Cable Video Franchising

One of the main areas that the recent wave of telecom reform has affected is cable video franchising.  Prior to this reform, the traditional process of establishing franchise agreements resided at the local/municipal level for the vast majority of states.  Local governments would work with the cable provider to develop an agreement (with certain conditions) to allow them to offer cable service in its municipality.

With growing competition in wireline cable video service, many groups found this archaic regulatory regime to be inefficient and slow. In addition, with over 30,000 municipalities in the US, it would be a very daunting task to work with the hundreds if not thousands of local governments in one’s footprint to gain the right to provide cable service in that area.

Congressional Activity

Not to be outdone by the states, Congress and the FCC have also looked into reforming video franchising at the national level.  Last year, both houses of Congress held hearings and introduced legislation on the issue. However, neither bill was enacted. For the 110th Congress, there has been some talk to revisit the issue (at least on the House side) but doing so might include having to take up the contentious issue of net neutrality again.

The FCC, last December, did adopt an order on video franchising. The new rules will: Set a “shot clock” of 90 days for franchising authorities to rule on applications from competitors with existing ROW access and 180 days for new entrants without existing ROW access; ban “unreasonable” build-out requirements for new entrants; require other fees and in-kind contributions to be counted toward the 5% franchise fee; while the final version of the new rules hasn’t yet been released, it has already met resistance from various groups and even from members of Congress.

The FCC order doesn’t look to preempt state law but there is concern that this could be an incremental step toward needlessly increasing the federal government’s role in the market and, more importantly, erasing the hard work of countless state legislators.

Reasons for Regulatory Improvement

The current framework of municipal cable franchising, while not broke, is inadequate for today’s market and for fostering future growth in this sector.  ALEC believes states should enact laws that establish statewide cable video franchise agreements in order to promote free markets, limited government, and consumer choice.  Below are the reasons for such legislation:

Brings Competition to the Markets Quicker – Under the current system, franchise agreements can take a month, 3 months, a year, or even 18 months to be approved, depending on the municipality, and then the provider has to deal with each municipality in its service area of that state. Statewide franchising streamlines this process by allowing the provider to deal with one entity instead of multiple local governments. As a result, competition enters the markets more quickly.

Consumer Choice – Increasing competition means more choices for consumers. Competition also will bring innovation, new service offerings, and improved customer service. Only 3% to 5% of US households live in a competitive cable wireline market.

Lower Prices – Competition also brings lower prices. The FCC has reported that prices in markets where wireline cable competition exists are 15% lower than areas with no competition. This means an approx. savings of $100 a year per household. It is estimated that the lack of competition is costing consumers a total of $9 billion year.

Reduces the size of Government – There are over 30,000 municipalities nationwide and a cable video provider must deal with each of them to be granted permission to offer cable video service to its citizens. With a statewide franchise, a provider would only have to deal with one government authority per state instead of ultimately 30,000 local ones. (Most states are comprised of hundreds of local governments and some have well over a thousand.)

Standardization – In addition to the varying degrees of approval timeframes, requirements or restrictions differ from one municipality to the next. It has also been documented where local governments have mandated to new entrants, additional contributions that are unrelated to cable service and/or weren’t required of the incumbent. So there is no standardization, a statewide video franchise would remove that.

Concerns

Some of the major concerns about statewide cable video franchising are the retaining of local control of public rights-of-way (ROWs) and safeguarding local government ”revenue” streams, which are derived from the franchising fee (typically 5% of a provider’s gross revenue from cable service). Certainly, statewide franchising policy must include provisions to ensure local governments maintain the management of ROWs.

With respect to safeguarding local “revenue” streams, it gets more complicated.  State policy makers should carefully review how these monies, from this fee, are being used. The reason being is that these franchising fees are usually directly passed on to consumer. This fee actually ends up as a tax; basically the municipality is making the consumer pay for the right of a cable operator to offer service in their home.

Build-Out Requirements

While the majority of states that have enacted or are considering cable franchise reform don’t include build-out requirements, a few states have had build-out mandates incorporated into their franchise reform legislation-some of them have been very severe in their requirements.

Given our free markets and limited government principles, we believe that these build-out demands are unnecessary and could hinder the very thing that statewide franchise reform hopes to bring competition. ALEC has several concerns with the inclusion of build-out requirements into statewide franchise legislation because of the negative implications that could arise to consumers and cable video competition.

Competition in a free market is a better alternative – competition is a much more appropriate and effective catalyst for the deployment and adoption of these services than the artificial influence derived from such regulation. When competition enters the market it will cause companies to maintain or expand their market share. This could be done by lowering prices, creating new services, expanding service availability, and/or targeting new customer segments.

Federal opinions oppose build-out requirements – both the FCC (Order 06-180) and DOJ (Ex Parte Submission Docket No. 05-311) have weighed in by opposing build-out requirements imposed on competitors by local franchising authorities (LFA).

DOJ Position – “the Department believes that Local Franchising Authorities (LFAs) should not be allowed to impose any such [build-out] requirements except where necessary to prevent income discrimination, which the statute prohibits.”

FCC Order – “we [FCC Commissioners] find that build-out requirements imposed by LFAs can constitute unreasonable barriers to entry for competitive applicants… In many cases, build-out requirements may have precisely the opposite effects – they deter competition and deny consumers a choice.”

Even though their positions deal with LFAs, it would be logical to assume the positions would transcend to state build-out requirements. Reason being, it would be even a greater burden to competitors to have to build out to a significant percentage or its entire footprint in a state instead of only within a municipality.

Existing availability – both the NCTA and Kagan Research report that 99 percent of the US households with a television are passed by a cable system. Satellite DBS is available to basically everyone. More so, the FCC reports that over 160 television markets, covering 96 percent of all U.S. TV households, have at least one DBS provider that offers local-into-local service. So cable TV is already available to anyone that wants it–it’s an issue of whether the demand exists.

Unreasonable timeframes – cable companies have had decades to build-out their infrastructure to customers whereas proposed build-out mandates would require competitors to build-out to large portions of their footprint within only a few years.

There is unfounded concern that, without these build-out requirements, certain citizens (rural and low-income) will be discriminated against and won’t have competition and choice with respect to cable TV, broadband, or other emerging services. Or worse yet, it won’t be available to them all together and the digital divide will continue to lengthen.

As the above data reflects, cable video service is already available to basically all households, either through co-ax or satellite. Broadband is continually expanding its footprint as technologies mature and capital is invested. So progress has been and is continuing to be made, it just takes time and some patience. At some point, government has to stop force-feeding supply, through regulation, and really work on cultivating demand, through education.