Franchise reform could net an annual economic payoff of $9 billion for U.S. consumers, according to an extensive new report from George Mason University.
“Were head-to-head wireline video rivalry, now offered to just under five percent of U.S. households, to extend nationwide, annual benefits to consumers are estimated to approximate $9 billion, with overall economic welfare increasing about $3 billion per year,” Thomas W. Hazlett, professor of law and economics at George Mason University, writes in Cable TV Franchises as a Barrier to Competition.
Video franchise reform would streamline the process telephone companies and other operators of terrestrial broadband networks use to enter local cable television markets. In most states, service providers reach agreements with local franchising authorities in every city or town they wish to provide service, a process that could take months if not years. Debate on reform has heated up in the wake of last summer’s passage in Texas of a law that lets would-be competitors apply to the state government for authority to offer cable and cable-like services anywhere in the state.
Spurred by the Texas law, as well as the actual rollout of long-promised broadband-based video services from companies such as Verizon and AT&T, states such as Florida, Kansas, Indiana, and Virginia have been examining statewide franchise measures. Indiana’s passed in March. (See “Hoosier Telecom Reform Leads Nation,” IT&T News, May 2006.) In Congress, draft bills in both chambers have provisions that would extend franchise authority to the national level.
The 81-page George Mason University report addresses the financial stakes of the battle over franchising and why incumbent cable companies and local franchising authorities tend to fight it. While reform offers consumers $9 billion in economic benefits, Hazlett writes, cable companies stand to lose as much as $6 billion per year in profits if direct competition were to break out nationwide. At the same time, Hazlett notes, “an open, predictable franchising process that restricted the discretion of local regulators would also cause a reduction in the rent extraction and redistribution opportunities available to local government leaders and interest groups influential at City Hall.”
But many of these concerns are trumped by the savings consumers inevitably see when competition enters the market. Hazlett cites FCC measurements of competitive and non-competitive cable markets that found subscription rates for basic and expanded basic services were on average 16 percent lower in the competitive group.
Hazlett recognizes that cities do incur costs when they need to accommodate cable construction and are entitled to compensation for use of right-of-way (ROW). These costs, he asserts, can be divorced from the “raw horse trading” of franchise payments over and above true liability. This reduces, if not eliminates, the problem of regulatory favoritism, unlevel playing fields, and general competition through rent-seeking.
“The optimal policy approach opens entry into cable TV markets while maintaining rules that impose liability on operators for the costs they may impose,” Hazlett writes. “Without barriers to entry, there is no artificial scarcity and the franchise ‘auction’ is eliminated, as general rules are enforced for use of public ROWs and the number of competitors is determined by the marketplace. Thus ends the rent seeking competition for special privilege.”
Elsewhere, in another new report, Yale M. Braunstein, a professor at the School of Information at the University of California at Berkeley, predicts cable competition franchise reform will save California consumers between $690 million and $1 billion. Braunstein calls on the same FCC data Hazlett uses, but takes a closer look at several markets in California.
Finally, a new report from the Pacific Research Institute, Cutting the Cord, by Sonia Arrison and Vince Vasquez, also cites the FCC data, as well as an example of the immediate price-cutting that occurs when new entrants are allowed in.
“In the summer of 2005, Verizon introduced its FiOS TV service in Keller [Texas], offering 180 video and music channels for $43.95 a month, or a 35-channel plan for $12.95 a month. It also offered three tiers of fast Internet access over fiber for $34.95 to $199.95. In response, the local cable company, Charter Communications, dropped its prices, offering a package of 240 channels and fast Internet service for $50 a month. That amounts to big savings for the people of Keller, compared to the hefty $68.99 Charter once charged for a TV package alone.”
Steven Titch ([email protected]) is senior fellow for IT and telecom policy at The Heartland Institute and managing editor of IT&T News
For more information …
The reports cited here are available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to http://www.heartland.org, click on the PolicyBot™ button, and search for documents #19020 (Sonia Arrison and Vince Vasquez, Pacific Research Institute) and #19021 (Thomas W. Hazlett, George Mason University). The Yale M. Braunstein report is available in five parts: #19015 (Video Competition in California), #19016 (Los Angeles), #19017 (Sacramento), #19018 (San Diego), and #19019 (San Francisco).
The Pacific Research Institute report is also available online at http://www.pacificresearch.org/pub/sab/techno/2006/Cutting_the_Cord.pdf.