The Chair of the New York State Public Service Commission announced today that the Commission is seeking a possible revocation of Charter Communication’s franchise to serve New York City and a $1 million fine payable to New York State for failing to meet its network buildout obligations agreed to as part of its 2016 merger with Time Warner Cable.

“It is critically important that regulated companies strictly adhere to the state’s rules and regulations,” said Commission chair John B. Rhodes. “If a regulated entity like Charter’s cable business decides to violate or ignore the rules, we will take swift action and hold them accountable to the full extent of the law.”

The most serious potential consequence is the revocation of Charter’s franchise agreement with New York City, which would force the cable operator out of the most important media market in the country. The Commission has opened an official proceeding to investigate whether Charter has tried to achieve its network expansion targets by using addresses in New York City where the company was allegedly already offering service or should have been.

Is Charter Meeting its Buildout Obligations in New York?

One of the key requirements Charter had to meet in New York in return for approval of its buyout of Time Warner Cable was an expansion of its cable footprint to at least 145,000 additional New York homes or businesses over a four-year buildout period. These “passings” — where service would be available for the first time, had to be in areas where the company was not already compelled to offer service through its existing franchise agreements. This requirement was designed to overcome the cable company’s traditional objections to servicing a location because of inadequate Return On Investment. A detailed audit performed by the Commission discovered more than 14,000 ineligible passings included by Charter in its December milestone report. Once these addresses were disqualified, Charter fall short of its obligation by more than 8,000 passings. As a result, this triggers an automatic $1 million fine, payable each time Charter fails to meet its agreed-upon buildout milestones.

New York City officials were concerned that Charter’s most recent milestone report asserted the cable company expanded service to 12,467 addresses in New York City, despite an existing franchise agreement with the city that included requirements that would guarantee those addresses either already had or should have had cable service available. If those allegations are proven true, Charter attempted to meet its buildout obligations by fudging the numbers.

“Metropolitan NYC is one of the most-wired cities in America and the world, and essentially, 100% of the NYC areas are served by one or more 100 Megabits per second (Mbps) wireline providers
such as Verizon FiOS, Cablevision, RCN, and Charter itself,” the Commission wrote.

The PSC’s staff conducted detailed reviews of 490 of those addresses claimed by Charter as having cable service available for the first time. None of them were found to be valid for inclusion in Charter’s service expansion reports, either because they were already serviced by Charter’s network or received service from a competing provider offering at least 100 Mbps service, or both.

In two instances, the staff found Charter was claiming new service expansion in buildings clearly already covered by the city’s existing franchise agreement.

“In a more egregious example, Charter also listed the Reuters Building as countable toward the December 2017 target in Charter’s January 2018 filing, which has a listed address of 3 Times Square,” the PSC wrote. “Staff could not find any photos of the building prior to 2014 beside aerial views, but construction was completed in 2001, well before the effective date of the current franchise agreements.”

In either case, Charter may be stuck between a rock and a hard place. If the company argues it did, in fact, provision cable service only recently, Charter probably materially breached its franchise agreement with the city, providing immediate grounds to begin franchise revocation proceedings under PSL §227.11. If Charter argues instead it was in compliance with its franchise agreement and did in fact already offer cable service to those addresses, Charter would be subject to an investigation about why it misled the regulator by claiming those locations as “new passings” when they were not.

Franchise Fee Dispute

A second controversy involves the amounts of franchise fee payments payable to New York City. City officials claim those payments have declined year-over-year since Charter completed its merger with Time Warner Cable.

Rhodes

A decline in franchise fee payments could be the result of cord-cutting, which has taken its toll on cable TV subscriptions at almost every cable company in the country. The fewer cable TV subscribers, the more likely revenue declines are going to occur, which in turn cuts franchise fee payments.

Charter Communications’ business model is also a departure from its predecessor, Time Warner Cable. In addition to ending many pricing promotions, Charter also stopped marketing stripped down, budget-conscious television packages. Many customers also faced dramatic rate increases as a result of Charter’s new bundled TV packages, which in some cases required customers to pay substantially more to keep all the channels included in their original Time Warner Cable package. As a result, many customers changed providers. Others decided to “cut the cord” and drop television service altogether while retaining broadband. The franchise fee does not apply to internet or phone service — just television.

Still, the PSC wants to audit Charter’s books to verify the company’s accounting has not departed from Time Warner Cable’s interpretation of the franchise fee agreement and unfairly undercut the city.

Charter has been given 21 days to respond with clear and convincing evidence it is not in violation of its franchise agreement with New York City or its merger obligations with New York State. If the Commission does not receive satisfactory evidence by the deadline, it is likely to begin hearings on whether Charter has committed material breaches of its agreements serious enough to warrant fines and/or franchise revocation.

Spectrum workers on strike march in the 2017 Labor Day parade in New York City. (Image courtesy: IBEW/Local 3)

Charter Communications’ list of addresses of some of its “locally based contractors” turned out to be self-storage locations, leading to accusations the company could potentially be in default of its franchise agreement with New York City.

Charter agreed to use city-based contractors wherever possible to maintain and upgrade its expansive cable system in the Big Apple. But an audit by the Department of Information Technology and Telecommunications found only seven of 26 vendors Charter uses are in the city, despite claims by Charter that 77% of its vendors are NYC-based.

On its own, the violation might seem minor, except for the fact Charter Communications has left 1,800 of its best-trained workers in New York and New Jersey out on strike for 11 months, the longest unresolved labor action of 2017.

Workers’ demands, presented by the International Brotherhood of Electrical Workers (IBEW) Local 3, have been largely ignored by Charter, in part because the company can find replacement workers outside of the area.

Charter’s denial of the accusation it was in violation of its agreement to use local labor included an attempt to broaden the definition of “located,” followed by an effort to change the subject to what the company alleges are more than 100 acts of vandalism committed by striking workers or those sympathizing with them.

“We continue to meet our franchise obligations, and our response to their findings is included in the report,” a Charter spokesman told the New York Daily News over the weekend.

Although union resources supporting the striking workers have been tested to their limits, the union and most of its members persevere. But it remains a difficult struggle, with some members on the verge of losing their apartments, and many more now relying on food banks and public assistance.

The dispute began after the former Time Warner Cable employees were transitioned to Charter Communications. Charter announced it wanted to pull out of the union’s pension and healthcare plans and replace them with a company-sponsored healthcare offer and a 401(k) retirement plan.

“They basically said that until we agree that they don’t have to contribute to our pension and health plan, they won’t talk about anything else,” Chris Erikson, business manager of Local 3, told the Daily News last fall. “That’s a gun to our head, they said ‘Take it or leave it.’ And our membership understands the value of what’s at stake here, and they decided to leave it.”

Efforts by large corporations to abandon employee care and retirement plans administered by the unions themselves is part of a broader national attack to make unions irrelevant, argue union defenders. The replacement plans offered by Charter are greatly reduced from what Local 3 fought for and won from Time Warner Cable.

“The practical side of the medical plan that the members have is: my son had a kidney transplant and I got the bill from Columbia Presbyterian hospital and it was $96,000. My share of that was 200 bucks. If I was in Charter’s medical plan I’d probably have to take a loan to pay the hospital bill – that’s with coverage,” Erikson told The Guardian.

Charter can certainly afford to cover its workers’ needs. The company’s CEO was the highest paid in the country in 2016, earning $98 million. The impact of the Trump tax cuts also delivered soaring profits for Charter Communications as a whole.

Profits for the fourth quarter of 2017 hit $9.6 billion, compared with $454 million during the same period in 2016. Profits for the year reached $9.9 billion, compared with $3.5 billion in 2016. Charter earned $41.6 billion in revenue in 2017.

New York Mayor Bill de Blasio thinks the strike has gone on for too long.

“It’s been almost a year that Local 3 workers have been on strike. It’s far past time for management to come to the table with a fair deal,” he said.

Charter Communications will have to face a courtroom to answer accusations the cable company intentionally sold internet service at speeds it knew it could not provide to its customers in New York.

New York State Supreme Court Justice O. Peter Sherwood rejected a motion by the cable company to dismiss New York Attorney General Eric Schneiderman’s 2017 lawsuit accusing Time Warner Cable (now owned by Charter) of systematically shortchanging as many as 640,000 New York internet customers by falsely advertising internet speeds it knew it could not deliver, often with at least 900,000 outdated company-provided cable modems incapable of supporting the higher speeds the company promoted.

“Today’s decision by the New York Supreme Court marks a major victory for New York consumers — rejecting every single argument made by Charter-Spectrum in its attempts to block our lawsuit,” said Schneiderman. “This decision ensures that our office can continue to hold Charter-Spectrum to account for its failure to deliver the reliable internet speeds it promised consumers, ripping you off by promising internet speeds it simply could not deliver.”

Charter’s Defense: Spectrum’s Ad Claims for Fast Internet Service are: “Prototypical instances of non-actionable puffery.”

Charter’s lawyers attempted a variety of legal strategies to get Schneiderman’s lawsuit tossed, including undermining the cable company’s own marketing efforts. Lawyers argued the court should ignore Charter’s claims it sold a “blazing fast, super-reliable connection” that could “stream Netflix and Hulu movies and shows effortlessly” as nothing more than “prototypical instances of non-actionable puffery.”

Scheniderman’s office claimed it was much more than that.

N.Y. Attorney General Eric Schneiderman

“Spectrum-TWC failed to maintain enough network capacity in the form of interconnection ports to deliver this promised content to its subscribers without slowdowns, interruptions, and data loss,” stated Schneiderman. “It effectively ‘throttled’ access to Netflix and other content providers by allowing the ports through which its network interconnects with data coming from those providers to degrade, causing slowdowns. Spectrum-TWC then extracted payments from those content providers as a condition for upgrading the ports As a result, Spectrum-TWC’s subscribers could not reliably access the content they were promised, and instead were subjected to the buffering, slowdowns and other interruptions in service that they had been assured they would not encounter.”

Charter also claimed it was not legally responsible for meeting its own advertised speeds because the company only sold speeds “up to” a level, without guaranteeing customers would get the speeds it advertised.

Even if a judge found Charter lacking in its legal defense, lawyers for the company more broadly argued that under FCC Chairman Ajit Pai’s net neutrality order, state courts and regulators had no power to regulate or oversee broadband providers because “regulation of broadband internet access service should be governed principally by a uniform set of federal regulations, rather than by a patchwork of separate state and local requirements,” according to Charter’s attorney Christopher Clark.

Justice Sherwood uniformly rejected all of Charter’s arguments to dismiss the case:

• Improper state venue for the lawsuit: “Spectrum-TWC fails to identify any provision [of law] that preempts state anti-fraud or consumer-protection claims, or reflects any intention by Congress to make federal law the exclusive source of law protecting consumers from broadband providers’ deceptive conduct.”
• False advertising: “This court finds that, contrary to defendants’ contentions, the FCC’s goal of promoting competition through [the Internet Transparency Rule], the FCC stated that the rule was intended to ensure consumers had the “right to accurate information, so [they] can choose, monitor, and receive the broadband internet services they have been promised. New York’s Executive Law and Consumer Protection Act […] require that [providers] refrain from fraud, deception, and false advertising when communicating with New York consumers.
• Netflix/YouTube slowdowns: The issue of interconnection agreements between content providers and Spectrum-TWC are matters for the court to consider because it is not an attempt to regulate those agreements. “Rather, the complaint simply alleges that Spectrum-TWC misled subscribers by claiming that specific online content would be swiftly accessible through its network, while it was simultaneously deliberately allowing that service to degrade […] and failing to upgrade its network’s capacity to meet demand for this content.”
• “Up to” speeds: Spectrum-TWC claimed that advertising speeds “up to” a certain level was not misleading because consumers understood this to mean the maximum speed, not average speed. In Spectrum’s argument, it claimed “reasonable consumers understand this is not a promise of ‘minimum’ performance, but rather ‘maximum’ performance.” But the judge disagreed. “Defendant’s theory is contrary to New York law regarding ‘up to’ claims” when those speeds are “functionally unattainable as a result of the defendants’ knowing conduct.”

Schneiderman’s office is seeking civil fines and restitution from Spectrum-TWC for customers in New York.

YouTube TV is adding seven new basic cable networks owned by Time Warner/Turner Broadcasting to its lineup along with NBA TV and the MLB Network.

The new TW/Turner Network channels — TNT, TBS, CNN, truTV, Cartoon Network, Adult Swim and Turner Classic Movies, along with more sports programming, will also mean a $5 a month rate hike for the streaming service, effective March 13.

Existing YouTube TV customers and those signing up before the rate increase takes effect will be spared the price increase, paying $35 a month for the service instead of the $40 rate charged new customers next month.

YouTube TV has focused much of its attention in the last year on getting local broadcast stations on its lineup, and now has a complete assortment of NBC, CBS, ABC, and FOX affiliates in dozens of TV markets. One of the reasons cord-cutters are reluctant to cancel their cable subscription is the loss of local stations, but YouTube TV has managed to overcome that roadblock for many subscribers.

The service has spent much of its annual budget on sports channels, which are usually the most costly basic cable networks. The addition of Time Warner, Inc./Turner Broadcasting cable networks came as a result of subscriber demand. Time Warner, fighting the Department of Justice over its proposed acquisition by AT&T, will likely use the new agreement as additional evidence the company is not withholding popular cable programming from AT&T’s competitors.

YouTube TV offers a 7-day free trial, after which subscribers are charged $35 a month. If interested in the service, now is the time to subscribe before it costs $60 more a year.

Spectrum markets where gigabit speed is already available.

Charter Communications is accelerating the deployment of the next generation cable broadband standard DOCSIS 3.1 so that it can offer almost every customer gigabit download speed by the end of this year.

“We plan to be 1 Gbps everywhere and marketing 1 Gbps everywhere this year, which is [also includes] taking up a significant portion of our business to minimum speeds of 200 Mbps at the same price we were charging for 60 Mbps a year ago,” said Thomas Rutledge, CEO of Charter Communications, on a Feb. 2 investor conference call. “And we plan to do that as quickly as we can, but because of the all-digital rollout and some of the other operational issues we have, we haven’t fully planned out [200 Mbps speed for] the whole country yet.”

Charter’s biggest challenge is expected to be swapping legacy modems inadequate for the task of delivering 200 Mbps and higher speeds to residential customers. Many Charter customers are still using modems originally provided by Time Warner Cable and Bright House Networks, generally considered adequate for supporting top speeds only between 50-100 Mbps. But Charter is planning to offer faster internet speeds to position itself as a viable broadband competitor in markets where fiber competitors have poached subscribers and the future threat of 5G speeds up to 1 Gbps are on the horizon. That could require a substantial modem exchange program, especially in cities that were never upgraded to Time Warner Cable Maxx before Charter acquired Time Warner Cable.

Charter’s migration for Time Warner Cable/Bright House customers continues, while Charter Legacy markets stall

In 2017, Charter intentionally focused most of its time and money integrating its acquired Time Warner Cable and Bright House Networks customers into Charter’s billing, provisioning, service, and retention systems. This came, Rutledge admitted, at the expense of long-time Charter customers who saw new product launches and upgrades delayed because of the ongoing integration effort.

It will take until 2019 to fully integrate all of Charter’s customers onto a single platform that will no longer distinguish if a customer was a long-standing Charter customer or a former TWC or BH subscriber.

Customers willing to abandon their legacy Time Warner Cable or Bright House plans in favor of a Spectrum plan are also dragging their feet. As of the end of 2017, 51% of TWC and Bright House customers were still sticking with their original plan, refusing to switch to Spectrum pricing and packaging. As customers face Spectrum’s new plans, some are canceling service. Time Warner Cable residential video customers dropped by 2.5% over 2017. Charter Legacy customers dropped by 1%, while legacy Bright House customers declined by 0.5%.

Legacy Charter areas saw subscribers running out of patience. The company lost 10,000 video customers in the last quarter versus a gain of 20,000 customers a year ago. Company officials blame the complications associated with absorbing millions of acquired customers for the results.

“In 2016 and 2017, we delayed a number of new product launches through the integration, particularly at legacy Charter within our fundamental structured operating model and business rules now in place, we will more aggressively launch new products nationwide,” said Rutledge.

Charter is also spending a considerable amount of its financial resources buying back its stock. During the fourth quarter, Charter accelerated its buyback program repurchasing 13.5 million shares in Charter Holdings stock totaling $4.7 billion at an average price of $347 per share. For all of 2017, Charter bought back $13.2 billion worth of its own stock.

Digital television conversions drag on…

Charter did not restart its digital television conversion program until June of 2017, and 30% of Time Warner Cable and 50% of Bright House Networks customers are still watching analog cable television as a result. Company officials promise digital conversion will be completed nationwide by the end of this year, the first step the company will take to make dramatic broadband speed increases possible.

“Our video products in those markets will improve,” Rutledge said. “Internet speeds will increase further and all-digital will drive more efficient operations in the field including electronic disconnects, self-installation and a reduction of unauthorized connections.”

Among the most significant improvements is the introduction of the Worldbox set-top box, which will be available nationwide by the end of 2018, but generally only to new video customers. The new box runs faster and is less expensive than the traditional set-top box, and better integrates on-demand and streaming video services.

Worldbox will also highlight Spectrum’s new Spectrum Guide, an improved on-screen program guide and content portal. The new guide will also include support for third-party streaming services like Netflix.

Charter has also begun to deploy an improved Wi-Fi router known as Wave 2, which claims to offer faster speeds and better signals throughout a customer’s home. Availability is reportedly spotty, but improving.