Franchise Reform and the FCC

Published April 1, 2007

In December, the Federal Communications Commission (FCC) adopted an order to reform video franchising regulations. Video franchise reform would increase the 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 December 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.

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 and lightning-fast broadband service over those lines. In order to offer video they must negotiate franchise agreements with each municipality. Reform of this process could substantially reduce transaction costs and make it easier to obtain those agreements.

Long Overdue

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 a barrier to entry. Removing that barrier will yield real consumer benefits in the form of additional broadband competition and additional video competition. Franchise reform is one of 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 its December order to incumbents. It 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.

Asymmetric Rules

Excluding the cable companies from reforms would perpetuate inefficient asymmetric regulation of the same services. In the early days of broadband, telecom firms were required to share their networks with competitors, while the cable companies were not. The cable companies were able to attract customers in part because they 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 telephone companies. To avoid this inefficiency, any franchise reforms granted to the telephone companies should immediately be granted to the cable operators as well.

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

Demand and Supply

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 it 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.

Scott Wallsten ([email protected]) is senior fellow and director of communications policy studies at the Progress & Freedom Foundation.