements under which ownership of in-building wiring is conveyed to the property owner, who then grants exclusive use of the wiring to a selected service provider; and, (c) other potentially anti-competitive practices. (Although the NOI does not identify such other practices, footnote 43 mentions Lansdowne on the Potomac Homeowners Ass’n v. OpenBand at Lansdowne, LLC, 713 F.3d 187 (4^th Cir. 2013), in which the court ruled that an exclusive easement granted to a cable operator was tantamount to a contract granting the cable operator exclusive access to an MDU property in violation of the FCC’s 2007 Order banning the enforcement of exclusive service agreements for video at MDU properties.)

Why is MTE access a public policy issue?

Agreements concerning MTE differ from simpler transactions in that there are there are three interested parties – not simply a buyer (the MTE resident) and a seller (the service provider), but also the MTE owner who stands between the other two. The service provider cannot deliver the service to the end-user without accessing, occupying and using the private property of the MTE owner. Thus, the owner’s interests must be taken into account, and those interests involve one of the oldest and most sacred legal concepts in Anglo-American jurisprudence – the concept of private property. Private property is defined as property from which the owner has the right to exclude others; it follows that the right to exclude others is an essential part of the value of private property.   

Ideally, the respective interests of the three parties – service provider, property owner and end-user – are aligned. An enlightened landlord knows that the value rental property asset is maximized when tenants are happy, and access to high-quality amenities contributes to tenant satisfaction. In the 21st century, access to broadband service is an essential amenity. Furthermore, an enlightened service provider knows that its relationship to the property owner is or should be in the nature of a quasi-partnership that persists over time. The best way to forge a relationship that persists over time is to contribute toward the value of the real estate asset by delivering high-quality services to end-users at competitive prices. Thus, the interests of property owners need not diverge from the interests of end-users and service providers.

In the real world, however, these three interests often diverge, and that’s why MTE access is a public policy issue in the first place. Public policy in this area is generally designed to protect consumers by ensuring that the market remains reasonably competitive. Consumers need protection when competition is suppressed, and that happens when the property owner behaves in ways that block tenants’ access to high-quality broadband services. Of course, service providers don’t like to compete. They prefer a monopoly and are willing to pay the property owner to gain and maintain monopoly status in the mini-market of the MTE property. Incumbent cable operators have developed various contractual strategies designed to secure and maintain exclusive access rights in MTE properties. Regulatory intervention by the FCC and various state authorities is justified on this basis.

The FCC’s current NOI is the latest of several interventions that began following enactment of the Telecommunications Act of 1996. These include the Inside Wiring Rules (promulgated in 1997 and revised in 2003), the Competitive Networks Order (issued in 2000, prohibiting exclusive access agreements between telecommunications providers and MTE owners and clarifying rules concerning access to inside wiring and other building facilities), the Exclusive Video Service Contracts Order (2007), the so-called Sheetrock Order (2007), Exclusive Telecommunications Service Contracts Order (2008), and the 2010 Exclusive Service Contracts Order (endorsing the use of bulk billing arrangements and exclusive marketing agreements for video providers).

As indicated above, each of these regulatory interventions is intended to prevent service providers from locking up customers who happen to reside in MTE properties by means of de jure or de facto exclusive access agreements between the service providers and MTE owners. It must be acknowledged that the FCC’s various interventions have had only limited success, as shown by the fact that there is only restricted competition for cable and broadband services in MTE (as in other) markets. Incumbent providers have a great deal of skill, resources and experience in avoiding competition. As a business strategy, exclusive access to MTE properties can work (notwithstanding the FCC’s efforts) because there are at least some property owners who believe (wrongly in my opinion) that there is more to gain from securing financial payments from service providers than in making sure that tenants are happy over the long term. In the cable television and broadband industries, financial payments from service providers to MTE owners come in the form of one-time “door fees” and recurring revenue share payments, both of which are used to secure exclusive or preferential rights in gaining access to MTE customers. Thus, the focus of the FCC’s new NOI is on compensation agreements and on exclusive wiring access arrangements that are the result of financial negotiations.

Distilled to its essentials, proponents of MTE access reform argue that structurally the MTE owner always functions as a gatekeeper who interferes with the relationship between the service provider and the MTE resident. Therefore, reform consists in dramatically limiting or even eliminating the MTE owner from the transaction altogether. According to this viewpoint, the sale of broadband services to MTE residents should be the same transaction by which residents of single-family homes purchase services, without the property owner being involved at all.

But is it accurate to say that the MTE owner always functions as a gatekeeper, and that the only function of the deal between the service provider and the property owner is to prevent MTE residents from having a choice among providers? After all, access agreements certainly address issues other than exclusivity and access – for example, specifying the kind of infrastructure to be deployed, allocating its costs, how the network is to be managed, what customer service standards are to apply, and so on. It may well be that proponents of access reform are oversimplifying the nature of and context in which access agreements are negotiated, and to the extent that is true, there may be some residual value of having a deal in place between the provider and the property owner.

Disregarding the principle of private property and focusing solely on the public policy aspect, the merits of the argument over access reform depend on the value of the deal struck between the service provider and the MTE owner. If the function of that deal consists solely in limiting consumer choice, then access reform is justified as a policy matter (again, disregarding the law and principle of private property). If on the other hand, the deal serves other valuable purposes that would be undermined by the current model of access reform, then the justification for reform is undermined. This is the question we intend to address in upcoming posts in this space.