Cable Franchises Raise Rates and Lower Quality

(Note: The following is an edited version of remarks delivered by Diane S. Katz last week as testimony to the technology committees of both the National Conference of State Legislatures and the American Legislative Exchange Council. The two organizations are preparing recommendations for reforming the cable franchise regime.)

Good morning. I am Diane Katz, director of science, environment and technology policy, at the Mackinac Center for Public Policy. The Mackinac Center is a Michigan-based, nonpartisan research and educational institute focused on state policy. It is the largest think tank of its kind in the country.

I am grateful for the opportunity to be here today, and I appreciate your interest in improving telecommunications policy.

The fundamental questions before you are:

• Should cable franchise requirements be imposed on Internet-based video services? The answer is a resounding "No."

• Are current franchise requirements a barrier to entry and competition? The answer is a resounding "Yes."

• Should states regulate franchise authority? The answer is "No."

• Finally, should Congress establish federal franchise requirements for video services? The principled answer is, "Congress ought to eliminate franchise authority altogether." But the realpolitik answer is, "Better a federal franchise regime than a state or local one."

But I ask you, "Why is a franchise regime of any sort even necessary?"

Municipalities say they must franchise both to manage rights-of-way and to control the supposed market dominance of the cable monopoly they’ve long sanctioned. That’s what they say. What I believe they are thinking is, "We sure as heck don’t want to lose the $3 billion we collect in franchise fees every year, not to mention all the in-kind services, including free TV time for local office holders."

Cable firms say we must franchise because most of them are trapped in long-term costly franchise agreements that would put them at a competitive disadvantage if newcomers aren’t also forced to pay off the locals. In other words, they want a so-called level playing field, as if such a thing actually exists in a competitive market. However, these same cable firms balk at any suggestion that their new Internet-based phone service should fall under the legacy regulations in telephone service. Not that I blame them.

So we have what economists call "a battle over rents." This is always a headache for legislators, because at the end of the day, someone always loses. Well, I’m here to suggest that the only interests that you must protect are the best interests of consumers. Under that rubric, there’s simply no justification for continuing the franchise regime, let alone expanding it to broadband service providers.

To apply franchise regulation to Internet-based video would suffocate this nascent technology. It would be positively inane to require broadband service providers to negotiate franchise agreements with 35,000 municipalities, or even 50 states, as if we want to erect barriers to entry. To do so would rob consumers of choice, as well as the lower prices and service improvements that long have eluded cable customers. Where barriers to entry exist in the form of franchise extortion, new entrants would be precluded from investing in new or expanded networks.

And don’t worry about right-of-way payments. Most of the facilities-based broadband service providers already pay municipalities for the use of local rights of way. Adding new digital packets of video to the existing broadband pipelines won’t impinge on public rights of way.

Besides, federal law does not allow the imposition of franchise requirements on Internet protocol services.

I understand completely why the cable industry is antsy about Internet service providers getting a pass on franchise fees. But the solution is not to impose unnecessary and obsolete franchise regulations on everyone else as well. The answer is to eliminate franchising if we’re truly serious about promoting broadband deployment. As you know, if you want less of something, tax it. And if you want more of something, don’t. In reality, franchise obligations are nothing but a hidden tax, which allows municipal officials to avoid accountability. If they want the bucks, force them to get taxpayer approval, I say.

Allow me also to address the issue of build-outs. You will hear from the cable lobby and their municipal buddies that franchises are necessary to ensure that all citizens will have equal access to broadband services. But this is the United States, not Cuba or China or South Korea. Why is equal access to broadband more of a right than, say, access to cheap groceries or gasoline or medical care? We are a country of free enterprise. And you can bet that where there are paying customers, there will be video service. Indeed, low-income households constitute the fastest growing segment of the broadband market. That’s because competition — not franchising — has so lowered prices.

Technologically, we are way beyond the franchise regime. The convergence of technologies and applications has rendered service distinctions wholly obsolete.

We would do well to remember, as my friend Kent Lassman of the Progress and Freedom Foundation has pointed out, that franchising originated in Europe as grants of a sovereign. But we need not maintain a costly regulatory regime in which we are but serfs to the feudal lords of franchise.

Diane S. Katz is director of science, environment, and technology policy with the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.