2001 was not a quiet year in the digital video, broadband Internet and multifamily housing industries. It was replete with unexpected mergers, surprise bankruptcies and record levels of consumer dissatisfaction. However, this flurry of activity is creating more opportunity rather than less for competitive service providers and multifamily housing properties. In part, this new opportunity results from franchise cable companies treating property owners as they once did several years ago, overly enjoying a "big kid on the block" syndrome, their monopolies now bigger than before. But as expected by those who understand the multifamily housing industry, property owners are responding to this new/old attitude by tapping into competitive video and broadband service providers at a level not seen since the Nineties.

How And Why

The latest telecom mega-mergers and their new monopolies are facilitating the rebirth of a corporate culture in franchise cable that is opposite the needs of property owners. As such, owners are once again seeking alternative service providers-albeit more carefully and knowledgably than in the past. Today's property owners are growing increasingly more educated on the technologies and services available, as well as their contract language and negotiation options.

The oppressive business practices of these new franchise monopolies, when combined with the past failures of competitive video and broadband service providers, have emboldened the attitudes and practices of these powerful incumbents. These practices are oftentimes unethical, distasteful and at times, illegal. But with an ephemeral silver lining in the cloud, these business practices are paving the way for a resurgence of competition.

These self appointed "kings of the hill" are reverting to old and distasteful business practices at a time when the competitive video and broadband service has filtered out those who among them can and cannot meet the needs of the multifamily marketplace. By coincidence, the timing of these burdensome business practices by the Bell telephone and franchise cable arrives at an important turning point.

While the cable giants have been gloating about the demise of certain video and broadband service competitors, they have not been paying attention to the competitors remaining in the marketplace and have become experienced, well funded machines. More importantly, they are failing to give credence to the shift in attitudes of property owners toward franchise cable.

Attitude Is Everything

Multifamily housing grew out of an industry where apartments were once considered the dark side of real estate. In its early history, apartment complexes were not considered provocative or compelling investment opportunities. As such, property owners and developers learned to fight (and continue to fight) municipalities for permits, lenders for adequate capital, contractors for reasonable prices, insurance companies for fair rates and investors for a long term investment vision. These real estate mavericks were forced to develop a tenacious "can do, will do" philosophy in order to bring the industry to the respected state it rests at today. This evolution of events created the quintessential entrepreneur who when cornered, will fight through the hurdles and achieve the Company's goals. This entrepreneurial spirit applies itself whether it is fighting municipalities for building permits or negotiating for voice, video and data services.

The end result of the many battles fought by today's property owners is a housing industry that is respected, competitive and vibrant. Its impact is significant on the economy and American lifestyle as it provides housing to as much as 25% of the population. Its resident's account for over 30% of the cable industry's customer base. So, when the incumbent franchise cable companies begin cornering property owners with "We are the only viable game in town," speech, they are beginning to meet with an industry responding in kind with "You are incorrect."

Lessons Not Learned

To a limited degree, the Bell companies and franchise cable are enjoying the fruits of temporarily failed competitors. They appear to be missing the lesson offered by Dr. Suess's The Grinch Who Stole Christmas. Although they now live on top of the mountain and enjoy stealing away the world, like the Grinch, they fail to recognize it is the attitudes rather than the market conditions that control the service provider selection processes.

The history and depth of the multifamily industry's attitude indicates it will shift away from Bell companies and franchise cable simply to avoid being cornered by oppressive, monopolistic attitudes beginning to guide most of today's big cable and Internet players.

Listen Carefully

Unlike the past, high-dollar marketing materials and tech speak do little to sway property owners nowadays. They traditionally garner little concern over a particular technology or develop a preference for a particular provider. Rather, they are most interested in the end result of the technology and services provided. They are concerned as to whether or not a particular set of technologies and services will deliver quality digital video and broadband services to their residents. With the technological, service and financial changes over the past three years, competitive video and broadband service providers are finally able to meet these concerns with a long term financial viability. Franchise cable will do well to pay attention to this new breed of competitive provider, rather than living in a glass bubble where they oftentimes think the ills of failed competitors will not be cured.

The Grinch

Foundationally, multifamily property companies are not complex operations. They evaluate the needs of their evolving resident demographics, determine how their competitors are meeting these needs and identify the providers capable of becoming partners rather than adversaries.

To many multifamily property owners, the Grinch of business partners today is franchise cable. Permitted to move seamlessly in and out of giant mergers and acquisitions without impedance, these behemoths are wreaking havoc in the multifamily housing marketplace. Some practice their trade ethically, while several others are slithering past the uninitiated with unethical and illegal practices. They are reverting to practices of days gone by where the owner was (is) forced into a "deal" rather than a "partnership." But it is these practices and attitudes by franchise cable that further embolden property owners to seek alternatives, thereby creating opportunities for competitive video and broadband service providers who will meet the needs of a very demanding clientele; apartment residents.

You're a mean one. . .

While oftentimes trying to operate fair and equitable businesses, franchise cable is increasingly erring in its approach to the multifamily industry. Resulting from extreme pressure to secure long term easement and service agreements with property owners, some operators have employed less than fair and equitable business practices. While it is expected that such practices do not proliferate the market at large, the fact of their existence is highly disturbing to the multifamily housing industry. As such, franchise cable continues to fall in disfavor with many property owners throughout the country for these and many other reasons.

Whatever It Takes

A number of franchise cable systems are using third party contractors to complete the dirty work of locking multifamily properties into long term agreements. This practice typically lacks the necessary checks and balances required to prevent impropriety by commission based contractors. The decision to use such contractors with little corporate control is forcing property owners to avoid such deal-making.

In Texas, a Federal Court found in favor of a Houston property owner whose signature, (as well as the notary's signature) was forged by AT&T/TCI onto a perpetual Service and Easement Agreement. Four years after the forgery and many court battles later, the jury awarded $4.5 million to the owner (See: David & Goliath, June 2000, Private & Wireless Broadband). Despite its loss, AT&T continues to assert that the responsibility for this forgery rests with its third party contractor, who AT&T is not pursuing with criminal charges

During the trial, 37 contracts with other multifamily properties were requested for review. AT&T only produced five. Four of the five contracts produced were also found to have both the owner's and notary's signatures forged. But the hunt continues, as it is believed many other such forgeries exist.

In other cases, third party contractors are being used to approach property managers rather than property owners, although in no instance does a multifamily property owner knowingly permit a property manager to sign such a legal and binding agreement. But the pressure is on by the cash strapped franchise giants to get new contracts signed, or expired contracts renewed with multifamily communities. To these operators, the use of third party contractors makes sense when an estimated one third of all franchise cable customers reside in multifamily communities and as many as 40% of existing contracts are either expired, illegally signed or improperly recorded. They are strapped for time and are operating with smaller staffs due to budget cuts. However, the practice of using third party contractors is calling many things into question.

And There's More

Recently, a company with a portfolio of over 60 properties in several states described an experience where a property manager was manipulated into signing a long term cable agreement.

Upon conducting extensive research, investigative journalist Erik Wemple of Cable World, the leading franchise cable industry publication says, "Big cable companies appear to be leaning more and more on third-party contractors to handle the sticky business of fetching contracts. David Broderick, a former asset-management executive with Alliance Residential Management, says that Cox Communications last spring unleashed an aggressive agent from MDU Associates, Inc. on a 160-unit property in Amarillo, Texas. According to Broderick, the contractor strong-armed a low-level property manager into signing a ten-year exclusive contract for the property. Broderick protested to Cox that managers have no authority to sign such agreements. But Cox , he said, stood by the document. "I was stunned by their approach," said Broderick.

John Price, Cox's strategist for multi-unit business, said that, "MDU Associates handled the contract properly." However, Alliance Residential states it is continuing to pursue the matter and that Cox has not made any attempt to resolve the situation. In the mean time, Cox Communications continues to authorize the use of third party contractors, empowering such contractors to acquire signed Easement and Service Agreements with multifamily properties on its behalf.

In another case, one prominent Real Estate Investment Trust (REIT) asking to remain anonymous states "Recently a major cable company offered free cable service to the property manager if she would "sign this form," a form that effectively was an exclusive, non-revocable right of entry in perpetuity, even though the cable company had been notified the manager was not authorized to sign such a document."

Tricks Of The Trade

Not lacking in creativity, Charter Communications is trying to bill a property's revenue share to residents through the resident's cable bill, referring to it as a type of access fee. Experts believe this is a manipulative tactic to force owners into abandoning the quest for ancillary income through revenue sharing. As expected, this is wreaking public relations havoc on many properties. Property owners currently under an agreement with Charter are encouraged to determine if their properties are affected. If so, they should contact Charter, informing them of the non-disclosure clause standard to most cable agreements.

Scott Wiggins of United Dominion Realty Trust believes, "This practice violates the non-disclosure provision in our [cable] contracts. This practice violates the spirit of any partnership between [the owner] and [the cable company] by potentially putting our leasing associates in an adversarial position with their residents. What angers me most, however, is that Charter originally approached United Dominion with an attractive revenue share offer. We agreed to their offer, only to have Charter try to recast their offer as an access fee that our residents had to pay." United Dominion and others have successfully battled with Charter, however, many other unsuspecting property owners have yet to garner the knowledge or resources required to challenge this situation.

On Your Own

Because of current budget issues, AT&T is forcing owners nationwide to pick up the tab for wiring or post wiring, and AT&T is not alone. Others franchise operators are attempting to follow suit. However, in many cases their decision is creating an adverse effect. Property owners are beginning to realize that if they pick up the tab on what has traditionally been paid for by franchise cable, they should consider going one step further and circumvent the franchise cable operator in its entirety. This leads to seeking wiring design and installation, as well as services from competitive service providers. "Some property owners want to install their own wiring, while others do not," said one major REIT. "There are valid arguments for both decisions. However, the point is that franchise cable is forcing us to learn more, do more and seek alternatives to their services."

Unfortunately, in none of the cases mentioned above is there any recourse for a property owner to follow through the Federal Communications Commission (FCC), the lead governing body for all franchise cable operators. In each case, the owner is left to his own devices and the legal system. Becoming more aware of this fact forces property owners to evaluate services and agreements with competitive service providers where they are able to negotiate more protective agreements in favor of their properties and residents.

The Band Plays On

One positive effect of the tech and telecom market crash, as well as the mega-merger monopolies is a vacuum for investment capital. While many organizations and individuals lost big to Wall Street during 2000-2001, the experts were cashing out and retaining earnings for a rainy day. The rainy day has come and investments capital is once again moving toward competitive digital video and broadband service providers specializing in the multifamily housing market. This investment capital that was once stuffed into mattresses is now looking for new opportunities.

Despite nay Sayers, institutional lenders and venture capitalists, who were recently wandering a barren wasteland of dead tech investments, are now more bullish than ever on investing with competitive video and broadband service providers serving the multifamily industry. As evidence of this trend, a number of competitive service providers are announcing success in acquiring growth and operations capital:

· MediaWorks, a Southeastern-Mid Atlantic region digital video and broadband Internet services provider in the multifamily industry announces their largest ever round of funding to the tune of $7-$10 million.

· Advanced Telemedia, a leading competitive, digital video service provider in the Southeastern region and winner of the 2001 Operator of the Year Award, announces a funding of over $10 million.

· WSNet, a wholesaler of programming to companies such as MediaWorks, Advanced Tele-Media and US Online announces a $30 million dollar investment into it's coffers, just months after an earlier $42 million from its investors and $10 million from Motorola. This investment in addition to other changes places WSNet as the single largest competitor to the DirecTV-EchoStar giant, giving a significant boost to the competitive video provider industry.

· Global Interactive Communications, formerly ICS, is scheduled to have its private cable system assets purchased out of bankruptcy by Access Advisory Group, who has secured an undisclosed amount of funding to upgrade these assets to the state of digital service.

· In one particular Midwest region of the country, up to 15 property owners are beginning to invest significant capital in partnering with competitive digital video and broadband Internet service providers, sharing in the capital expense of bringing these services to their properties. This is a response to what they refer to as "an unfair and oppressive monopoly by franchise cable operators in the area." [note: this is not the REIT conceived Broadband Residential consortium]

· InterQuest Communications, a provider of broadband Internet services to the multifamily industry, announces a $3.1 million funding led by ComVentures, a leading communications venture firm. InterQuest is busy picking up the broken pieces from bankruptcies by Reflex Communications and VelocityHSI.

· Noment Networks, also a provider of broadband Internet services to the multifamily industry has completed several million in funding (unable to disclose amount due to confidentiality of investors) and completed the vertical integration of SunTech, a leading multifamily structured wiring firm. Noment is securing the properties once served by Darwin Networks.

· BroadbandNow, once thought to be a broadband Internet service provider of the past, has in fact not gone into bankruptcy, continues to show cash flow and acquire new capital. Additionally, due to significant changes in management, the company has scrubbed away over $200 million in debt and is operating strongly in eight markets. Like many others, BBNow realizes the wisdom of focusing on serving a region as opposed to the entire nation.

Each of these companies are raising funds by presenting business plans showing positive cash flow rather than positive pro formas. "Lenders and venture capitalists are not investing in ideas any more, but they are still investing in businesses that can show a profit," said Trey Gaskins, CEO of Advanced Telemedia.

Focus. Focus. Focus.

The other contributing factor to positive growth is an increased understanding amongst both service providers and property owners on the concept of regionalized, rather than national services. To date, there is not a single, competitive video or broadband Internet service provider that has successfully executed a national service plan without failing. Such plans have resulted in significant debt, numerous bankruptcies and some lost faith amongst within the multifamily housing industry.

The focus on regionalized systems and service is creating significant momentum toward positive cash flow and more importantly, customer satisfaction. Property owners are regaining their faith in these now market hardened, competitive service providers. But perhaps most telling of this revival in market demand for competition is the rise of OpTel from its Chapter 11 Bankruptcy (see: side bar).

Fah who for-aze! Dah who dor-aze!

Only the Whos down in Whoville have any notion as to what these phrases mean. But if the Whos are competitive service providers and multifamily property owners they are singing "The time of opportunity is returning. Thank you Mr. Grinch for being so green. And do not bother coming to the Feast. Do not bother showing up to eat the Roast Beast."

The three main ingredients required to make competition for digital video and broadband services thrive in the multifamily marketplace are 1) affordable technology, 2) access to capital and, 3) market demand. These three things exist. Pending a major shift in direction of the FCC's understanding and attitude toward competition for digital video and broadband services in the multifamily housing market (see MDU Point of View, p. 18, December, 2001), competition on a regionalized basis will prove to be both alive and well throughout 2002.

About the Author

Larry Kessler, CEO of InteliCable Group, is the nation's leading expert and advisor on the subjects of digital video, broadband Internet, structured wiring and contract negotiations for the multifamily housing industry.