Benefit Consumers: End Cable Monopolies

Published December 1, 2006

From the time cable lines began replacing TV antennas four decades ago, municipalities have required cable firms to obtain franchises under the assumption that cable service was a “natural monopoly” in need of taming. This local regulation, which was never justified, has become destructive now that there are assorted technologies and service providers that consumers could choose from if given the chance.

Evidence abounds that franchising by cities and townships costs consumers. Cable TV rates in markets without meaningful competition run as much as 25 percent higher than in competitive markets. For example, per-channel cable rates in southeast Michigan have undergone, on average, an annualized rate of increase that is nearly 38 percent above the inflation rate from 1991 to 2006.

Local officials say they must control franchising to regulate the use of public property on which network infrastructure is located. They also argue local franchising is necessary to prevent cable companies from “redlining” poor neighborhoods. But legislation can be written so control over public property remains and can include service quotas for low-income households.

The most egregious deception is the claim that reform would rob municipal budgets of franchise fee revenue, thereby jeopardizing vital services. In reality, franchise revenues would increase. Competition spurs lower rates, and to the extent that rates drop, current customers are likely to upgrade their service, while households that currently don’t subscribe will do so.

Brookings Institution researchers Robert W. Crandall and Robert Litan concluded competition would increase the number of video subscribers between 29.7 percent and 39.1 percent. Consequently, franchise fee receipts would increase by between $249 million and $413 million per year nationwide, they found.

State lawmakers would also do well to remember that cable operators pass directly to customers the cost of franchise fees paid to local governments. Any attempt to artificially inflate franchise revenue would constitute a tax hike.

Where franchise reform has been adopted, the benefits have been both immediate and substantial. The recent passage of statewide franchising in Indiana, for example, prompted AT&T to announce an expansion of high-speed DSL service to 33 rural communities. An analysis by the Perryman Group projects more than $3.3 billion in new telecom investment for Texas.

Much of the local franchise regulation in force today was fashioned in the 1960s and 1970s–the cyberspace equivalent of the Stone Age. Which state today can afford to reject cable franchise reforms that benefit consumers and promote high-tech investment?

Diane S. Katz ([email protected]) is director of science, environment and technology policy at the Mackinac Center for Public Policy.