February 13, 2006

Video Franchising

Key materials
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The Regulation

  • The FCC seeks comment on whether certain franchising practices by local governments unreasonably restrain competition in video services.
  • The issue is timely because several large telephone companies have proposed to offer video services.

Our Findings

  • By constraining competition, local video franchising imposes significant costs on two groups of consumers. Current cable subscribers pay higher prices than they would pay if there were competition, and potential customers forego cable TV service because they believe it is too expensive at current prices.
  • Two decades of studies by government agencies and independent scholars consistently find that competition leads to lower cable rates.
  • The FCC has authority under several federal statutes to identify and preempt unreasonable franchising practices.

By the Numbers

  • Video franchising costs consumers approximately $10 billion annually in higher prices and forgone services.
  • Widespread video competition could create $7 billion in consumer benefits annually. Current subscribers in markets without wireline video competition could see their annual cable rates fall by about $94 each. Consumers who do not currently subscribe, but would subscribe at a lower, competitive price, would each gain an average of $46 annually.
  • A 2005 Government Accountability Office study found that direct wireline cable competition lowered cable rates by 16.9 percent.

Our Recommendations

To promote competition, the FCC should:

  • Declare unreasonable any refusal to grant a franchise justified on the grounds of natural monopoly, reduced investment risk, or right-of-way management unless the local franchising authority presents overwhelming empirical evidence that the alleged problem exists and cannot be solved in any way other than barring new entry.
  • Require local franchise authorities to explain in writing any refusal to grant a franchise.
  • Preempt aspects of state level playing field laws that force entrants to make the same capital expenditures or cover the same service area as the incumbents.
  • Declare unreasonable any state or local requirement that would force a new entrant to build out its network faster than the incumbent actually and originally built out its network.
  • Declare unreasonable any delay in granting a franchise that exceeds some specified deadline, such as 120 days. Establish simple default conditions under which a new entrant would automatically receive a franchise if the local franchising authority has not acted by the deadline.
  • Declare unreasonable any "nonprice concessions" in franchise agreements that are not directly related to setup or operation of a cable system.

Mercatus Legal Fellow Jerry Brito and Senior Research Fellow Jerry Ellig submitted written testimony into the record for the Senate Committee on Commerce, Science, and Transportation's hearing on video franchising. Click here to read the testimony.