Web Spat Stalls McLeodUSA in Iowa.

McLeodUSA's bid for a cable franchise in Coralville, Iowa, has stalled over its objections to having the city include Internet services in its gross-revenue calculations.

As a result, a 10-year franchise passed by Coralville voters in November lapsed Jan. 4. A new deal will have to be struck and put before the electorate in a special election, according to city officials.

Assistant city attorney Christine Diehl said McLeodUSA's original deal defined Internet access as a cable service, making it subject to the same 5 percent franchise fee imposed on video.

However, a change in the company's negotiating team resulted in a shift in McLeodUSA's position after an election date on the franchise had been set by the county election commissioner, Diehl added.

"We were working under McLeodUSA's assurances right up to the deadline," Diehl said. 'After it went to the election commission, it became apparent that this was a critical concern for them. Unfortunately, it was something that we were not willing to accept."

On Nov. 4, voters approved the franchise by a margin of more than 80 percent, putting the Cedar Rapids, Iowa-based telephone company on a collision course with Tele-Communications Inc., the city's incumbent operator.

Under the terms of the franchise, McLeodUSA had 60 days, or until Jan. 4, to accept the agreement. When the company failed to do so, the arrangement was considered void, Diehl said. The two sides must negotiate a new deal and begin the election process over again.

McLeodUSA officials were unavailable for comment last week.

Although the two sides had not spoken since the Jan. 4 deadline, Diehl said the city hoped to keep "the lines of communication open" in hopes of working out a compromise.

Meanwhile, TCI -- which has already agreed to pay a 5 percent franchise fee on an Internet service that it has yet to launch in Coralville -- will move ahead with an upgrade of its local network sometime in the first quarter.

TCI will have until October to complete the upgrade in the community of 15,000 residents near Iowa City - a location where McLeodUSA has already obtained a franchise.

"It'll be two-way-capable, which will allow us to launch @Home [Network] and digital cable," said Deb Blume, regional communications director for TCI of Iowa.

McLeodUSA has already obtained franchises in Cedar Rapids, Marion and Hiawatha, Iowa, and it has been negotiating a similar deal in Des Moines, the state's largest market.