Pain and Cable

Two men journey into local franchising hell.

If the following story sounds familiar, you're almost paying too much attention. Because in 1982 I wrote—in this very magazine—an article on the bizarre auctioning of cable television franchises by city governments around the country. Within that article was a long sidebar that detailed the frustrating exploits of two brothers, Carl and Clinton Galloway. Their firm, Universal Cable, had then spent three years trying to procure a franchise to do business in the city of Los Angeles. The tale seemed to demonstrate the crass politicization of the process by which local governments award cable franchises and to highlight the plight of those who attempt to fight the insiders at city hall.

Little did we know how good a story the Galloways were. For in the intervening years, their tale has expanded to include a landmark legal fight that has gone to the U.S. Supreme Court; a federal court decision finding that Los Angeles violated the Constitution on seven different grounds in its cable franchise maneuverings; a series of front-page "cable scandals" exposed ever-so-belatedly by the Los Angeles Times; and a cable monopoly that, despite making a mockery of everything Los Angeles claims it seeks to promote, is still protected by the local government—in defiance of federal law.

So, while in 1982 the Galloways were the little folks fighting the downtown interests, their battle has now gained national prominence and has even come to typify how free speech and robust communications competition are strangled by the bureaucratic process. Our little horror story has become an epic struggle.

South-Central Los Angeles is a classic urban market. It contains a dense housing mix of about 210,000 family units for a predominantly black and Hispanic population. Social services, including entertainment, are limited: Only one movie theater operates within the entire area. People tend to have lots of kids, and they like to stay home at night due to the high crime rate. Telephone poles provide easy access to the great majority of homes, eliminating the expense required to bury coaxial cables underground. It is, in many respects, a surprisingly solid market for cable television service.

This was the perception of Carl and Clinton Galloway back in the late 1970s. The brothers were financially successful (Carl, a physician; Clinton, an investment banker), and they had invested in Ebony Cablevision, a producer of shows of interest primarily to black Americans. Integrating Ebony into the distribution business seemed like a great idea: South-Central Los Angeles was a fat cable market, and it was entirely unwired. The Galloways took Ebony into reorganization, with the new firm—Universal Cable—dedicated to providing a wider variety of programs to all viewers. Then they marched down to City Hall to procure their license to sell cable television subscriptions in South-Central L.A.

That seemingly perfunctory trip, in mid-1979, has yet to arrive at its final destination. The voyage has taken the Galloways to Franchising Hell, an Alice-in-Wonderland world where the ability of government power brokers to reward friends, punish enemies, and manipulate the "public interest" is virtually unconstrained—even by the U.S. Constitution.

What Universal Cable ran into was an elaborate franchising process, complete with public hearings, consultants' reports, "needs assessments," and evaluation of (voluminous) competitive bids. To those not intimately involved in the process, the procedure might have looked like an objective way to choose the best cable company to serve South-Central Los Angeles. That's just the way the architects of the system wanted it to look. For those involved in the process of actually awarding cable franchises, for South-Central L.A., the only factor that made any difference at all was one's score on the political-juice meter.

When the Galloways asked Los Angeles for a license to build a cable television system, necessary to obtain permits to cross public rights-of-way with a cable, they were referred to Councilman Robert Farrell's office. The City Council had determined that South-Central was a "black franchise" and that Mayor Tom Bradley and the three black city councilmen would jointly determine its dispensation. Farrell quickly seized leadership on the issue, instructing all interested parties to deal with his staff counsel fresh from Harvard Law School, Channing Johnson.

Johnson is the man to whom the Galloways had to explain their cable franchise request in the summer of 1979. Johnson was clearly moved by the Galloways' optimistic assessment of the South-Central cable market. By early 1980, he had a) devised and implemented a restructuring of the Los Angeles cable franchise map to more clearly delineate ethnic areas; b) left the City Council; and c) formed his own cable company, CTI, to vie for the South-Central franchise. B) and c) appeared to overlap. But the city attorney dropped his conflict-of-interest investigation (City Councilwoman Peg Stevenson had instantly called the city attorney's office after the Galloways informed her of the deal) when both Channing Johnson and Robert Farrell refused to answer questions.

The City Council conducted two very complicated rounds of franchise proposals and evaluations in 1980–83. The bidding between CTI and Universal was joined by a subsidiary of American Television & Communications, then the largest cable operator in the country (and today owned by media giant Time-Warner). The latter had distributed a full 20 percent of its equity shares to a collection of community organizations (including the World Christian Training Center, the Sugar Ray Youth Foundation, and the Westminster Neighborhood Association) in hopes of buying some local clout. But ATC's real problem was its race. As Councilman Farrell told the Los Angeles Times, "it's important a black-owned company get the award…not just another honky group that wants to get into L.A. and make a profit."

ATC began a process of political tanning, so to speak, as it "respect[ed] the need" for incorporating more black ownership. "If I were ATC," advised Councilman Farrell, "I'd worry about my chances to get the final award without taking on more black participation." Since ATC had already unloaded 20 percent of its stock off the top, the price for the franchise was getting very stiff indeed.

During a series of closed-door meetings during 1980, 1981, and 1982, Mayor Bradley and Councilmen Farrell and David Cunningham (another black representative with a hands-on approach to franchise assignments) pointedly told both ATC and the Galloways that merging with Channing Johnson's CTI was the only way to go. The Galloways resented the interference from city hall and insisted that awarding a huge share of stock to political brokers was a recipe for economic disaster that would undermine their desire to actually build a cable television system. Their firm had already entered into a 60-40 partnership (Universal having 60 percent) with a "white" cable company, Six Star Neilsen, and their refusal to abandon existing business relations for political expediency killed any hope of a merger with CTI: "You can't just divide a cable franchise two or three ways with a political deal," Carl Galloway told the Times in mid-1981.

Carl may have been slightly naive; he has since learned precisely how it's done. After the Galloways lost their bid for a franchise in 1982 by a single vote, the 15-member City Council deadlocked and denied all three bidders. ATC took its "honky" cable proposal home, and the political wheels began rolling toward what might be called Operation Oreo.

The well-connected real estate development firm Kaufman & Broad, longtime financial supporters of the mayor, formed a shell corporation, ACCESS, that gained the South-Central franchise. Kaufman & Broad carefully doled out 20 percent of ACCESS shares to the CTI movers and shakers, including the former South-Central cable policy maker Johnson and two religious leaders with close ties to Tom Bradley. Danny Bakewell walked away with an impressive 4.25 percent of the stock for his Brotherhood Crusade, and another 0.5 percent of the shares for himself (a sort of pastoral gratuity, perhaps). According to a 1986 memo by Channing Johnson, "all parties agreed that the Brotherhood Crusade would temporarily hold" the stock until Bakewell could organize his partners (sort of gives "brotherhood" a capitalized value). The energetic Bishop H.H. Brookins, a regional director of the African Methodist Episcopal Church (despite having no actual flock) and a political mentor of Bradley, pocketed 1 percent. Some "investors," including Bakewell and Brookins, ponied up not one dime.

During the franchising rounds, Bradley's liaison to the black community William Elkins and Bishop Brookins frantically attempted to engineer a merger of CTI—the politically correct "black" firm—with Universal. "All that we ever do is to try to make certain that credible minorities are in the bid process," Elkins said in a 1988 deposition.

As Elkins told it, the effort was simply "to minimize infighting and competition among blacks so they could present a stronger bid. This is an affirmative action issue, nothing more." And, more boldly: "I'm proud of what I've done here. I'd shout it from the steps of City Hall if I had to." And Bishop Brookins, who set up secret meetings to discuss a possible merger of the black firms, characterized his concerns as portraying only the "magnitude…and importance to the community of the South- Central franchise."

What was not, apparently, important to the community was cable service itself. Under the long-awaited 1983 franchise award, no one laid an inch of cable until 1988. And then it was a "honky" cable firm—Boston-based Continental Cablevision, the nation's third-largest cable operator. Kaufman & Broad simply shopped their franchise around for four years, selling it to American Cablesystems, which was in turn sold to Continental. (While the city has long asserted its need to tightly control the franchise in the interests of local residents, it now claims to have no record and no details of the transactions that sent the award out of town.)

South-Central was the very last place in Los Angeles to get cable. As late as March 1990, cable bypassed some 52,000 homes in the neighborhood. And once service actually started to become available, the minority interests had vanished from everywhere but the deposit slips. Continental admits that its minority partners have played absolutely no managerial role.

Channing Johnson, who today manages a partnership owning 6.25 percent of the South-Central system (probably worth between $3 million and $6 million), openly acknowledges that the total extent of his involvement in the system is collecting dividends. "For me, this is a business transaction. I'm not there to be a liaison to the black community for Continental Cable," he told the Times last year. Hey, what happened to community involvement?

By 1990 even the city's own lawyer, Ed Perez, referred to the award process as just standard political sleaze: "It's the old rent-a-citizen concept," he told the Times. But Perez's view is offensive to Johnson: "I don't want to be associated with Brookins. I'm not one of these folks you pluck off the shelf because you have the right skin color or right contacts."

One might like to know what Bishop Brookins thinks of this rather demeaning assessment by his business partner Johnson, but it's difficult to get the bishop on the phone just now. The Times did learn that he's not so closely tied to the South-Central community any longer: Bishop Brookins is today on the AME payroll somewhere in the Maryland-Virginia-District of Columbia area.

Even the Times was at long last able to see through this scam. Shaken by Brookins's procurement of a number of fat noncable franchises (including a $7.3-million cut of airport concession profits, shared by Brookins and a select minority few—including the wife of House Ethics Committee Chairman Julian Dixon), the Times finally targeted an editorial at the graft just across the street. In "Cable Con in South-Central L.A.," the paper wrote that the fact that "Brookins and others in the mayor's circle of enterprising friends were handed shares in the lucrative franchise as virtual gifts is more than just another example of how badly the Bradley Administration's chronic cronyism has abused and affronted the public interest."

But "the public interest" was exactly what the city claimed it was serving as it resolutely awarded its single cable franchise to its hand-picked firm. The Times failed to notice that the key to the consumer extortion was monopoly; the exclusion of eager competitors such as the Galloways was what made this cable franchise so inviting. And all through the 1980s, the Galloways were locked in a legal battle (code name: Preferred Communications v. City of Los Angeles) to break down the exclusive franchise award and break into the South-Central cable television market.

Their fight began after the City's merger talks broke down in 1982. The Galloways claim these merger attempts were only thinly disguised shakedowns: "There was no secret about it," says Carl Galloway. He claims that Elkins explained point-blank that "Bishop Brookins and Danny Bakewell must be taken care of. They sealed off the business for Tom Bradley's friends." And so the Galloways went to court.

The Galloways filed a federal lawsuit in 1983, attacking the monopoly cable award on First Amendment and antitrust grounds. (Los Angeles, as is typical across the country, issues "nonexclusive" cable franchises but refuses to award more than one such license for any of its 14 non-overlapping franchise areas. That wouldn't be in the "public interest.") The city laughed off the suit, as U.S. District Judge Consuelo Marshall tossed it out without a trial.

Then the laughing stopped, and the city's "public interest" smirking began. At each successive judicial level, the politicians' cynical rationalizations were smoked out, as the city lost an exhaustive series of federal rulings. In a unanimous decision, the Ninth Circuit Court of Appeals reinstated the First Amendment claims, holding that the city could no more issue a monopoly license in cable than it could in newspapers. (The city walked on antitrust because of certain state immunities from prosecution.) The court rejected the city's plea to reconsider the case en banc.

The U.S. Supreme Court did take the city's appeal, but in June 1986 it voted, 9-0, to uphold the Ninth Circuit ruling. This forced the case back to the district court for a trial. But the trial never happened. In January 1990—nearly seven years after filing its constitutional claim—the Galloways' Preferred Communications (as Universal is now known) won a stunning summary judgment: The city had violated the Galloways' constitutional rights seven different ways in denying them a license to compete in the South-Central cable television market.

So the Galloways get the cable franchise, and justice prevails; the Constitution lives, and the American Way of Life triumphs once again? Well, stay tuned. Because Los Angeles has not—to this day—issued the Galloways a permit to do cable business.

The city now maintains that, while the federal court found that they trampled the Galloways' rights, its mission today is simply to "process" the application of Preferred Communications in a more refined, more constitutionally sound way. City officials envision a new series of hearings, studies, meetings, evaluations, and consulting reports that will allow the city to determine if "the public interest" is served by issuing a franchise to Preferred Communications. And that will take a while. And if the new and improved franchise round is unconstitutional? Well, Preferred can always file another suit.

Preferred quickly filed a franchise application after winning the federal suit—and the paperwork still sits at the bottom of some bureaucrat's "in" basket. The company has now filed charges against the mayor and Los Angeles's chief cable bureaucrat for conspiring to deny the hard-won civil rights of the gentlemen of Preferred.

The alibis to end run the Constitution continue, post-fabricated to dress up a monopoly in the political interest: There isn't enough space on the phone poles for a second company (a claim contradicted by the city's own expert in 1989 after having been argued vigorously by the city through long years of litigation). Preferred isn't financially qualified to operate a cable company (an assertion that contradicted the city's own 1981 evaluation; in any event, such concerns didn't stop a more politician-friendly crew with no cable holdings from getting the franchise). The Galloways aren't really serious about the cable business; they just like filing nuisance litigation (an argument that might be a bit more compelling if the city had ever won a case).

The sordid details of this case are classic. Sadly, they are typical of many cities. Indeed, every federal agency to seriously look at municipal cable franchising in recent years has been appalled. In July 1990, reacting to the anti-competitive behavior of Los Angeles and other municipalities, the FCC proposed federal legislation to "forbid local franchising authorities from unreasonably denying a franchise to potential competitors who are ready and able to provide service."

This followed the principal franchise conclusions of a major federal report issued in June 1988 by the National Telecommunications and Information Administration, the most detailed federal cable study in 14 years. The report's analysis of the local regulatory situation turned the city's "public interest" argument for monopoly licensing on its head: "The common occurrence of exclusive cable franchises does not serve the public interest. The franchising process has seriously impeded entry by competitors and imposes substantial costs on franchisees, cable subscribers, and the public. Municipalities should, instead, encourage competitive cable operators to service a franchise area. This would result in greater choice, better service, and lower prices to consumers. In fact, many of the 'market power' problems and issues we face today are direct outgrowths of a franchising process that has, and continues to, erect large entry barriers."

When the city of Los Angeles chiseled out "the public interest," it was found to lie in forcing the predominantly poor citizens in South-Central to wait nearly 10 years before CNN, HBO, or MTV was allowed into their neighborhood, so that a complicated political payout matrix could bless the investment portfolios of "rent-a-citizen" hustlers now scattered to the winds—all to have the consumer service finally delivered at monopoly prices by the subsidiary of a huge firm located in Boston.

Say what you want about Carl and Clinton Galloway, they're still in the Los Angeles area. They've got a slip of paper informing them that the U.S. Constitution is on their side. And they still have dreams of building a competitive cable television system in South-Central L.A.

But at Los Angeles City Hall, that's not what it takes to be "in the public interest."

Contributing Editor Thomas W. Hazlett, an economist at the University of California, Davis, is currently a visiting scholar at Columbia University's Center for Telecommunications & Information Studies. He has written widely on cable television policy in both scholarly journals and the popular press and was an expert witness in Preferred Communications v. City of Los Angeles.