Universal Build-out Requirements Hinder Competition

Published May 17, 2007

Dear Editor:

Thank you for your citation of The Heartland Institute’s report in your May 15 editorial on the benefits of franchise reform. Indeed, if House Bill 1500 passes, Illinois consumers will see more competition faster.

While you clearly favor competition, you urge the state government to mandate universal build-out. But, as our report shows, these “universal” build-out requirements have often proved to be a chief barrier to competitive entry, especially those requirements that demand new entrants reach 100 percent of local households within three to five years. Very few cable companies accomplished universal coverage within this time frame. Many took a decade or longer. Demanding that any new entrant, starting with zero market share, achieve what many companies with monopoly protection were unable to do is hardly “fair competition.”

With build-out guidelines, not mandates, new entrants, which are starting with zero market share, have the ability to roll out service in a manner that makes economic sense. Despite concerns from critics of franchise reform, so far there has been no evidence that the phone companies have been targeting only wealthier neighborhoods for video. In Ft. Wayne, Indiana, in fact, Verizon began its fiber optic build-out in the poorer neighborhoods.

This makes sense when you think about it. Households without cable, or those that can afford only basic programming tiers, are the most likely to consider alternatives. Marketing 101 says it’s inevitably easier, cheaper, and more profitable to court first-time customers than try to poach users from entrenched competitors. Finally, with nervous shareowners watching, Verizon and AT&T are not spending $23 billion and $11.5 billion, respectively, on video network upgrades only to deliberately ignore huge numbers of otherwise-eager consumers.

Build-out requirements were a quid pro quo for cable franchises that local governments regulated and protected. Franchise reform recognizes the era of deregulation and competition is here. That means lawmakers must allow market forces to have the upper hand when new competitors enter. It works. From just the short time franchise reform has taken hold, we’ve seen that prices drop and build-out happens. That’s why states are embracing statewide franchise reform in greater numbers and with greater bi-partisan majorities.

Steven Titch ([email protected]) is senior fellow for IT and telecom policy at The Heartland Institute.