Cable-Franchise Reform: Deregulation or Just New Regulators?

By Summers, Adam B. | Freeman, April 2007 | Go to article overview

Cable-Franchise Reform: Deregulation or Just New Regulators?

Summers, Adam B., Freeman

There is much hand-wringing and teeth-gnashing among politicians who decry businesses for maintaining monopolies that harm consumers. Yet in a free market such businesses will find any monopoly position fleeting. If they charge too much or fail to provide suitable quality in their products and services, other entrepreneurs will recognize a profit opportunity and jump in to take market share away from them. It isn't enough to obtain a dominant position in an industry; even a "monopolist" faces competitive pressures if it wants to keep that position.

There is an exception to this rule, however: government-protected monopolies. If other businesses are prevented from competing with the monopolist through laws, regulations, or exclusive agreements (such as franchise agreements) with the government, there really is no chance of competition. In this case, consumers are harmed because the monopolist has little incentive to provide the lowest prices, the highest quality, or the most innovative products so long as the necessary lobbying is done and tribute paid to the government. This is not a free market. Thus one could say that the only "bad" monopoly is a government-protected monopoly.

Today at least one type of government-sanctioned monopoly is starting to break: the cable-television market. Cable-television companies typically have to negotiate with local governments and pay them a portion of their revenues and other compensation for the exclusive right to offer cable services in an area. Few parts of the country have allowed any competition at all in local cable markets, but that is starting to change.

In the past two years state governments have attempted to streamline the cumbersome and costly process of obtaining numerous local government video franchises by allowing cable and telecommunications companies to apply for a single franchise issued by the state. These reform efforts also remove the local monopoly protection, permitting multiple competitors. The change is intended to open up competition, particularly to telephone companies such as AT&T and Verizon Communications, which have been trying to break into the cable market, and to offer consumers greater choice and lower biUs.

It should be noted that even where franchise rules prevent competition among cable providers, they may face competition from satellite providers. According to J.D. Power and Associates surveys, satellite providers have increased market share from just 12 percent of U.S. households in 2000 to 29 percent in 2006. During this period, cable providers have seen their share fall from 66 percent to 58 percent. A December 2006 Federal Communications Commission (FCC) report found that satellite competition did not appear to affect cable prices. But this may be because satellite providers often offer more channels and premium services than cable providers do or better newsubscriber promotions, such as free installation and equipment. If so, consumers are getting more for the same prices they would pay for cable. In any case, that cable is steadily losing market share to satellite indicates that many consumers feel they are better off with the added competition and services.

State and Federal Reform Efforts

Michigan most recently passed cable-franchise reform when Governor Jennifer Granholm signed the Uniform Video Services Local Franchise Act in December. Consumers and telecommunications companies won another significant victory when California passed the Digital Infrastructure and Video Competition Act of 2006 last September, opening up the state's sizeable market to competition. Under the previous franchise structure in California, a potential cable provider would have needed to gain approval of over 500 separate franchises from local governments to provide service across the entire state. The video-franchising process typically took six to 18 months, resulting in significant costs from business lost during the negotiation process and the time and energy spent on the negotiations themselves, not to mention concessions required by municipal governments as a condition of obtaining the franchise. …

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