Legal battles over cable franchising may add a hurdle to SBC Communications Inc.'s (NYSE: SBC) planned rollout of IPTV service later this year (see SBC: 'Let Us Entertain You!').

Attorneys and industry advocates from SBC, the cable industry, and municipalities are already jousting over whether TV channels piped through the Internet are bound by franchise law, and the courts seem to be where the debate is heading.

The battle is worth watching because SBC and other phone companies could wind up forfeiting 5 percent of their return on investment to local authorities if the franchising rules are shown to apply.

The franchising agreements formed between TV providers and municipalities typically include standard provisions for reliability, customer service, billing cycles, public access channels, and the payment of a franchise fee.

National Cable & Telecommunications Association (NCTA) president Robert Sachs fired the first salvo in the IPTV debate in a speech to the Washington Cable Club on December 14. Sachs said there is no distinction between the technology used to deliver cable television in the Telecommunications Act of 1996, the law which set forth the franchising rules.

The business plan for SBC's Project Lightspeed, Sachs said, aims to target what it calls “medium-“ and “high-value” customers -- those willing to pay $110 per month for services -- with its IPTV offering. “To protect against ‘cherry picking’ certain neighborhoods based on income, the Communications Act requires local franchising authorities to ‘assure that access to cable services is not denied to any group of potential residential cable subscribers because of the income of the residents of the local area in which such group resides’,” Sachs says.

SBC says the NCTA’s motives are not really rooted in serving the public. “It’s not surprising that the head of the cable association would speak out against what we’re doing, because he’s afraid of the competition,” says SBC spokesperson Mike Balmoris (see MSOs Yawn at Lightspeed).

SBC argues that its TV service isn't the same as a broadcast or cable-provided service. To make that point, SBC’s lawyers are relying on a November ruling by the Federal Communications Commission (FCC) exempting the VOIP carrier Vonage Holdings Corp. from the jurisdiction of state utilities regulation and placing it under federal jurisdiction. The FCC’s central reasoning behind the decision was that Vonage’s VOIP service was not affected by state borders in any way and should not be regulated as such (see FCC Shields VOIP From States and Vetting SBC's VOIP).

“This is an IP platform,” Balmoris says. “It’s the same as when the cable companies provide telephone service over IP; there is no regulation at the local level.”

Balmoris says SBC last year filed a forbearance petition with the FCC which states its view that IPTV should be exempt from the franchising agreements. The agency recently extended its deadline to respond, and is now expected to give its view by May 2.

But SBC isn't waiting that long to start digging up neighborhoods. Construction is set to begin this quarter to deploy SBC fiber close to customer locations to provide new, feature-rich, IP-based services, including IP television, VOIP, and fast Internet access. Project Lightspeed is expected to reach 18 million households by year-end 2007.

Balmoris said SBC’s response to any legal challenge from municipalities -- those potentially losing out on franchise revenues -- depends on the circumstances and timing. “We’ll cross that bridge when we come to it,” he says.

For the cable industry, the connection between the Vonage decision and an SBC exemption from local TV franchise rules is too big a stretch. “That decision was specific to voice,” says NCTA spokesman Brian Dietz.

The cable industry, and some localities, are citing language in the Telecommunications Act to support their argument that TV is TV, whether IP or not, and the franchising rules apply to phone companies. “The Act is really very clear on franchising; there is really no need for further interpretations on that.”

“City officials have said they will file injunctions [against SBC] if they don’t abide by the franchising rules,” Dietz says. “At federal level, the Congress could draft new language specifying that phone companies must enter franchise agreements."

Balmoris says some cities welcome the phone companies entrance in the local TV market because of the downward pressure they may place on rising cable TV prices. The NCTA’s Dietz, on the other hand, points out that many cities are more interested in collecting the franchising fees the phone companies might bring to city coffers.

“If SBC continues with their plan to roll out cable television service without entering into the franchising agreement, the law is very clear under Title 6 of the 1996 Telecommunications Act,” says Marilyn Morhrman-Gillis, director of federal relations at the National League of Cities.

Morhrman-Gillis says the situation could play out in a number of ways, depending on SBC’s rollout. “How cities choose to respond would depend on what they announced and in what locations and when,” she says. “But I wouldn’t be at all surprised if cities filed injunctions against SBC.”

One of SBC’s competitors, Verizon, has chosen to form traditional cable franchising agreements with cities and has already entered agreements with Beaumont, Calif. and the Dallas suburb of Sachse.

— Mark Sullivan, Reporter, Light Reading