Video Killed the Franchise Star: The Consumer Cost of Cable Franchising and Proposed Policy Alternatives

A version of this working paper was published in the Journal on Telecommunications and High Technology Law, Vol. 5, p.199, 2006.

The Issue

• Congress, the FCC, and state legislatures are considering 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 $10.4 billion annually in higher prices and forgone services.
• Widespread video competition could create $6.3 billion in consumer benefits annually. Current subscribers in markets without wireline video competition could see their annual cable rates fall by about $86 each. Consumers who do not currently subscribe, but would subscribe at a lower, competitive price, would each gain an average of $43 annually.
• A 2005 Government Accountability Office study found that direct wireline cable competition lowered cable rates by 15.6 percent.

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.

Congress could address anticompetitive franchising practices in the following ways:

• Remove barriers to open entry by amending Title VI of the Communications Act to no longer require a franchise before a provider may offer video service.
• Promote certainty and regulatory uniformity by adopting clear rules for anyone offering video service, including:
  • An obligation to carry no more than a fixed number of Public, Education, and Government (PEG) channels. For example, Texas's statewide franchise statute has set this number at three channels for a municipality with a population of at least 50,000, and two channels for a municipality with a population of less than 50,000.
  • In place of franchise fees, obligate video providers to pay only a reasonable fee to the municipality in which it operates to cover the costs imposed on the municipality by its use of the public rights-of-way. However, this fee should be capped, just as franchise fees are now capped. If a video provider is already making payments for use of the public rights of way, these payments should be taken into account.
• Allow municipalities to manage the public rights-of-way only through nondiscriminatory rules that apply generally to all users of the rights-of-way.
• Allow providers to offer video service in only part of a municipality, and prohibit any authority from requiring a provider to build out its video service in any particular manner.
• The above framework should be made applicable not just to new entrants, but incumbents as well. Existing franchises should be preempted to the extent they are inconsistent with the new system.