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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of: ) CSR 5137-E ) Paragon Communications, d/b/a ) Gardena (CUID CA0934) Time Warner Communications and ) Hawthorne (CUID CA1022) KBL Cable Systems of the Southwest ) Lawndale (CUID CA1099) ) Los Angeles County(CUID CA1557) Petition for Determination of ) El Segundo (CUID CA0467) Effective Competition ) Torrance (CUID CA0941) ) ) Fountain Valley (CUID CA0752) ) Huntington Beach (CUID CA0751) ) Stanton (CUID CA0932) ) Westminster (CUID CA0750) ) Garden Grove ) (Orange Co. uninc.) (CUID CA0943) ) Los Alamitos(CUID CA0944) ) Rossmoor ) (Orange Co. uninc.) (CUID CA0845) ) Midway City ) (Orange Co. uninc.) (CUID CA0931) ) Cypress ) (Orange Co. uninc.) (CUID CA1540) ) City of Orange (CUID CA0940) ) Orange County uninc. (CUID CA0814) ) ) South Pasedena (CUID CA0893) ) San Marino (CUID CA0992) MEMORANDUM OPINION AND ORDER Adopted: April 30, 1998 Released: May 1, 1998 By the Acting Chief, Cable Services Bureau: I. INTRODUCTION 1. Paragon Communications, d/b/a Time Warner Communications and KBL Cable Systems of the Southwest (collectively, "Time Warner"), filed a petition asserting that it is subject to local exchange carrier ("LEC") effective competition in the above-captioned communities (the "Communities") from Pacific Bell Video Services ("PBVS"), d/b/a Pacific Bell Digital TV, a digital wireless cable operator serving Los Angeles and Orange counties, California. A number of the Communities (collectively, "the Cities") filed a joint opposition to Time Warner's petition and Time Warner filed a reply. 2. Section 623(a)(4) of the Communications Act of 1934, as amended ("Communications Act") allows franchising authorities to become certified to regulate basic cable service rates of cable operators which are not subject to effective competition. For purposes of the initial request for certification, local franchising authorities may rely on a presumption that cable operators within their jurisdiction are not subject to effective competition unless they have actual knowledge to the contrary. Certification becomes effective 30 days from the date of filing unless the Commission finds that the authority does not meet the statutory certification requirements. In Implementation of Cable Act Reform Provisions of the Telecommunications Act of 1996 ("Cable Act Reform Order"), the Commission instructed cable operators believing themselves subject to local exchange carrier ("LEC") effective competition under Section 623(l)(1)(D) of the Communications Act to file a petition for determination of effective competition pursuant to Section 76.7 of the Commission's rules. Section 623(l)(1)(D) of the Communications Act provides that a cable operator is subject to effective competition where: a local exchange carrier or its affiliate (or any multichannel video programming distributor using the facilities of such carrier or its affiliate) offers video programming services directly to subscribers by any means (other than direct-to- home satellite services) in the franchise area of an unaffiliated cable operator which is providing cable service in that franchise area, but only if the video programming services so offered in that area are comparable to the video programming services provided by the unaffiliated cable operator in that area. II. THE PLEADINGS 3. Time Warner argues that it is subject to LEC effective competition in the Communities from PBVS, a digital wireless cable operator serving Los Angeles and Orange counties. With regard to the LEC affiliation requirement, Time Warner contends that the corporate relationships that exist between PBVS, Pacific Bell, Pacific Telesis Group ("PTG"), and SBC Communications Inc. demonstrate that PBVS is a LEC affiliate. Time Warner asserts that according to PTG's world wide web home page, PBVS is a wholly-owned subsidiary of Pacific Bell, a LEC serving three-fourths of the residents in California. Time Warner states that the web materials also indicate that Pacific Bell is owned by PTG, "[o]ne of the nation's largest telecommunications providers." Finally, Time Warner asserts that PTG is, in turn, owned by SBC Communications Inc., which is also a LEC. 4. With regard to the requirement that the LEC competitor offer video programming service in the unaffiliated cable operator's franchise area, Time Warner asserts that PBVS is physically able to deliver service to potential subscribers in the Communities. Time Warner explains that PBVS provides digital wireless cable service to Los Angeles and Orange counties through the use of two MMDS transmitters, which are located at Mt. Wilson in Los Angeles County and Modjeska Peak in Orange County. Time Warner provides a map indicating that the Communities are located within one or both of the estimated 35-mile protected service areas surrounding PBVS's transmitters. Time Warner also submits a line-of-sight/shadow plot map which Time Warner contends demonstrates that PBVS's actual service area encompasses the Communities, due chiefly to the flat terrain in the area. Based on these maps, Time Warner asserts that PBVS's service is technically available to all homes within the Communities. Moreover, Time Warner claims that PBVS already serves many customers in the Communities. In support of this contention, Time Warner submits photographs of 65 homes in the Communities with PBVS receive antennas attached to the rooftops. In addition, Time Warner submits a PBVS subscriber bill belonging to a Time Warner employee who lives in one of the Communities, Garden Grove. Time Warner argues that PBVS's actual service to subscribers in the Communities demonstrates that PBVS is "physically able" to deliver service. 5. Time Warner claims that potential subscribers in the Communities are reasonably aware that they may purchase PBVS's video service. Time Warner submits examples of PBVS's marketing materials which Time Warner alleges have been "distributed in the above-captioned communities." Time Warner also includes an article on the launch of PBVS's video service from a local newspaper, the Daily Breeze, which serves communities covered by the Los Angeles County System. Furthermore, Time Warner contends that the fact that numerous subscribers in the Communities receive PBVS's service demonstrates that subscribers are aware that they may purchase the service since they have already done so. Time Warner states that it must also be assumed that many of these subscribers have made their neighbors aware of PBVS's service, given the presence of PBVS receive antennas on their rooftops. Time Warner further contends that no regulatory, technical or other impediments exist to households in the Communities taking service from PBVS. According to Time Warner, potential subscribers need only contact PBVS to activate service. 6. Time Warner asserts that PBVS offers programming comparable to that offered by Time Warner in the Communities. Time Warner provides PBVS's channel line-up which demonstrates that PBVS's most basic service consists of 49 channels of video programming, including numerous local television broadcast signals. 7. Finally, Time Warner maintains that actual competition currently exists in the Communities. Time Warner claims that it has, in fact, lost subscribers to PBVS and has taken certain actions in response to competition from PBVS. For example, Time Warner states that it has added channels to some of its systems serving the Communities. In addition, Time Warner asserts that it has established a seven day per week, 24 hours per day in-house customer service office. 8. The Cities, which are located in Los Angeles and Orange counties and are served by Time Warner, oppose the petition. The Cities do not dispute that PBVS is a LEC affiliate or that it offers programming comparable to Time Warner's video programming. They argue that Time Warner has failed to demonstrate that PBVS "offers" service in the Cities within the meaning of the Commission's rules. The Cities argue that the evidence presented by Time Warner is insufficient to demonstrate that PBVS's service is actually available, from both a physical and marketing viewpoint, in the Communities. The Cities assert that Time Warner has not shown that PBVS's service is available in all of Los Angeles and Orange counties or that subscribers residing in all of Time Warner's Los Angeles and Orange County communities can actually receive PBVS's service. The Cities contend that the fact that they are within PBVS's estimated 35-mile protected zone does not establish serviceability because topographical conditions can minimize or prevent service delivery notwithstanding proximity to transmitters. The Cities state that the same conditions that preclude the clear reception of broadcast signals in material portions of these communities may affect the ability of an MMDS operator to offer video programming service within the communities. The Cities argue that Time Warner must demonstrate on a franchise area by franchise area basis that service is "offered." 9. The Cities further dispute Time Warner's claim that subscribers in the Cities are reasonably aware of PBVS's video service offerings. They contend that the PBVS marketing materials submitted by Time Warner fail to demonstrate the existence of either any direct marketing campaign or any PBVS subscribers within the Cities. Citing the Bureau's decision in Charter Communications Entertainment II, L.P. ("Charter"), the Cities contend that Time Warner cannot rely on broad generalizations with respect to marketing or serviceability to establish that effective competition exists within specific franchise communities. The Cities also argue that the alleged subscription of an unnamed Time Warner employee in Garden Grove is statistically insignificant in Garden Grove and proves nothing about subscribers outside of Garden Grove. The Cities further argue that the photographs of rooftop dishes submitted by Time Warner could depict the homes of PBVS employees engaged to test market the service. In addition, the Cities contend that there is significant doubt as to the availability of PBVS on a widespread basis. The Cities point to several articles which suggest that PBVS plans a "gradual rollout" of its video services. The Cities contend that this type of marketing does not satisfy the "offer" requirement within the Commission's rules. The Cities further argue that the present and future viability of PBVS's video service is so doubtful that it cannot be considered effective competition to Time Warner's cable service. In support of this assertion, the Cities cite numerous articles which they claim raise questions about the commitment of SBC Communications Inc. (PBVS's new owner) to its wireless cable service. 10. In reply to the Cities' opposition, Time Warner argues that PBVS does "offer" service to the Communities within the meaning of the Commission's rules. Time Warner contends that the evidence it has presented meets or exceeds the evidentiary standards accepted by the Commission in previous decisions granting effective competition petitions and "demonstrates that PBVS is in fact providing MMDS service to many subscribers in the Communities." To demonstrate that PBVS "offers" service to the Communities, Time Warner states that it has submitted 35-mile contour maps, line-of-site maps, PBVS marketing materials, photographs of homes in the Communities with PBVS antennas on their rooftops, a PBVS subscriber bill, and newspaper articles. Time Warner maintains that it was not required to prove that PBVS serves any customers because its petition was filed under the Commission's interim rules which do not require a percentage pass or penetration rate. Time Warner states that in previous decisions the Bureau has found that effective competition exists in certain franchise areas even where the competitor's service is not currently available throughout such franchise areas. 11. Time Warner contends that evidence of PBVS's actual service to subscribers in the Communities, in addition to other evidence included in the petition, proves that PBVS is "physically able" to serve residents in the Communities. In response to the Cities' argument that the homes in Time Warner's photographs could represent those of PBVS employees assigned to test market the service, Time Warner cites an article which states that as of the beginning of October 1997, "[o]f the 4,000 test customers in Southern California that were offered free trial services, 80% have been converted to paying subscribers." Time Warner further argues that it makes no difference whether the homes in the photographs represent paying subscribers or a mixture of paying subscribers and PBVS employees since the photographs were submitted to prove that PBVS is physically able to serve homes in the Communities for little or no additional investment. 12. Time Warner argues that the line-of-sight maps and 35-mile contour maps it provided demonstrate that PBVS's signal is available throughout all of the Communities from one or both transmitters. Time Warner states that the Bureau has previously relied on similar maps in granting effective competition petitions. Furthermore, Time Warner asserts that most of the Communities are located considerably closer than 35 miles to the relevant PBVS transmitter. Time Warner argues that the Cities do not provide any evidence to indicate that PBVS's signal is not available in the Communities. According to Time Warner, there is no topographic reason why the Communities cannot receive PBVS's signal. Time Warner contends that the key fact supporting the Bureau's decision in Charter to deny the effective competition petition with respect to the City of Norco was a signal reception problem which does not exist here. Time Warner reasserts that there are no regulatory, technical or other impediments to households taking service from PBVS. 13. Time Warner argues that the Cities offer no facts to counter the petition's evidence that residents of the Communities are "reasonably aware" that they may purchase PBVS's service. Time Warner states that it included with its petition PBVS marketing materials which were distributed in the Communities as well as a local newspaper article regarding PBVS. In addition, Time Warner contends that Pacific Bell's world wide web home page helps to ensure that residents are "reasonably aware" that they may subscribe to PBVS's service. Time Warner further asserts that it is not asking for a finding of effective competition with respect to all of Los Angeles and Orange counties or even with respect to all of the communities it serves in these counties. Rather, Time Warner states that it is seeking a determination of effective competition only with respect to the discreet community units listed in its petition. 14. Time Warner argues that its petition contained evidence that actual competition exists today in the Communities. Time Warner claims that it has lost subscribers to PBVS and has taken certain actions, such as upgrading its systems and improving customer service, to respond to the competition. In particular, Time Warner asserts that it has lost almost 1,200 subscribers in the Communities who have stated that their reason for disconnecting was to subscribe to PBVS. Furthermore, based on its own observations of PBVS rooftop antennas, Time Warner estimates that some 2,500 subscribers throughout all of the Communities have switched to PBVS. As to the Cities' arguments regarding the future viability of PBVS, Time Warner contends that the articles cited by the Cities are "speculative and hearsay-ridden." In addition, Time Warner submits its own article containing quotes from current PBVS management regarding PBVS's viability. III. ANALYSIS 15. In the absence of a demonstration to the contrary, cable systems are presumed not to be subject to effective competition. The cable operator bears the burden of rebutting the presumption that effective competition does not exist with evidence that effective competition, as defined by Section 76.905 of the Commission's rules, is present within the franchise area. Time Warner has failed to meet this burden. While Time Warner partially satisfies the LEC test for effective competition by demonstrating that PBVS is a LEC affiliate that provides comparable programming, Time Warner fails to establish that PBVS "offers" service as contemplated by the statute and our rules. 16. With regard to the first part of the LEC test, which requires that the alleged competitive service be provided by a LEC or its affiliate (or any multi-channel video programming distributor using the facilities of such LEC or its affiliate), Time Warner has provided sufficient evidence demonstrating that PBVS is LEC-affiliated under the Commission's interim rules. The corporate relationships that exist between PBVS, Pacific Bell, PTG, and SBC establish PBVS's LEC affiliation. Additionally, we find that Time Warner is unaffiliated with PBVS, Pacific Bell, PTG, or SBC. 17. Time Warner has submitted sufficient evidence demonstrating that PBVS provides programming comparable to Time Warner's channel line-up in the Communities. PBVS's most basic service consists of 49 channels of video programming, including numerous local television broadcast channels, which satisfies the programming comparability criteria. 18. As to the requirement that the LEC competitor "offer" service, Time Warner has not met its burden. Time Warner has failed to establish that PBVS "offers" service because Time Warner has not presented sufficient evidence that subscribers in the Communities are reasonably aware that they may take service from PBVS. Cable operators seeking to prove that they are subject to effective competition from a LEC or its affiliate must not only show that the competitor is physically able to deliver service free of any regulatory, technical or other impediments but that subscribers are "reasonably aware" that they may purchase the competitor's service. Consumer awareness of a competing service is an essential element of the offer requirement of the LEC effective competition test. 19. We have stated that potential subscribers may be made reasonably aware of the availability of a competing service through, for example, advertising in the media or direct mail. We have also stated that cable operators seeking to prove that they face effective competition may rely on marketing information to demonstrate consumer awareness of the competing service. In this instance, Time Warner submits examples of PBVS's direct mail marketing materials. Time Warner does not present evidence that PBVS has engaged in any type of mass media marketing. 20. The direct mail materials submitted by Time Warner are not sufficient to demonstrate that potential subscribers in all of the Communities are aware of PBVS's service. Although Time Warner claims that the marketing materials were distributed "in the above-captioned communities," there is no evidence in the record defining the scope of the direct mail campaign. Specifically, there is no proof that the mailings were made to subscribers in all of the Communities and there is no information concerning how many subscribers in the Communities were actually sent mailings. 21. Time Warner points to articles on the launch of PBVS as evidence that subscribers in the Communities are reasonably aware of PBVS's service. One of the articles Time Warner cites is contained in a newspaper called the Daily Breeze, which Time Warner concedes only serves communities covered by its Los Angeles County System. Another article that Time Warner submits from the Orange County Register confirms that PBVS "will expand slowly across the county through direct-mail." It appears that some subscribers were targeted for the mailings while many other potential subscribers were not solicited. Former PBVS Vice President and General Manager Jeff Carlson has said that the company is purposely controlling the number of subscribers to "contain demand." According to Carlson, the company will add new customers gradually to ensure high-quality service. Carlson has also stated that "[a]s for the advertising, we are doing a very controlled rollout; it is conservative by design. We have limited our marketing to very specific demographics." The Orange County Register article cited by Time Warner and other articles, for the most part, simply corroborate the statements made by Carlson and describe the launch of PBVS's video service as a "gradual roll-out" and as "low key." 22. We note that several thousand PBVS employees were used to test market the service. That certain specific subscribers are aware of PBVS because they are employees of the company or were specifically targeted does not mean that subscribers in the Communities generally are informed that there is an alternative video service provider to the cable operator. The cable operator must submit evidence demonstrating that potential subscribers in the Communities, not only segments of the population that may have been specifically targeted or handpicked for solicitation, are reasonably aware that they may purchase services from a video provider other than the cable operator. Contrary to Time Warner's assertions, the existence of a world wide web page (with the address "www.pacbell.com") does not demonstrate that subscribers in the Communities are reasonably aware of the competing service. Many potential subscribers may not have access to, or a working familiarity with, the internet or may not be aware of this particular site. Furthermore, the web site suggests that PBVS's service is limited to certain areas and that only residents of those areas will be contacted directly. Because evidence of a broad awareness of the existence and availability of PBVS's service is lacking, we find that Time Warner has failed to prove that PBVS "offers" service in the Communities. 23. As a general matter, we note that evidence presented by cable operators regarding the number and location of subscribers to the competing service shows that the competitor is physically able to deliver service. Such evidence, in most cases, can also reflect the degree subscribers are reasonably aware of the competing service since they are, in fact, receiving it. However, in this instance, evidence submitted by Time Warner that 1,200 subscribers throughout the 19 Communities have switched from Time Warner's service to PBVS's service does not persuade us that consumers in the Communities generally are knowledgeable about PBVS's service. If totalled, the number of households in the Communities is roughly 375,000. The number of subscribers that Time Warner claims are definitively aware of PBVS's service because they have switched from Time Warner to PBVS is 1,200. This figure represents only .3% percent of the total number of households in the 19 Communities (1,200 ö 375,000 = .3%). Given the lack of information concerning the scope of PBVS's direct mail campaign as well as what appears to be PBVS's incremental marketing strategy, that PBVS has some subscribers in the Communities does not demonstrate that subscribers throughout the Communities are reasonably aware of the availability of PBVS's service. 24. We find that Time Warner has failed to submit sufficient evidence demonstrating that its cable system serving the above-captioned communities is subject to LEC effective competition from PBVS. Time Warner's petition is denied. Our determination is consistent with our recent decision in Charter Communications Entertainment II, L.P. in which we denied that cable operator's claim that it faced effective competition from PBVS in numerous communities in Los Angeles County, California. IV. ORDERING CLAUSES 25. Accordingly, IT IS ORDERED that the Petition for Determination of Effective Competition filed by Paragon Communications, d/b/a Time Warner Communications and KBL Cable Systems of the Southwest, challenging the certification of local franchising authorities in the above- captioned communities IS DENIED. 26. This action is taken pursuant to the interim rules adopted in Implementation of Cable Reform Provisions of the Telecommunications Act of 1996, 11 FCC Rcd 5937 (1996), and is without prejudice to any further action taken by the Commission in adopting final rules pursuant to the Notice of Proposed Rulemaking contained therein. 27. This action is taken pursuant to delegated authority under Section 0.321 of the Commission's rules, as amended. FEDERAL COMMUNICATIONS COMMISSION John E. Logan Acting Chief, Cable Services Bureau