Video over DSL Threatened by Regulation

Published July 27, 2005

Telephone companies such as SBC and Verizon are preparing to roll out video services over DSL. The mood is jubilant among consumers and the industry, as this stands to further stimulate the market for broadband services.

Until now, DSL suffered from its lack of the video value proposition cable TV providers have. And, somewhat unfairly, DSL has been perceived as technologically inferior to cable modem service. The prospect of video over DSL, combined with technology improvements that can deliver Internet bandwidth on par with cable modems, stand to make the telephone companies much stronger competitors.

Cable TV companies are well aware that video over DSL presents their biggest competitive threat since the arrival of direct broadcast satellite. That is one reason they have mounted a massive lobbying offensive in states such as Texas and Virginia to require telephone companies to go through the same franchising process cable companies have to in every city and town where they hope to offer service.

No one doubts that by forcing the telephone companies to deal individually with tens of thousands of towns nationwide, their entry into video and head-to-head competition with the cable companies will be delayed by months if not years.

The recoil by consumers and industry against the cable tactics has been strong enough that the Texas legislature, which this spring sided with the cable industry and refused to change the law to grant a statewide video franchise to SBC and Verizon, is revisiting the vote in a special session taking place in June and July.

At the federal level, legislation to streamline the introduction of video over DSL has bipartisan sponsorship in the House and Senate.

A Chance to Promote Competition

Rather than encumber new entrants with regulations originally designed to check monopoly power that cable companies once had, legislators ought to give serious thought to overhauling or eliminating franchise regulations that now impede competition.

At the local level, cable companies tend to face two sets of obligations. The first set covers their physical facilities, while the second covers the content and service they provide. The prospect of competition calls for states to revisit the rationale behind both.

As far as the physical network, both cable and telephone companies must pay the city fees for right of way. These fees presumably cover the use of streets and conduits where cables run, the cost of pedestrian and traffic disruption when digging is required, and so on.

Since the city legitimately incurs costs, there must be some form of compensation. However, these costs should be standardized and non-discriminatory. In other words, there should be a common formula for assessing right-of-way costs for phone and cable companies and any other companies that seek similar right-of-way access.

Meanwhile, a franchise fee is essentially a tax (passed on to consumers) service providers pay for the right to provide services within a political jurisdiction. The term “franchise” connotes monopoly and the terms the franchisee accepts in exchange for exclusivity. These typically include “must carry” provisions for local television stations, setting aside a channel or channels for community use, and a requirement that the company agree to serve all residents.

Franchise fees may have made sense at the time when cable companies were in fact monopolies. The “franchise” process began to break down when direct broadcast satellite companies like DirecTV entered the picture–even though they provided essentially the same product as the cable companies, they were declared exempt from local franchise fees. Now that the consumer has a wide choice of ways to see television and movies in the home–including DVD purchases and rental–cable and phone companies are becoming just two distribution channels among many available.

It’s no secret that Netflix and Blockbuster are looking to the Internet as their next method of leasing videos. Once digital rights management is sorted out and video downloads via the Internet become more common, the case for maintaining the current structure of franchise fees on service providers who electronically deliver content will weaken further. Legislators at the state and federal level advocating change clearly see the votes in Texas and Virginia as attempts to pound a square peg into a round regulatory hole.

States ought to standardize and centralize right-of-way and any other fees or service obligations on behalf of the cities and communities in their jurisdiction. Level the playing field by eliminating obsolete regulations, not by encumbering new players by old rules. The policy goal is to promote competition and new investment as quickly as possible, not protect entrenched service providers.

Some elected officials have expressed concern about the lack of broadband access, having to choose among too few service providers, and high cable rates. Video over DSL offers them a chance to address those concerns. Phone companies have the technology and are ready to go.

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