Texas Gets Cable Competition, Lower Prices

Published May 1, 2006

Six months after the Texas legislature created a statewide video franchising structure, local phone companies have been rapidly extending multichannel video services, while rates have decreased and consumers have become much more aware of choices.

SB 5, which Texas Gov. Rick Perry (R) signed into law after it passed the legislature last August, allowed telephone companies and other broadband providers to apply directly to Austin for authorization to roll out video services anywhere in the state. Verizon has launched its FiOS and AT&T has launched its U-verse video service.

Lawmakers are watching Texas–the first state to create a statewide video franchise mechanism–as debate over franchise reform heats up. Since passage in Texas, Indiana and Virginia have enacted similar legislation (and in some ways better), while like bills have been introduced in Missouri and Florida. (See related article, page 1.) The Barton-Rush bill, currently pending in the U.S. House of Representatives, would create a national video franchise structure.

Prior to SB 5, video service providers were faced with the prospect of negotiating individual franchises in thousands of individual cities, towns, and villages in Texas, a process proponents of the bill say would have slowed introduction of video competition. Aside from incumbent cable companies, most of the opposition to franchise reform comes from local governments, which fear loss of the franchise fee revenue stream and a say in the provision of public, educational, and government (PEG) channels. So far, however, all the legislation that’s been enacted or proposed preserves at least a 5 percent franchise payment to local municipalities plus PEG mandates.

As Verizon rolled out service, first in Keller and then in Plano and Lewisville, Charter Communications, the incumbent cable TV company, dropped its prices. Verizon priced its FiOS TV service at $43.95 a month for 180 video and music channels. The company also offered a 35-channel plan for $12.95 a month. Shortly thereafter, Charter began offering a bundle of 240 channels and fast Internet service for $50 a month, compared to $68.99 Charter had been charging for the TV package alone.

What’s more, two studies have shown heightened consumer awareness about the new competitive choices.

According to a Bank of America research report, Battle for the Bundle: Consumer Wireline Services Pricing, “The rollout of Verizon’s FiOS service in select markets has elicited thinly advertised, yet highly competitive pricing responses for incumbent cable providers.”

Taking the role of consumers inquiring about area cable TV service, the authors discovered that when they showed awareness of the competing FiOS service, cable competitors were willing to offer more competitive pricing.

Meanwhile, a second study of the Dallas area markets by the American Consumer Institute (ACI) found greater customer churn, declining prices, and market growth. ACI polled 883 scientifically sampled cable consumers living in three newly competitive portions of Keller, Plano, and Lewisville. The survey asked consumers if they were aware that cable TV competition existed in their community. Key findings include:

  • In newly competitive markets, the competitor had captured nearly 20 percent of market share.
  • Some 22 percent of consumers reported to have switched their cable TV or video provider in the past six months.
  • One in six consumers reported saving money on their cable service subscription as a direct result of competition, and most consumers were aware of the new competitor.
  • Half of those switching service providers reported significant savings on their cable bills, averaging $22.30 per month.
  • Some consumers stayed with their incumbent provider and reported to have saved, on average, $26.83 per month on their average cable TV bill, as a direct result of competition, evidence that competition quickly puts downward pressure on incumbent prices.

The study found wireline competition expands the total size of the cable TV and video market. This means competition should not adversely affect the local franchising fees local governments collect from wireline providers and use to support public access channels and other community services.

The report concluded the current level of consumer benefits, as measured by consumer welfare, was “immense.” As an aggregate, the competitive portions of these communities are realizing $2.4 million in consumer benefits per year as a result of lower cable TV and video prices, ACI said. That figure will likely increase to $14.1 million per year as competition continues to develop and as consumers become more aware of competitive choices and prices, the study noted.

ACI describes itself as a non-profit independent research group. It claims to accept memberships only from individual consumers and consumer groups, and not corporations or unions.

The Texas bill allows new video entrants to request a franchise from the state. However, existing franchise holders must wait until their local agreements expire, a provision that riles cable companies. Other bills, including the federal act, allow a current franchisee to apply for a state or national franchise upon entry of a competitor.

The Virginia law puts municipalities on the clock. A TV market entrant that applies for a franchise would have the right to start service in that territory 75 days later. A municipality would have 45 days to negotiate the terms it wants. If no agreement is reached, the TV provider could opt for an “ordinance” franchise, a default agreement based on the rules in the new state law.

Franchise reform has a number of key supporters, including FCC Chairman Kevin Martin. Speaking in March at TelecomNext, the annual telecommunications industry trade show, Martin said rates for cable television have steadily grown higher since the 1996 Telecommunications Act has been in place, while the rates in every other area of telecommunications have declined. Martin said the commission will try to address ways to reduce barriers to entry, with “some reasonable limitations” that could be put around what local franchising authorities can require as new competitors try to enter new towns or cities across the country.

Meanwhile, the National League of Cities (NLC) released the results of its latest annual opinion survey, in which a majority of city officials warn proposed federal legislation limiting their use of local video franchise fees would strain local budgets. The study, The State of America’s Cities, 2006, shows 86 percent of the cities responding to the survey impose franchise fees on cable and other multichannel video operators. Of that number, 83 percent of respondents claim federal legislation placing franchise authority in the hands of the states or the FCC would affect city budgets either somewhat (46 percent) or greatly (37 percent).

Steven Titch ([email protected]) is senior fellow for IT and telecom policy at The Heartland Institute and managing editor of IT&T News.