Policy Documents

Statewide Video Franchising Legislation: A Comparative Study of Outcomes in Texas, California and Michigan

Kaye Husbands Fealing, Nicholas Sakaimbo, Matthew Henry, Dane McFarlane, Steve Kelley –
March 1, 2009

The Minnesota Legislature commissioned this State Video Franchising Study under S.F. No. 3337 - Conference Committee Report, Energy Omnibus Bill, §29. The bill directs the Department of Commerce (the Department) to contract with the University of Minnesota for a study on the impact of legislation enacted in at least three states that authorize franchises for video service to be issued by a state agency. The bill specifies the content that must be considered in the study and it requires the Department to submit a report to the Legislature.

The researchers were instructed to consult with associations representing a variety of stakeholders, including
municipalities and communities of color prior to starting the analytical phase of the study. Furthermore,
they were instructed to conduct research and analysis on information pertaining to no fewer than three states
(excluding Minnesota) that have authorized franchises for video services to be issued by a state agency. The
specific questions posed by the Department are as follows:

a. the number of video service providers that have applied for a state video franchise;
b. the number of incumbent video service providers that have elected to terminate an existing
franchise agreement and apply for a state video franchise;
c. the amount of capital invested by new video service providers to furnish video service;
d. the number of communities in which new video service providers intend to offer video services,
as reflected in their applications;
e. the number of communities with an incumbent video provider in which new providers intend to
offer video services;
f. the number of communities with no incumbent video service provider in which new video
service providers intend to offer video services;
g. the effect on video service prices in communities with an incumbent video provider in which
new video service providers offer video services;
h. the effect on franchise fee revenue received by municipalities from video service providers;
i. the effect on the number of Public, Educational and Governmental (PEG) channels available to
communities;
j. the effect on the amount of revenues received by municipalities to support the provision of PEG
programming in communities;
k. the effect on the amount of PEG programming available in communities;
l. the progress of new video providers in meeting any build-out requirements in the law; and
m. the effect on municipal services provided to communities by video service providers

The initial stakeholder meetings revealed a keen interest in this project and a strong desire to see analysis of
the impact that statewide laws regarding video franchising could have on consumers. In addition to the questions
outlined by the Department, stakeholders representing municipalities identified two issues that this study
could address: (i) What are the outcomes for consumers relating to wireline television services since the first
state video franchising legislation was enacted? (ii) Is there a cause and effect relationship between statewide
video franchising (SVF) and increased competition, and does that increased competition lead to improvements in conditions for consumers of wireline television service. Every attempt was made to address all of the issues
posed by the Department, as well as industry and community stakeholders.

Following this introduction, the report proceeds with a summary of federal and state video franchising laws. It
should be noted that there is a subtle but meaningful distinction between state-issued franchises and statewide
franchises. In the former case, franchise applications are standardized by the state, but municipalities
continue to regulate activities of multichannel video programming distributors (MVPDs). In the latter case,
the MVPDs receive the license to provide service throughout the state, with the stipulation that the provider
will build out the entire state in a stated amount of time. This study reviews states with both types of franchise
agreements.

The third section of this report focuses on stakeholder analysis, where the critical issues are identified. Although
previous studies have highlighted similar concerns, the current study benefits from a longer time horizon
within which to observe changing conditions resulting from enactment of SVF laws.

This study utilizes a comprehensive dataset on prices, allowing for some measurement of SVF’s impact on
consumer welfare. Section four of this report presents information and data sources, while the results of the
study are summarized in the fifth section. To make the analysis tractable, three states are investigated indepth—
Texas, Michigan and California. Texas was an obvious choice for this study. Since it was the first state
to transfer franchising authority from local authorities to state authorities, this case gives the greatest opportunity
to measure the effects of SVF laws. While the laws in Michigan and California were put into effect around
the same time, these states add useful demographic and geographic dimensions to the study. Michigan has
some similar characteristics to Minnesota, particularly: number of persons between 18 and 64 years of age,
home ownership rates, median value of owner-occupied housing units, median household income, and number
of building permits. These are important factors in determining usage of transmitted video in a region.
While California is twice as large as Minnesota in terms of land area (with more than three times the population
density), the case is instructive particularly when it comes to build-out, PEG and customer service issues.
Although AT&T is the primary telecommunications company in California, Verizon is aggressively rolling out
fiber-to-the-premises (FTTP) in several areas of the state. California, therefore, is an interesting case to observe
for the effect of competition on the prices of services.

In addition to the data analysis, the results section details the responses to the specific questions posted by the
Department. Conclusions and recommendations for further analysis follow the results.