Michigan OKs More Video Service Competition

Published February 1, 2007

After a year of bitter debate, the Michigan Legislature in December approved franchise reforms intended to increase competition in video services. No longer will municipal officials be permitted to dictate the terms and conditions under which service providers gain access to the local market.

The Uniform Video Services Local Franchise Act makes franchises for cable and other video services uniform statewide. Local authorities are prohibited from imposing fees or other requirements not stipulated by the statute.

“We stand ready to make a historic investment in network and human capital in Michigan,” said AT&T Michigan President Gail Torreano. “Video reform legislation holds great promise for our state, and we look forward to delivering new video options to Michigan consumers.”

Uniform Agreement Pending

Under the new Michigan law, video service providers will be required to remit up to 2 percent of gross revenues to support public access programming, plus a fee, as yet undetermined, to underwrite the new regulatory costs of the Michigan Public Service Commission.

The latter will develop the uniform franchise agreement to be used by all localities. At press time the agreement was expected to be finished by the end of January.

Municipalities will retain direct control of public rights of way.

Michigan joins California, Connecticut, Indiana, Kansas, New Jersey, North Carolina, Oklahoma, South Carolina, Texas, and Virginia in enacting such franchise reform over the past two years.

Franchising ‘Outlived Usefulness’

The Michigan action coincided with the Federal Communications Commission’s finding that local franchising impedes cable competition and broadband deployment. In a December 20 order on franchising, the FCC fingered local authorities for unnecessarily prolonging negotiations; imposing unreasonable build-out requirements; demanding unwarranted “in-kind” payments to subvert the cap on franchise fees; and imposing excessive requirements for educational and government programming access.

“If the goal of cable TV regulation is to maximize consumer welfare, the cable franchise has outlived whatever usefulness was claimed for the institution,” said economist Thomas Hazlett in “Cable TV Franchises as Barriers to Video Competition,” a study published recently by the George Mason University School of Law.

“Given the regulatory options available,” Hazlett noted, “there are no benefits associated with cable franchising that offset the losses emanating from reduced competition.”

Municipalities have long required cable firms to obtain franchises, under the assumption cable service was a “natural monopoly” in need of taming. But there exists an assortment of technologies and service providers that consumers could choose from, if given the chance.

Competition Brings Lower Prices

The benefits of competition in video services were underscored with the release on December 27 of the Federal Communications Commission’s latest figures on cable pricing. In markets where two cable operators competed, rates ran 17 percent lower than in communities without competition, according to the report.

The cable industry is challenging the report as misleading. They say it fails to account for programming improvements.

Fee Revenues Could Rise

There’s every reason to believe municipalities will actually receive greater franchise fee revenues under the new system, analysts say. To the extent that competition creates lower rates, current customers are likely to upgrade their service, while some households that currently don’t subscribe will do so. Consequently, the gross revenues of video service providers will increase.

The Michigan reform measure, which was bitterly opposed by municipal officials, allows municipalities to assess new entrants for the same franchise fee paid by the cable incumbent, which is capped under federal law at 5 percent of gross revenues. In the absence of an incumbent, or upon the expiration of the incumbent’s franchise agreement, municipalities may levy a franchise fee up to 5 percent of gross revenues for a new franchise.

“Introduction of head-to-head wireline competition for video promises to significantly increase gross industry revenues and, therefore, could substantially increase local franchise fee collections,” noted Lawrence J. Spiwak, president of the Phoenix Center for Advanced Legal and Economic Public Policy Studies, writing in the Washington Times. “Indeed, recent research reveals that if wireline video competition is successful, then as price declines and consumers buy more, gross taxable revenues from the wireline video industry will increase by an estimated 30 percent.”

Many Regulations Remain

There’s still plenty of regulation in the new Michigan law, which requires the largest telecom companies to provide video service access to at least 25 percent of households in their service area within three years, and not less than 50 percent within six years.

The act does break new ground in allowing incumbent cable firms to terminate their existing franchise agreements and obtain the uniform statewide franchise instead. This provision will likely face a legal challenge, however.

The act also stipulates that existing franchise agreements cannot be renewed or extended beyond their current expiration date.

Net Neutrality Push Fails

The year-long battle over reform intensified unexpectedly in the eleventh hour when Google executives descended on the state capitol and unsuccessfully pressed lawmakers to amend the bill with so-called “net neutrality” provisions that would prohibit broadband networks from instituting tiers of transmission services.

Google and other content providers contend priority services such as higher-speed transmissions would destroy the “neutrality” of Internet traffic, which currently moves on a first-come, first-served basis.

Network owners and economists say tier pricing could help generate revenue needed to expand broadband infrastructure, which is inadequate for widespread delivery of video and other new bandwidth-intensive services.

The Michigan Legislature refused to jeopardize the franchise legislation with an issue that many consider decidedly federal in nature. The federal courts have already invalidated a number of state laws intended to regulate the Internet, viewing any such regulation as a federal prerogative.

Similar showdowns are expected elsewhere this year as a multitude of other states prepare to address franchise reform.

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

For more information …

“Cable TV Franchises as Barriers to Video Competition,” by Thomas Hazlett, is available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to http://www.policybot.org and search for document #19021.