Video Franchising Reform

Background: Cable TV was originally introduced in the 1940s to bring reception to rural areas that were not able to pick up broadcast television signals. Because of the need to control use of public rights of way, local governments initiated the first cable regulations in the form of franchise laws.

The economic rationale behind franchising centered on the cable industry's natural monopoly status. Initially, extreme economies of scale and high start up costs of the cable industry validated this supposition. In theory if the video marketplace were left unregulated, one firm would achieve monopoly over the market and adopt monopolistic practices that would hurt consumers, competition, and innovation. Franchise laws were a way to reap the benefits of economies of scale while limiting the negative aspects of a monopoly.

Local governments have controlled the franchising process with the FCC providing limited guidance. The FCC concluded in its 1972 Cable Television Report and Order that local governments were inescapably involved in the franchising process because construction of coaxial cable infrastructure would require use of the streets and other public rights of way. Assuming that localities could only support one cable franchise, most local authorities issued exclusive franchises granting local monopolies for the providers. The resulting monopoly profit potential allowed local governments to secure preferential and profitable agreements. Furthermore, the lack of uniformity in franchising from locality to locality makes the process extremely burdensome and costly for cable companies. Without the presence of restraining competition, these extra costs were passed on to consumers in the form of higher rates and reduced service – costs that continue through the present day.

The 1984 Cable Act solidified localities' control over the franchising process, stating that "a cable operator may not provide service without a franchise." However, the act prohibited phone companies from entering the video marketplace and virtually eliminated rate regulation in the face of "effective competition." Unfortunately, it defined "effective competition" as the availability of three over the air channels. As a result, 97% of all cable systems were free from rate regulation despite persistent monopoly conditions. With no legitimate competition other than satellite dish operators to keep prices down and no rate regulation to prevent cable providers from misusing the market power that franchise agreements often conferred, cable rates increased 32% in the next four years.

Congress has passed numerous measures over the past 20 years striving to "reform" the video marketplace to little or no effect. The last major telecom "reform" bill, the 1996 Telecommunications Act, only compounded the lack of competition evidenced in the cable market today. The bill essentially eliminated all remaining rate regulation in anticipation of competition from non-traditional sources. However, without addressing the heart of the problem – cable franchising – the bill produced more harm than good. In 2006 Congress considered, but did not pass, comprehensive legislation to open up the cable television market to fair competition and give consumers real choice. Since then, the major battleground has shifted from the Congress to state legislatures, with 11 states passing legislation to facilitate intermodal competition in the last two years. The FCC has even gotten into the act. In March 2007 the commission released an order giving local governments 90 days to approve cable-service licenses sought by phone companies.

CCIA's Position: Competition is the defining characteristic of a market economy. It provides the incentive to produce new products that consumers want, improve efficiency, lower the costs of production, and pass on these innovations in the form of lower prices and better service for consumers. In a competitive market, a firm that does not act in the best interests of consumers will be punished and, ultimately, fail. But when government regulations prevent fair competition, incentives to undertake these beneficial actions are weakened. The market power conferred by franchises may discourage innovation, misdirect investments, or enable other activities to stifle competition rather than improve products. As a result, consumers will face higher prices and fewer choices in the short run; in the long run, the losses to consumers may be even more severe. Government agencies must be careful to avoid regulations that could prevent fair competition or encourage the concentration of market power.

The federal government must therefore rethink its regulatory approach to the cable television industry. "Cable franchising" must be reformed to minimize political dealing and inefficiency. The rationale legitimizing exclusive local franchising stems from antiquated assessments of the video marketplace. The emergence of new technology has invalidated these assessments and has led to convergence in the telecommunications industry. Currently, satellite television provides competition to traditional cable companies, and internet protocol television (IPTV) is poised to become a viable competitor. With telecom companies starting to roll out new Fiber to the Premises (FTTP) technology capable of competing with current cable video technology, the stage is set for a revolution in the video marketplace. Conversely, cable modem technology allows traditional cable TV operators to offer broadband access to the Internet in competition with DSL service from the telcos.

With over 30,000 local franchising authorities, the current system presents an almost impenetrable barrier to entry for non-established video competitors. If new competitors must negotiate separate contracts separately with every local government, innovation and new competition will enter the cable market more slowly. CCIA believes that Congress or the states should remove artificial barriers preventing real competition in the video marketplace and avoid regulation, except when necessary to promote open markets and competition.