Meet the System–Phoenix: Cox Draws a Line in the Arizona Sand

Sometimes the first domino falls quietly, almost imperceptibly. It’s not until the second, third and fourth dominos start to fall that the world begins to take notice. When CableWORLD last visited the Cox system in Phoenix almost three years ago ("Meet the System: Cox Aims to Get Back on Track in Phoenix," Aug. 5, 2002 issue), the dynamics of franchise renewal had pretty much settled into a standard, even predictable, groove. Cable was decades removed from its bloody franchising wars, and the blue-sky promises of those early days had morphed into a sort of benign mutual respect that most successful marriages seem to achieve. Come renewal time, incumbent MSOs systematically would visit their franchises, going over old turf like length of contract, access channels and free service to public institutions. They’d listen dutifully to the concerns of each municipality. Ultimately, MSOs would leverage their incumbency and get new franchise agreements that read much like the expiring ones. For years, the Cox system in and around Phoenix was no different. Late in the spring of 2002, however, the first domino started to teeter. Cox believed it was time to fundamentally change one of the hallmarks of the local municipality/cable system dynamic. Faced with competition from DirecTV and Qwest—robust competitors unburdened by franchise fees—Cox, in the person of VP of community relations, Ivan Johnson, proposed to reduce the impact of such fees in Mesa, a suburb of Phoenix. Cox’s initial proposal was to cut by more than half the percentage of gross revenue the company—or more specifically, its customers—paid in franchise fees. No system in the country had ever asked for a reduction in its franchise fees, but once one did it was a safe bet that others soon would follow suit. The Mesa officials, predictably, balked, but Cox stood firm. Negotiations between Johnson and Mary Wade, city attorney for Mesa, were long and hard, stretching over the course of 18 months. Although Johnson says he has great respect for Wade, and calls her "a friend," he nevertheless feels she was "a little surprised" by both Cox’s proposal and the steadfast nature of its position on franchise fees. Wade did not return numerous phone calls for comment. A Mess in Mesa The negotiations really got bogged down when the city of Mesa opted to retain a consultant, Johnson says. "The problem with consultants is they come in with low bids for a set number of hours," says Johnson, a former NCTA staffer. "But when things drag on they get paid more and more and more, so they have no real incentive to negotiate quickly." As is usually the case in such negotiations, most of the early conversations were held in private, and neither party aired much to the general public. But as the stalemate continued throughout 2002 and into 2003, Johnson and Cox decided to apply a bare-knuckled element to the negotiations. "I reminded the city that we were a media company and that we were going to use our medium to take our message directly to our customers," says Johnson. Looking back, Johnson thinks that the city’s consultant told his client that Cox was bluffing and would never take the issue public. Cox wasn’t bluffing. All along the MSO had been referring to franchise fees as a tax, but, in preparation for a February 2003 election, it began drafting internal message points solidifying that position. Among the positions up for grabs in the citywide election were some city council seats. Most politicians run from the mere mention of the word "taxes," but in one of the most conservative cities in one of the most conservative states in the county, they don’t just run, they sprint. As part of its PR campaign, Cox drew up a petition with the goal of creating a referendum that would place the question of franchise fees on the citywide ballot. Another key element was the participation of a highly charged activist group, Citizens for Lower Taxes, which organized a march and rally at the Mesa City Hall. The group, led by chairman Kirk Adams, began to mobilize once Cox went public and the issue hit the local press. "In our view, the city of Mesa was taxing cable customers and making the cable company do the collecting," says Adams, who is also Republican Party chairman in the Mesa district. Once he viewed franchise fees as taxes, he took action. His group quickly adopted the motto, "Enough is enough," and set out to help Cox in its battle. As the number of voters/customers signing the petition rose, so did the pressure on the city. If the required number of signatures were reached, the referendum would have to, by law, be placed on the ballot. "By the time we went public, the only way to stop what was happening was to cut a deal, which is what they ultimately did," says Johnson. No Losers in Mesa Cox succeeded in reducing its franchise fees and, as a bonus, got to play the public role of anti-tax crusader. In addition, the agreement removed any responsibility on the part of Cox to provide Mesa a capital grant and eliminated the city’s additional 5% tax on the cable license fee. While the city ended up with a reduction in overall revenue, it was given two new secure digital channels for use by the city police and firefighters, as well as direct access to Cox’s countywide emergency alert system. It also was able to claim that the franchise fee, rather than being cut by half, was reduced only from 5.7% to 4.5%. A joint press release gave both sides the opportunity to make their cases and claim victory. For his part, Adams, the leader of the activist group, says: "We saved taxpayers $40.7 million dollars in franchise taxes over the course of the 15-year contract." City council members in Mesa recognized that if they hadn’t cut the deal with Cox, the issue would have been on the ballot, it would have passed and the referendum would have put the city’s franchise fees not at 4.5% but at 3%, and services to the city would have been slashed. "Some of them up for election knew that if this made the ballot, how could they not support a tax decrease in a city like Mesa, Arizona?" says Johnson. The Next Dominoes? Cox is in negotiations with other municipalities in Arizona and elsewhere, and it will undoubtedly be looking to replicate its historic reduction of franchise fees. "This definitely woke some people up throughout Cox," Johnson says. The Phoenix franchise agreement, which expires in June 2009, stipulates that the city gets the standard 5.7% of gross revenue. Based on the city’s projections, a combination of a reduction in franchise fees and having to pay for the free services currently afforded them by their agreement with Cox might result in an annual reduction in revenue of $8.2 million. Cox has been using its local avails in Phoenix to spread its gospel of lower taxes; the city of Phoenix has launched a counter-campaign linking the revenue generated by franchise fees to such vital local services as police and fire protection. "Cox has been vicious in its attack on these license fees, so we’ve had to counter their messages with some of our own," says Norris Nordvold, intergovernmental program coordinator for the city of Phoenix. Fresh on the heels of Cox’s muscle play in Mesa, the Arizona Cable and Telecommunications Association has been lobbying to eliminate franchise fees altogether. There are pending bills in both houses of the Arizona state legislature based on the premise that there is a competitive inequity in how cable companies are forced to do business in municipalities. And while nothing is certain, Johnson holds out great hope that one of them will become law and help Cox and other operators in the state play on a more level field with its competitors. Nordvold says that the ACTA and cable companies like Cox are being disingenuous with their messages: "They say that they want to compete with satellite on an even playing field, but they forget they use the public right of way, and all services that do that have to pay for it." Cox Phoenix? Make That Cox Arizona Cox may have been busy making cable history over the past three years, but that’s not to say it wasn’t actively building its business as well. In fact, Cox has been building a virtual cable empire in Arizona. In 2003, the company began integrating its Tucson system into its Phoenix operation. Recently it began doing the same with its smaller Southern Arizona systems. It’s not hard to imagine the day when Cox will have the first-of-its-kind statewide cable system in the country, operate it out of Phoenix and brand it as, simply, Cox Arizona. (In fact, the latter has already happened.) The Phoenix system, which is run by VP and region manager Steve Risley, systematically is integrating the Cox Tucson system. "The first step we took in the integration of our system was to create functional areas that report into a statewide organization, primarily out of Phoenix," says Anne Doris, Tucson VP and system manager. She adds that Cox had been focusing on "an alignment of statewide products and services." VP of marketing Tony Maldonado, a graduate of the Kaitz fellowship program, is driving the penetration of those products and services. Maldonado and his team operate in a competitive region whose per capita Latino population is as large as any in the country. Two versions of marketing materials frequently are produced, with copy that is not just a translation, but a "trans-creation" tailored with idioms and subtle differences in message points. Direct mailers are routinely bilingual. Cox achieved a 19% increase in customers in 2004, and projects to see another 14% increase in 2005. As is the case with many MSOs, activity in the business services division is on a steep upswing. "My goal is to make Cox Business Services about 25% to 30% of the company’s overall business in Arizona," says John Egan, VP of Cox Business Services in the state, adding that in 2005 Cox Arizona is projected to pull in over $1 billion in revenue. As one of the most important systems under the Cox corporate umbrella, and considering the company’s recent run of J.D. Power awards for service excellence, it would seem fair to conclude that Cox Arizona is more than holding its own in the area of customer service. "There is a reason Cox has been recognized time and time again—not just our service, but as an employer of choice. It’s because there is a real focus on people here," says Lee Scanzano, VP, customer care. While Cox Arizona customers who spoke to CableWORLD expressed overall satisfaction with their local cable company’s service, Phoenix intergovernmental program coordinator Norris Nordvold says that one very important customer, Phoenix Mayor Phil Gordon, recently voiced frustration to him over the fact that a few days prior he had spent 45 minutes on the phone with Cox, trying to clear up a problem with his own service. "They’re getting better," says Nordvold, "but they still have a ways to go." —M.C.A. Cox Arizona by the Numbers Employees: 2,500 statewide
Miles of plant: 15,000
Homes passed: 1.7 million
Bandwidth: 750 MHz
Percent upgraded: 97.4%
Basic subs: n/a
Basic penetration: n/a
Basic rate: $17.95, limited basic
Digital subs/penetration: n/a
Digital rate: $45.95
HSD subs/penetration: n/a
HSD rate: $24.95-$64.95
DVR: Launched 2003.
VOD: Launch date not available.
Ad insertion: 68 channels Source: Cox