A Shaky Future for Franchise Fees

Published November 1, 2006

Franchise reform is about much more than cable TV. The broadband dimension that comes with these network upgrades brings a new level of urgency to policy change.

The reason the industry and enlightened state legislatures are seeking franchise reform is not because the phone companies want to offer video for its own sake. The ultimate goal of both the phone and cable companies is to create rich broadband networks that can integrate various types of data. Today, video service is the avenue of entry–the means, not the end.

Unfortunately, the provisioning of video services today is highly regulated at the local level. While video is the primary application associated with franchising, in the scheme of wireline broadband services, it is part of a suite of integrated services that can be delivered not only by service providers, but by third parties using those service provider networks.

This integration will lead to a fundamental shift in the way phone and cable companies do business. Both groups are coming to terms with their emerging, not-yet-fully-defined role in the global supply chain for information services and Web-driven consumer information technology.

Moreover, local officials may not have much of a say in how all this shakes out. Technology and business opportunities are already changing distribution models for video entertainment. “Cable TV” has become just another choice consumers have for electronic video acquisition.

Throughout much of the year, the discussion about alternative methods of video delivery to the home has been speculative. That changed in October, when Google acquired YouTube, a 19-month-old start-up that was rapidly making a name for itself in online video, for $1.65 billion. Analysts believe the deal will spark a scramble for similar online video acquisitions among Microsoft and Yahoo.

While still a risk for Google, that the company sees a potential revenue stream through the integration of YouTube’s video sharing and distribution scheme with its own advertising and search engine prowess represents a fast coming-of-age for Internet video.

Cable Model Gives Way?

Until recently, network and cable TV companies had exclusive control over the distribution of entertainment to the television set. True, customers could purchase or rent videocassettes and DVDs, but that required an extra step–a visit to a video store or an on-line order through Netflix. The “impulse” decision that drives video-on-demand purchasing was the exclusive purview of the cable provider until recently.

In January, Starz, the premium pay network available only through cable systems, launched Vongo, a Web site that currently offers 1,500 titles for download. Consumers pay a monthly subscription fee. Other sites, such as Movielink, offer similar services. Apple’s iTunes offers downloads of episodes of popular television shows such as Lost and Desperate Housewives. Major League Baseball and the National Basketball Association stream live video of games. In September, AT&T Broadband TV, a service offered in partnership with content aggregator MobiTV, began live real-time streaming of 20 cable channels, including Fox News and the Weather Channel, to anyone with a broadband connection, regardless of whether he or she is an AT&T DSL or landline customer. It is purely a Web-based, third-party content service.

“Cities have created an unfair tax on cable companies and limited competition in a fast-paced, competitive marketplace,” Anaheim Mayor Curt Pringle wrote in an FCC filing earlier this year. “Furthermore, many cities have used these fees to fund essential municipal services unrelated to cable, although the fees simply are not a long-term stable source of revenue for cities.”

Pringle’s suggestion that cities begin to wean themselves from franchise revenues is sound advice. Following his own counsel, Anaheim approved an agreement with AT&T in March that charges no franchise fees. Similarly, it is negotiating a new cable contract with Time Warner Cable that also will charge no fees.

Cities would do well to remember that local franchise fees are not tied to all video revenues, just to the revenues collected via the cable TV model. Franchise revenues are safe as long as the service provider uses a local satellite head-end to receive hundreds of programming channels and pipe them down the cable to area homes. Should programming delivery shift to a Web-based client-server model, where the cable box works more like a Web browser than a TV channel tuner, subscription-based Internet video could replace today’s downlink-and-transmit model. The Google-YouTube tie-up and AT&T’s deal with MobiTV are steps in this evolution.

The problem for cities is, under these business models, video revenues–the source of franchise fees–are divorced from the local service provider. From a corporate point of view, AT&T and Comcast may still be programming distributors, but they won’t be managing delivery in a way that makes franchise fees possible.

Market evolution favors unregulated models. For local franchise agencies, the battle against franchise reform stands to be a losing one. Initiatives at the state and federal level have the momentum of constituent and legislator support. Right behind them come companies with video distribution schemes that exist outside regulatory bounds. For local authorities, the wisest course of action is to make plans for the day when the local TV distribution is no longer a cash cow.

Steven Titch ([email protected]) is senior fellow for IT and telecom policy at The Heartland Institute and managing editor of IT&T News.