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Saturday, February 10, 2007

Need. More. TV.
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Video franchise reform would both increase supply of broadband as well as demand for the service, adding to competition and benefiting consumers. The FCC should thus be praised for pushing forward an important but controversial issue. The FCC's recent order also raises interesting questions about how reforms should handle legacy investments and highlights the need to pay attention to inherent consumer demand for broadband.

Back in December, the FCC adopted an order to reform video franchising regulations. Under the existing regime, municipalities grant franchises to companies wishing to offer video services. Historically, that meant the local cable company was the lone franchisee and was in effect granted a monopoly in exchange for paying a franchise fee and providing certain services, such as public access channels. Cable companies enjoyed largely monopoly status until satellite companies entered the market, generating competition. In part because they did not use actual wires, satellite companies were exempt from franchise rules.

The issue today is that the legacy telephone companies, in particular AT&T and Verizon, are rolling out optical fiber and want to offer video over those lines in addition to lightning-fast broadband service. In order to offer video they must negotiate for franchise agreements with each municipality. Reforms could substantially reduce transactions costs and make it easier to obtain those agreements.

Franchise reform is long overdue. While cities understandably want oversight over some aspects of installing this infrastructure, such as digging up neighborhood streets, there is no economic rationale for local franchising of video services. The need to obtain a franchise represents little more than a barrier to entry. Removing this barrier will yield real consumer benefits in the form of additional broadband competition and additional video competition. Indeed, franchise reform is one of the few policies (along with moving more spectrum into the market) almost guaranteed to increase competition.

The FCC is now grappling with the sticky question of how to apply the order to incumbents and has requested comments on how the order should apply to existing franchisees (the cable companies).

As a matter of economic efficiency, the key question is how the order affects investment going forward. Thus, if franchise reforms increase efficiency - and by removing regulations not targeted at a market failure they should - then any reforms should apply to all firms in the market, regardless of their historic franchise benefits and obligations.

Excluding the cable companies from reforms would perpetuate inefficient asymmetric regulation of the same services. In the early days of broadband the telecom firms were required to share their networks with competitors while the cable companies were not. The cable companies were able to gain far more customers than were the telephone companies in part because cable faced fewer regulations. Granting franchise relief to telecom firms but not their cable competitors would represent new asymmetric regulation, this time giving a relative advantage to the telcos. To avoid this inefficiency, any franchise reforms granted to the telephone companies should immediately be granted to the cable operators as well.

Nevertheless, any non-economic factors that might delay cable companies from being able to benefit from franchise reform should not also delay changes that will ease market entry. Franchise reforms should happen immediately, and they should apply to cable companies as soon as practicably possible.

Franchising also highlights the issue of broadband demand, which gets relatively little attention. Consumer demand for broadband is, in part, a function of the content available to them. Some countries that are frequently held up as broadband models, like Japan and France, explicitly allow TV over broadband lines. And if there is one thing Americans need, it's more television. The ability to watch TV over broadband increases consumer demand for the service. Franchise regulations, by making it difficult to offer TV services that way, artificially depress demand for broadband services.

Video franchising today has two negative impacts on broadband investment: it reduces competition by creating an entry barrier, and suppresses demand by arbitrarily limiting the type of content allowed to flow over the lines. Franchise reforms thus represent an excellent opportunity to promote broadband investment and adoption in the U.S.

posted by Scott Wallsten @ 3:47 PM | Broadband , Cable , Communications , Internet , Local Franchising , The FCC , Wireline

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Nice insight on the negative effects of video franchising. Keep it up!

Posted by: ANiTOKiD at February 13, 2007 12:34 AM

In your post you state "franchise reform is long overdue" and that "the FCC should be praised for pushing forward" this issue. I must admit, I'm a little confused with regard to these statements. Since 2005, state-level franchise reform has successfully removed archaic barriers to entry and improved cable competition in many significant areas of the country.

To date, eight states have successfully enacted statewide franchising reform; Texas, Indiana, Kansas, South Carolina, North Carolina, New Jersey, California, and Michigan . In addition, Arizona and Virginia's state legislatures standardized local authority processes, fees, etc., bringing fractional relief to competitors. It's also worth noting, Oklahoma's Attorney General and the Connecticut Public Utility Commission have issued favorable opinions on franchising for their states. These twelve states constitute over 40% of the US population and have already seen positive results from these laws by introducing more competition to their markets. More choices and lower prices have quickly followed in many cases.

The Public Utility Commission of Texas has granted over thirty new statewide franchise agreements to companies offering cable video services. These new entrants have caused a 20% decrease in cable prices in just one year alone. Lower prices are not the only benefit consumers are reaping from reforms. In New Jersey, Verizon announced its plan to invest $1.5 billion over the next three years to build-out its FiOS network in that state. In Indiana, AT&T announced plans to invest $250 million over the next three years to deliver next-generation video & broadband services. For Michigan, the company has promised to invest over $600 million and create 2,000 new jobs during the same period. This level of investment and job creation has only been possible because of state-level franchising reform.

Looking ahead, at least twenty states will be considering franchising reform this year–eight states have already introduced legislation. If only these eight states enacted reform, the affected US population would increase to over 60%. This high level of cable reform activity and success in the states leaves little need for federal intervention.

The efforts of the FCC and Congress to standardize timeframes, terms, applications, and procedures are unnecessary and could apply a cookie cutter approach to specific state needs. While the recent FCC order doesn't look to preempt state law, it might be an incremental step toward increasing the federal government's role and erasing the hard work of countless state legislators who share the same vision and goals of their federal counterparts. States have effectively taken the lead in cable franchise reform and are the ones that deserve the true praise.

Posted by: Matthew Hussey at February 15, 2007 10:02 AM

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