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Item 6 Desk Item Adopt Resolution Extending the Cable Television Franchise Agreement with AT&T Broadband from March 31, 2003 to March 31, 2004COUNCIL AGENDA REPORT DATE: February 18, 2003 TO: MAYOR AND TOWN COUNCIL FROM: DEBRA J. FIGONE, TOWN MANAGER SUBJECT: DISCUSSION: MEETING DATE: 2/18/03 ITEM NO. 6 DESK ITEM ADOPT RESOLUTION EXTENDING THE CABLE TELEVISION FRANCHISE AGREEMENT WITH AT&T BROADBAND FROM MARCH 31, 2003 TO MARCH 31, 2004 Attached, for your information is a copy of a San Francisco Chronicle article that was in the Monday, February 17th edition. Diane McNutt asked that we forward a copy to each of you. Attachment: February 17, 2003 San Francisco Chronicle article tat,. c i42—.0 PREPARED BY: PAMELA JACOBS Assistant Town Manager PJ:pg N:IMGRWdmin WorkFileslcnclrpts\2-18 desk item. cab lets. wpd Reviewed by: Assistant Town Manager `V, Attorney Clerk Finance Community Development Revised: 2/18/03 3:27 pm Reformatted: 5/30/01 Comcast execs paint rosy future Cable operator vows to fix reputation for bad service Todd Wallack, Chronicle Staff Writer Monday, February 17, 2003 Comcast Corp. Chief Executive Officer Brian Roberts faces a daunting task. Just three months after taking control of AT&T Broadband, the Bay Area's largest cable operator, Roberts concedes it won't be easy to shake the system's reputation for lousy service and limited offerings, cultivated through the years by earlier owners. "We want to fix it," said Roberts, a Philadelphia cable scion. But Roberts cautioned: "We are not going to fix it overnight. This is a battleship that is going to turn slowly." Roberts, in town last week with other Bay Area executives to tout the new ownership, made plenty of promises in an hourlong interview with The Chronicle. Topping the list: Roberts vowed to spend more than $400 million to finish upgrading nearly all its cable lines in the Bay Area by the end of 2004 to offer more channels and high-speed Internet service in more neighborhoods. (Less than half of area lines are now upgraded.) To celebrate the changeover, Roberts and other top Comcast executives held a pep rally for 3,500 employees on the aircraft carrier Hornet in Alameda. AT&T Broadband officially adopted the Comcast name last Friday with a flurry of ads featuring Lance Armstrong. But local customers and government officials reacted with some skepticism to all the hoopla. AT&T Broadband, after all, made similar promises when it took over TCI in 1999, only to wind up disappointing locals. "We're going to be watching Comcast very closely," Oakland City Councilwoman Jane Brunner said. Oakland is in the midst of negotiating Comcast's franchise agreement with the city, and Brunner said she has learned the importance of extracting promises in writing -- with penalties if cable companies miss the targets. Meanwhile, city officials in San Francisco are not happy about the slow pace of the upgrading of the city's cable system -- only a quarter of which has been completed. When AT&T Broadband acquired TCI, it promised to finish the upgrading work by September 2003. Now, with Comcast on board, it looks as if the upgrading will be completed by the end of 2004, more than a year behind schedule. "We are terribly disappointed," said Denise Brady, deputy director of San Francisco's Department of Telecommunications and Information Services. For some customers, the promises come too late. Hundreds of thousands of Bay Area residents have switched to satellite TV in the past few years, partly out of frustration with AT&T Broadband and its predecessors. To talk about the changes and competition from satellite, a group of Chronicle editors and writers met last week with Roberts, company founder and Chairman Ralph Roberts (Brian's father), Comcast Cable Communications President Stephen Burke and Joseph Fischer, who oversees Comcast's operations in California. The Chronicle: Where do you plan to start making changes? Brian Roberts: We took 150 (Comcast) executives and moved them around the country. That is a lot of people to move. 2003 is not a transitional year. 2003 is hit the ground running. This is our Super Bowl, and we are quite focused. Burke: This is my fourth trip to the Bay Area. AT&T was running it as one market. We looked at it and said, "My gosh, this is 1.6 million subscribers -- and there is a difference between Oakland and Napa." This is not one market, so we are dividing the business into five areas. Each of those will have local management. And we will bring all customer calls for video back this year. AT&T was moving calls out of state. B. Roberts: Last year, (AT&T Broadband) actually lost customers on a net basis. Alarm bells were ringing. Ralph Roberts: This system has changed hands 18 times. B. Roberts: It has probably had more transitions than any other market in the country. It is a market that should be fully rebuilt (and) that should have high -definition video, Internet, all those things. If you look at Philadelphia as an example, Philadelphia is 100 percent rebuilt. We have HDTV throughout the market. We have a brand-new version of video on demand, so you can stop and fast forward. The market that should be first is Silicon Valley and the Bay Area, not Philadelphia. Job No. 1 is to get this going. This is going to take $400 million in new infrastructure. The Chronicle: Is that $400 million you have to get back from customers? B. Roberts: This is total risk capital. If people don't buy cable modems (and other products), nobody gives us the $400 million back.... The first benefit is to give people more TV channels. Once you make that step, there are other steps. Like HDTV, interactive television if we ever figure that out, cable telephony. The Chronicle: Can you talk about what you are going to do on each of those fronts? Joe Fischer: On the outside, we will probably have video on demand in the Bay Area in areas that are upgraded within six months. Likewise, high- definition television. On telephony, we plan to continue with switched telephony that exists here now. There are trials in Detroit and Philadelphia on IP telephony, which is a different product we will switch over to. As we upgrade neighborhoods, you'll see us (add more) digital channels. And we'll launch the high-speed data immediately in those neighborhoods. The Chronicle: You raised cable TV rates 6.5 percent in January. B. Roberts: It was really in the works (before we bought AT&T Broadband). The Chronicle: What about the future? B. Roberts: We can invent new products. Those products are optional, so that has taken pressure off of rates. One of the reasons rates go up is programming. Programming costs have been going up double -digits. Cable has been going up on average around 5 percent a year. Both of those are higher than inflation. But it would have been higher without the introduction of cable modems. What we don't have today is the option to say ESPN is optional. CNN is optional. That's in basic cable, and our contracts won't let us pick and choose. So as we go forward, we are trying to make every new product optional. By the way, Dish Network and DirecTV both raised their rates by $2 per month. i The Chronicle: Comcast has a reputation for charging more than AT&T Broadband. r'id you've promised Wall Street you'll double the profit margins for AT&T Broadband usiness. Is part of your strategy to raise rates? B. Roberts: It's no secret that AT&T's average margin was around 20 percent ai id •Comcast's is around 40 percent. But their revenue is not that different. As a matter of fact, it is slightly higher because of (the revenue from cable telephone service). It is just a matter of focusing and running a tight ship. The Chronicle: Are you going to tinker with the channel lineups? B. Roberts: Guys in Philadelphia won't make that decision. And even in the Bay Area, what happens in one part of town will not necessarily be what happens in another. Fischer: We have no plans to drop anything. Obviously, if we have no plans to drop anything, it's difficult to shoehorn anything in. But we are still looking at it. The Chronicle: Can you talk about your decision to charge cable modem customers $14 more per month if they don't also subscribe to cable TV? B. Roberts: We went to the same pricing for cable modem that we have everywhere. There is a bundle. Most DSL providers do the same thing. There is an efficiency of having more than one product coming into your house. The Chronicle: Do you risk losing customers to DSL? B. Roberts: That is always a risk. But I believe we added cable modem customers in November, December and January at a very good rate in every market. It is a very hot product. The Chronicle: What do you think of SBC Communications' interest in buying DirecTV and bundling telephone with DSL and pay TV? B. Roberts: Good luck. The Chronicle: How would you rate the Bay Area cable system compared with other areas'? B. Roberts: I think there is significant room for improvement. A big part of our strategy is to get to local. You call customer service in San Francisco, there is a good chance now that call is being answered in Canada. It should be answered in San Francisco. The way you win is by giving better service. c In the Bay Area, no one knows anything about Comcast. We have a blank slate of paper. We have an opportunity to change people's perceptions of their cable company for the first time. :� E-mail Todd Wallack at twallack©sfchronicle. com. y 1" ,f , 1'.. �.J �..;,9