Competition Demands Franchise Reform

Published January 1, 2006

State legislatures across the country are questioning the need for cable franchises given the prospect of video competition from telephone companies and other Internet service providers. Many lawmakers are concluding the costly cable franchise regime is wholly obsolete.

Franchises were originally adopted to manage municipal rights-of-way and to control the market power granted a cable monopoly. In return for rights to a local market, cable firms pay municipalities up to 5 percent of gross income and also contribute a slew of in-kind services–including free airtime for local officials.

Given the cost of constructing a cable network three decades ago, firms were more than willing to pay municipalities for a captive customer base. But advances in technology now enable a host of other telecommunications companies to offer video services through existing lines. Verizon, for example, aims to have Internet-based video services pass more than 400,000 homes in north Texas by the end of 2006, according to Telephony magazine.

Municipalities say they must franchise–to manage rights-of-way and to control the supposed market dominance of the cable monopoly they’ve long sanctioned. What I believe they are thinking is, “We don’t want to lose the $3 billion we collect in franchise fees every year, not to mention all the in-kind services, including free TV time for local office holders.”

The fundamental questions before state legislatures are:


  • Should cable franchise requirements be imposed on Internet-based video services? The answer is a resounding “No.”



  • Are current franchise requirements a barrier to entry and competition? The answer is a resounding “Yes.”



  • Should states regulate franchise authority? The answer is “No.”



  • Finally, should Congress establish federal franchise requirements for video services? The principled answer is, “Congress ought to eliminate franchise authority altogether.” But the realpolitik answer is, “Better a federal franchise regime than a state or local one.”


Cable firms say we must franchise Internet-based video because most cable firms are trapped in long-term costly franchise agreements that would put them at a competitive disadvantage if newcomers aren’t also forced to pay off the locals. In other words, they want a so-called level playing field, as if such a thing actually exists in a competitive market. However, these same cable firms balk at any suggestion that their new Internet-based phone service should fall under the legacy regulations in telephone service. Not that I blame them.

‘Battle over Rents’

So we have what economists call “a battle over rents.” This is always a headache for legislators, because at the end of the day, someone always loses.

I would suggest the only interests legislators must protect are those of consumers. Under that rubric, there’s simply no justification for continuing the franchise regime, let alone expanding it to broadband service providers.

To apply franchise regulation to Internet-based video would suffocate this nascent technology. It would be positively inane to require broadband service providers to negotiate franchise agreements with 35,000 municipalities, or even 50 states, as if we want to erect barriers to entry. To do so would rob consumers of choice, as well as the lower prices and service improvements that long have eluded cable customers. Where barriers to entry exist in the form of franchise extortion, new entrants would be precluded from investing in new or expanded networks.

And don’t worry about right-of-way payments. Most of the facilities-based broadband service providers already pay municipalities for the use of local rights of way. The fact that some of the digital packets running through the pipe now encode video does not add to city costs. Besides, federal law does not allow the imposition of franchise requirements on Internet Protocol services.

I understand completely why the cable industry is antsy about Internet service providers getting a pass on franchise fees. But the solution is not to impose unnecessary and obsolete franchise regulations on everyone else. The answer is to eliminate franchising if we’re truly serious about promoting broadband deployment.

Finally, there is the issue of build-outs. The cable lobby and their municipal allies say franchises are necessary to ensure all citizens will have equal access to broadband services. But this is the United States, not China, Cuba, or South Korea. Why is equal access to broadband more of a right than, say, access to cheap groceries or gasoline or medical care?

We are a country of free enterprise. You can bet that where there are paying customers, there will be video service. Indeed, low-income households constitute the fastest-growing segment of the broadband market.

Technologically, we are way beyond the franchise regime. The convergence of technologies and applications has rendered service distinctions wholly obsolete.

We would do well to remember, as Kent Lassman of The Progress & Freedom Foundation has pointed out, that franchising originated in Europe as grants of a sovereign. We need not maintain a costly regulatory regime in which we are but serfs to the feudal lords of franchise.

Diane S. Katz ([email protected]) is director of science, environment, and technology policy at the Mackinac Center for Public Policy. This article is adapted from testimony she delivered to the technology committees of the National Conference of State Legislatures and American Legislative Exchange Council