Reform Video Franchises for Cheaper, More Competitive TV Services
2007-02
** This Policy Note is a summary of Reason Public Policy Foundation’s policy study “I Want My MTV: Reforming Video Franchises for Competitive TV Services.” Washington Policy Center recently co-published with Reason the policy study, “Better Prices and Better Services for More People: Assessing the Outcomes of Video Franchise Reform.” It is available online at washingtonpolicy.org.
Video franchises are the revenue sharing agreements that cable TV companies sign with local governments in return for the exclusive right to sell video services to customers. Because local and municipal governments own so much of the cable TV and telephone infrastructure, TV and telephone companies entered into franchise agreements with those local governments for the right to use those lines. The TV/Telephone company would give a portion of their profits to the government for the “exclusive” usage rights.
For decades this model seemed to work well because of limited competition. But the 21st century brings with it new technology that fundamentally changes the way almost every American receives television/ telephone/ video content.
The stories of the concessions local municipalities extracted from cable companies for franchise rights reads as something out of a bad mystery novel: parking lots, free televisions, furnished public access television studios, and even a recreation center and a new swimming pool.
Perhaps local officials rationalized their demands by telling themselves that, one, the local cable system was a monopoly and, two, that even though these perks raised prices for consumers, TV entertainment was not so essential that adding a dollar or two in taxes or surcharges could be considered a burden.
But the notion of cable “exclusivity” was undermined by the advent of direct broadcast satellite (DBS) companies several years ago. The two principal DBS companies, DirecTV and Dish Network, have garnered 27.7 percent of the multichannel video programming market as of 2005, according to the FCC.
Traditional telephone companies, such as AT&T and Verizon are also shaking up the scene as they introduce services that allow consumers to download video services over the Internet. It is services like these that create the need for cable television franchise reform because neither DBS nor video-on-demand falls under local jurisdiction. Therefore, these services are not subjected to the same expensive franchise fees.
Video franchise reform allows competition to enter the cable market faster. Competition drives down prices for consumers.
But local franchise authorities—and the cities and towns they represent—fear loss of revenues and regulatory control. In several instances, government and regulatory officials have actually forbidden companies from upgrading telephone/Internet systems in towns until they can figure out how to extract more money in franchise fees. Essentially, regulators are preventing consumers from benefiting from new technology until a ransom is paid.
Companies already face a regulatory nightmare in many states when it comes to video franchising – and it is no different in Washington state. However, companies are not the only ones losing out. According to both the FCC and the Government Accountability Office, when cable markets are competitive, prices are 15 percent or more lower for customers.
Franchise reform could net an annual economic payoff of $9 billion for U.S. consumers, according to an extensive report from George Mason University.
The free-market perspective calls for a light hand in all these regulatory provisions. Franchise fees are both a form of discriminatory taxation and intrusive regulation, both of which, from a free-market angle, should be resisted. The phone and cable companies that do require the use of public thoroughfares should pay the market price for the rights to use that infrastructure. And municipalities, acting on behalf of taxpaying residents, are entitled to seek compensation for their use. But a franchise agreement implies protection or restriction or exclusivity of service, which cities can no longer guarantee because of so many competitive video alternatives that now exist beyond the reach of regulators.
If a town wishes to create its own TV programming, its government can vote to allocate resources. Many cities and towns already operate their own web sites, some very sophisticated. Yet they do not demand their Internet Service Providers to fund or furnish their web server, programming design or administrative services.
Two examples involve companies that until recently were traditionally telephone companies. Verizon is rolling out its FiOS service—which runs fiber optic lines to individual homes—giving homes and businesses up to ten times faster Internet service than standard cable broadband connections. This enables a larger bandwidth Internet connection to handle massive downloads such as high definition video content. AT&T, also long a traditional telephone carrier, is rolling out its U-Verse IP video service. With U-Verse, the viewer downloads video the same way he or she might do so from a web site, although AT&T’s content is streamed and optimized for viewing on a large-screen TV. These instances are both where the viewer actively “commands” the content, and retrieves it, which is different from the current passive cable TV system.
One of the primary goals of video franchise reform is to recognize that services once separate and distinct, i.e., phone, Internet, and cable TV, today can be offered to consumers by one company over a single network. Regulatory reform will help dismantle the regulatory regime that treats these services as if they were still isolated into service silos, rather than converged and integrated. This regulatory regime gave service providers greater incentive to “stay in their corners,” rather than aggressively expand into the market for converged, integrated services—and deliver those benefits to consumers.
Unfortunately, some lawmakers aim to level the playing field by extending the current regulatory burden to new technologies, when it would be more beneficial to consumers and local communities if these burdens were instead removed all around.
According to the International Telecommunication Union’s January 2006 report, The United States ranks 19th in the world in terms of broadband penetration. In order to improve on broadband penetration and compete on the global scale, local regulation of cable TV, which keeps the industry anchored in the past, must give way.