Showdown in Bristol County

BY MAVIS SCANLON There are only two major north-south roads that run through Bristol County, R.I., a couple of peninsulas that extend into Narragansett Bay between Providence and Newport. Route 114 traverses through Barrington, the county’s most prosperous town; Route 136, which cuts through the old manufacturing and industrial zones, is lined with a hodgepodge of strip malls, small businesses and residences. Anyone who has ever strung cable — or who’s followed the multiyear saga of Cox Communications’ overbuild of Full Channel TV — would immediately take note of the telephone poles that march along the sides of Route 136. The indelible stamp of Cox’s overbuild of the local cable operator is strung on these poles, some of which had to be reinforced in order to hold the weight of the wires. The lowest line or two always belong to the phone company, in this case Verizon. Above that are the aerial lines of Full Channel’s plant, which was rebuilt starting in 2000 to accommodate digital video and high-speed data. Strung directly above Full Channel’s wires is Cox’s new plant’s line, installed in 2001. The MSO’s top-tier position on all those Bristol County telephone poles is not without significance — or conflict. Just one year after it started offering service here, Cox has already netted 3,100 video customers while Full Channel has lost 1,400. At this rate, things could get bad for Full Channel in a hurry. That’s where the conflict comes in. And make no mistake, there is plenty of that. For Cox, the fourth-largest MSO with a virtual lock on the state, moving into Bristol County furthers its business plan to have a contiguous system throughout all of Rhode Island; for John Donofrio, Full Channel’s founder and president, the overbuild may be his worst nightmare come true. Tensions have risen to such levels here that people on both sides have resorted to flinging charges of sabotage. Both Donofrio and his system manager, Mike Davis, say their wires have been cut and their circuit breakers broken. A pair of Cox contractors working on lines in the town of Warren relate mysterious stories of downed Cox cable plant. Not quite the warm-hearted splendor one might expect from the likes of this otherwise bucolic New England locale. Donofrio could have avoided all this. In late 1999, Cox CEO Jim Robbins approached him about buying the cable system he’d launched in 1984. The two met twice by Donofrio’s account, the first time over lunch at a Providence restaurant, where Robbins sought to gauge Donofrio’s interest. He was indeed drawn to selling his small company to the much larger one, or at least seeing what price it might fetch, and so the two men left the eatery agreeing to talk further. Donofrio also agreed to provide Robbins with a financial breakdown of his company so that Robbins could bone up on Full Channel’s operations and begin thinking about a price. The next time the two men met was over dinner in Palm Beach. Robbins, says Donofrio, having gone over Full Channel’s financials, spoke of how poorly the system was operating. “He gave me a lot of negative reasons why he shouldn’t pay a market value,” Donofrio recalls. It was at this point that Donofrio brought in a broker at CEA to handle the negotiations for him. However, a full year after that first lunch meeting in Providence, Cox still hadn’t budged from its original offer. Neither side will divulge what the offer was, though press reports have pegged it (perhaps too generously) at $2,000 per subscriber, or roughly $24 million. Not only did Donofrio refuse to sell his then 12,000-subscriber system, he upgraded it, eventually spending some $6 million to do so. After Cox’s New England division decided to forge ahead in the county on its own, Donofrio went on a crusade to stop Cox in its tracks. He charged the MSO with skirting local cable laws, urged regulators to investigate its compliance with state rules, filed a couple of lawsuits and publicly derided the bigger company by painting it as the fat cat interloper bent on crushing an established local business. This despite the fact that both Cox and Full Channel were among the state’s nine original cable franchisees. He also may have gone out of his way to antagonize Robbins. In a handwritten letter faxed to Cox’s CEO, dated Oct. 3, 2000, Donofrio promised to “ask potentially embarrassing questions during the discovery process” as Cox sought regulatory approval to operate in Bristol County. He ended by urging Robbins to contact him if Cox had “any desire to revisit or rejuvenate our purchase/sales discussions.” But at that point, it appears, Robbins had had enough, and on Oct. 9, he wrote back to Donofrio. Robbins wrote of being “disappointed” in Donofrio’s letter, particularly “its tenor and the thinly veiled threat to retaliate against Cox for not purchasing Full Channel.” Robbins also made quite clear his intentions in Bristol County, stating that “a build out makes good sense” for Cox. “Therefore,” he added, “we plan to continue with efforts to seek a license to serve those areas.” Two and a half years later Robbins has followed through on his plan — and Donofrio has to compete with him. The thing is, the fiercely independent operator, who at the age of 76 splits his time between homes in Massachusetts and Florida, now faces the sort of fight that could well put his business at risk. Among the cable industry’s unwritten laws, carried over from the old days when things were more collegial, is that you don’t move in on somebody else’s territory. It’s also expensive to do it. Operators are loathe to compete for the same service area, and so there’s always been a kind of gentleman’s agreement to avoid doing so. Perhaps Donofrio had this in mind when he rebuffed Robbins’s offer. Rhode Island, after all, is the smallest state in the union. It’s also the only state in which one operator, Cox in this case, overwhelmingly dominates cable delivery. Would it really opt to do an overbuild in such a small county, rather than simply wait until the local cable op might be more amenable to sell? What Donofrio might not have fully appreciated at the time was just how much Cox wanted — and needed — to be in Bristol County. The ring-in-ring architecture of its cable plant means that Cox needed two diverse paths for its network to travel through. In the event some fiber is cut or damaged anywhere in the plant, the signal is automatically switched to the backup route without any interruption to the customer’s service. Cox had its wires strung throughout Rhode Island’s four other counties (Providence, Kent, Washington and Newport), but Bristol is the county that connects Newport and Providence. The county, which is minutes from Providence and has some of the state’s most attractive demographics, also allows Cox Media to pitch the entire Providence DMA to prospective advertisers. It is also the last area Cox needed to wire to be able to offer a statewide calling plan. That’s important to Cox, as the three-product bundle (video, data and telephony) lies at the heart of the Atlanta-based company’s entire strategic plan. “Our business plan for Rhode Island has always been to serve the entire state,” says John Wolfe, VP of government and public affairs for Cox New England. “We made no secret of that plan.” Contrary to those who might say otherwise, Wolfe insists that Cox is not the bad guy here. “In the Bible story, David was the good guy and Goliath was the bad guy,” he says. “That’s not the case here. I don’t think you can presume one company’s motives are purer than the other’s — it’s just an intensely competitive situation.” For Full Channel that’s not such great news. The company, Donofrio says, can be viable with 9,000 to 10,000 subscribers. But that’s where it is right now. The 1,400 customers it lost in Cox’s first year in Bristol County put Full Channel at just over 9,400 at the end of January, according to the state’s Division of Public Utilities and Carriers (DPUC), which regulates cable. Faced with what he calls a barrage of Cox’s advertising, telemarketing and door-to-door sales, Donofrio says it’s a wonder he hasn’t lost more customers. He says Full Channel is profitable and, at the urging of his investors (whom he declined to name), might even expand its network into adjoining East Providence to compete with Cox. “Of course, the financial viability is a reason to hesitate a little bit,” Donofrio says. “There isn’t an overbuilder in the country that has gotten more than 15% to 20%” of the incumbent’s subscribers. That’s one reason why he’s optimistic that Full Channel has already seen its biggest customer losses in Bristol County and soon will begin to regain some. The millions Donofrio spent to upgrade his system means that Full Channel can now offer digital and high-speed data. Donofrio also plans to begin reselling Verizon phone service by mid-April and has his sights on offering VOD at some point as well. Of course, Cox is no mere overbuilder, and so it’s possible that all Donofrio’s work might have been done for naught. If Cox continues signing up customers at its current rate, Full Channel’s subscriber base could be in tatters in short order. The ultimate market share Cox will attain is anyone’s guess. There is a contingent of residents in the county, especially in the historic town of Bristol, who are loyal to Full Channel and therefore resistant to Cox’s marketing efforts. Cox has hired RCH, a contract sales firm, to blanket neighborhoods with sales reps, and this hasn’t gone over too well with some of the locals. “From my personal experience [Cox] seems to be overly aggressive,” says David Barboza, a town council member and a deacon at a local church. He says he had five visits from five different salespeople who kept coming even after he said he wasn’t interested. “I’m very loyal to Full Channel,” Barboza says. “They have been a part of this community since the inception of cable. Competition is always a good thing, but by the same token I want to see Full Channel survive.” The DPUC’s cable analyst Steven Martin, whose duties include fielding complaints from the public about their cable company, says he’s received only a couple of phone calls about Cox’s sales tactics in the county, but they didn’t warrant following up. “They felt the salesperson or marketing person was a little pushy,” Martin says. Cox’s Wolfe says not to judge a sales force by a few aggressive reps. “The fact that a couple of customers did not have a good experience with our sales force is troubling to us,” he says. “Those aren’t tactics we would tolerate.” It’s clear by its marketing efforts and introductory offers how badly Cox wants to entice new customers. Not only is Cox now competing with Full Channel — whose 114-channel digital package, at $48.20 including taxes and fees, is less expensive than Cox’s — but it’s also competing with satellite. One recent satellite offer in Providence gave consumers 130 channels for $39.99, well below Cox’s price for 112 digital video channels. (Cox’s digital package also includes dozens of pay-per-view and music channels.) Cox’s offers are alluring, at least at first glance. For example, through April 15, Cox New England customers can sign up for digital and get 50% off the rate for six months. It actually sounds a little better than it is. Rather than the $8.95 rate for digital standard, customers would pay $4.99. But in order to get that rate, you have to sign up or already have expanded upgraded basic, for $43. With taxes and equipment charges, that’s about $53 a month for the first six months for 112 channels, 33 of which are new, according to a Cox customer service rep. New customers who sign up online receive two free months of digital and half-price installation. Customers who take a three-package bundle get Cox’s standard $10 bundling discount. It’s not hard to discern why Cox is pushing so hard with its special offers. Like other MSOs, Cox, which serves about 6.3 million customers and saw revenue of over $5 billion last year, is under intense pressure to meet financial targets and generate free cash flow. As one of the few MSOs that actually grew its subscriber base in 2002, Cox also needs to meet or exceed its subscriber growth projections. Small as it is, Bristol County represents fresh pickings. What Cox says are pure business reasons for pursuing its overbuild in the county, others see it as the big company muscling in on the smaller company. “I am furious about what is going on in Rhode Island regarding the muscle of Cox, and what it’s done to hurt Full Channel,” says Dave Esty, a Bristol resident and one of the longest-serving directors of the Ad Council. Full Channel does have its supporters in this regard, including members of Bristol County’s Citizens Cable Advisory Council. Unfortunately for Donofrio, such backers are powerless to help him, as they cannot dictate to the DPUC, which sets the rules. Over the years these advisory groups — which are just that, advisory, and have no authority whatsoever — have fallen by the wayside. Bristol’s is one of the few still-active groups in the state, but its limits were underscored at a recent meeting with representatives of Cox and the DPUC. Only three of 12 members showed up in the Warren Senior Center at Town Hall, and without a quorum, scheduled elections for new officers could not take place. After the meeting disbanded, and Cox’s and DPUC’s people had left, a fourth member arrived. For the last couple of years, Donofrio has challenged nearly every DPUC ruling that relates to Cox. Under Rhode Island’s cable laws, in exchange for franchise fees, cable companies are required to provide a separate network, called the Industrial/Institutional network, or I-Net, to all municipal buildings. They also must provide a certain number of public access channels and studios. Full Channel is charging — and some advisory council members and public access producers agree — that Cox has lived up to neither the letter nor spirit of these laws. In a couple of areas Cox received waivers, and in others, where the predecessor company did not keep up a viable I-Net, Cox didn’t either, according to a brief written by Assistant Attorney General William Lueker. For its part, Cox is adamant that it has complied with the state’s rules and offers as proof the franchise transfers it has been granted as it snapped up systems throughout the state. “Clearly there are two legal opinions,” says Eric Palazzo, the assistant administrator of the DPUC. Palazzo says he and DPUC administrator Tommy Ahern chose not to look back to determine whether Cox had been in compliance over the years, because that would likely entail a lengthy court battle. Rather, Cox, the DPUC and the attorney general’s office negotiated a settlement of the I-Net issue after two years of public hearings, demonstrations of Cox’s proposed alternative to the mandated I-Net and expert testimony from both sides. The proposed settlement does not require Cox to build a separate network but allows it to make available I-Net services through its “Full Service Network.” Other provisions of the agreement provide for free Internet data service at speeds lower than 128 kilobits and discounts for higher-speed service; it eliminates certain equipment costs for the end user and provides for a wider outreach program to educate and train people to use the system. It also limits the charges that can be placed on institutional users and confirms that the cost of the network to commercial users won’t be passed on to residential users. In a brief written after the settlement, Lueker backed some of Donofrio’s assertions that Cox had not officially been in compliance with the state’s I-Net requirements and that the company had not satisfied some of the initial requirements that allow for waivers. However, he noted, “the settlement agreement currently negotiated between Cox and the [DPUC’s] Advocacy Section has significant merit and is worth preserving.” He recommended that further hearings be held so that Cox may be given further opportunity to prove it is meeting the letter of the law. A DPUC hearing officer is expected to issue a final ruling on the settlement by the end of March. Donofrio says he is prepared to keep fighting if he is unhappy with the final ruling. “We’ll go to the Supreme Court of the United States if we have to,” he says. “I feel very strongly that the regulatory people are not performing their duties.” Although some of the assistant attorney general’s comments can be viewed as a victory for Donofrio, it is a small one in a big war. His last, best hope is a suit in Rhode Island Superior Court that seeks to overturn the state regulator’s decision to grant Cox its initial certificates of compliance, construction and operation. Full Channel expects to submit a brief to the court in that case within 30 to 60 days. Although a long shot at best, Donofrio is hoping the court might determine those certificates illegal, based on the fact that Cox began building its network in the county using a construction certificate it had been awarded for its telephone network but before the DPUC awarded it a construction certificate for its video network. “That may hurt them in the final court decision,” he says. Ironically, just as Full Channel went to the state (and now to court) to try and get Cox to abide by the letter of the law, Cox did basically the same thing to another tiny operator in Rhode Island. The New England Cable Television Association, representing several operators, filed a petition with the DPUC in July 2001 that sought to shut down Starlight Communications, which serves about 2,000 customers in apartment complexes. NECTA’s argument was that Starlight was operating without a license, but the DPUC ruled that Starlight did not fit the federal government’s definition of a cable system, as its services did not cross public rights of way. John Wolfe at Cox said that to compare the Full Channel situation with Starlight was like comparing “apples and pomegranates.” So what now for Bristol County’s oldest cable company? Perhaps the biggest irony here is that Donofrio says he’d still be open to a buyout offer, from Cox or anybody else. Early in his career Donofrio was the GM of a Rhode Island radio station, and it was there, he says, that he learned never to turn away a salesperson. “You never know if they have a better typewriter,” he says. “I never close the window on anything, actually.” Trouble is, Cox may have done just that. Now that its plant is almost completely built, there’s little need to buy Full Channel. Claus Kroeger, SVP of operations for Cox’s Eastern division, says he sees no point in talking with Full Channel now. As it stands, Cox has spent an estimated $16 million to build out Bristol County. “Depending on how quickly we gain market share,” Kroeger says, Cox’s return on its investment could run “somewhere in the neighborhood of four to six years.” What’s more, Jim Robbins has been quite clear when addressing Cox investors that he won’t be spending money on acquisitions right now. That leaves Donofrio in a tough spot: still independent in a market he used to have all to himself but no longer does, and wondering if, five years from now, the company he built will still be in the game. As he fights on, he’s convinced it will be, citing the country’s many small operators that exist even as the biggest MSOs grow ever larger. “I don’t think there is the slightest chance in the world Cox is going to put us out of business.”