Florida’s state legislators are debating the Consumer Choice Act of 2006, which would replace local cable franchises with a streamlined state franchise system. The bill, similar to legislation recently passed in Texas and Indiana, would encourage telephone companies to more quickly roll out video services based on platforms such as fiber to the home and Internet Protocol TV (IPTV).
Local franchise laws stand in the way of this new development. Negotiating franchise agreements can take years, and there are some 33,000 local video franchises in place around the country. Many of these agreements are very long and detailed contracts.
Verizon says it has been able to negotiate only 20 agreements in two years for its new video service. AT&T says it will have to negotiate 2,000 to 2,500 separate agreements in its 13-state service area. At that pace it would take decades for innovative video services to reach consumers.
Allowing local governments to write exclusive franchise agreements with cable companies was a product of the rotary phone era, before the Internet, IPTV, satellite TV, and Voice over Internet Protocol (VoIP). Because there was no competition to telephone and cable companies, local governments could tax and over-regulate both of them and use the revenues and perks to subsidize some consumers or finance unrelated public services.
Cable TV and telephone companies submitted to over-regulation and over-taxation because their legal monopolies meant they could recover their investments by raising prices. Consumers had nowhere to go to escape the higher prices.
But cable TV and telephone are no longer monopolies. There are now more cell phones in use in the U.S. than landline phones, and VoIP is rapidly eating into the telephone companies’ subscriber bases. Cable companies lost 1.4 million subscribers in the 12 months ended November 2005, according to the Television Advertising Bureau. Alternative methods of video distribution, such as satellite, reach more than 30 percent of households.
Companies such as Google TV, Akimbo, and DAVE TV are offering video-on-demand over the Internet in direct competition with cable providers. Cable and telephone companies are losing their ability to pass through the costs of regulations and taxes that apply to them but not to their competitors.
Cities and towns no longer have the ability to offer or enforce a video “franchise.” In a market with multiple electronic distribution channels for video entertainment, franchise fees single out the segment that is attempting to upgrade local infrastructure to support the broadband, high-speed Internet, and innovative services like telemedicine, distance learning, e-commerce, and e-government that local lawmakers say they want. Yet those same lawmakers insist on retaining a mechanism that contributes extra cost and delay.
Cable franchise laws are obsolete. They have become unnecessary barriers to investment, competition, and consumer choice. If we want to continue to pay for services currently funded by cable companies or subsidize some consumers, we need to find some way other than franchise agreements.
Replacing local franchise authority with state-level franchise authority would be a big step in breaking down these barriers and getting our nation’s regulatory code in sync with the needs of a rapidly growing industry and increasingly sophisticated consumers. That is the core of Florida’s Consumer Choice Act.
In Texas, the first state to enact statewide franchising, consumers saw benefits within six months. (See related story, page 1.) Half of all households saw an average price drop of between $22 and $26 a month, whether they switched providers or not. Lower prices and more choice put cable and broadband within reach of more people. In the Dallas-area markets where phone and cable companies went head-to-head, the overall market grew for the first time in years. That experience runs counter to predictions made by franchise reform opponents, who say without local control, video and high-speed Internet services will end up concentrated among well-to-do consumers.
Cable companies that have paid the price to negotiate and work under local franchises have good reason to be concerned about the transition to a streamlined state or national franchise system. The way to protect their interests while also allowing innovation and change to occur is to reduce regulations and taxes on incumbents as well as newcomers, instead of imposing old regulations on newcomers. Indiana shows this can be done.
Deregulation can sweep away regulatory relics, such as local franchise authority, without unfairly punishing companies that were forced to pay to play in the past. Consumers will benefit from more choices and lower prices. They should make their voices heard in this debate.
Joseph Bast ([email protected]) is president of The Heartland Institute.