Municipalities instituted cable franchising under the assumption that cable service was a "natural monopoly." The theory of natural monopoly, now widely questioned, presumes that more than one cable network in any given community would be economically inefficient. That is, the high costs of constructing a cable network are affordable only if a service provider can garner a large share of the market in order to lower average costs over the long-run.
The regulation of rates and terms of service were intended to subdue the market power of cable’s supposed natural monopoly, as well as to regulate the use of public property in the deployment and maintenance of network infrastructure. Meanwhile, municipal budgets have long benefited from the $3 billion in franchise "fees" collected annually nationwide — not to mention a variety of in-kind services such as free TV time for local office holders. Former New York Mayor John Lindsay characterized cable franchises as "urban oil wells beneath our city streets."
In reality, the cable "fees" that flow to municipalities come from consumers’ pockets. Cable operators are free to pass the cost of franchise "fees" directly to their customers. Therefore, franchise fees are simply a hidden tax. According to researcher Jonathan Samon, of the Georgia Institute of Technology: "This system is unjustified because the costs passed on to consumers from the cable companies constitute an essentially needless wealth transfer from consumers to their municipality."
Residents of 12 Michigan cities became fed up two years ago and filed lawsuits alleging that franchise fees collected from some 700,000 subscribers exceeded the amount needed for cable TV services. Indeed, substantial fee revenue flows into cities’ general funds.
Many analysts attribute the market dominance of cable to the absence of competitive technologies. In hindsight, competition could have restrained monopolies by generating new technologies and applications that instead took decades to achieve. The eventual emergence of broadband and the Internet offer customers real choice among video service providers — as long as newcomers are allowed market entry. As further noted by Jonathan Samon:
"A large factor in the monopoly status of cable television operators is that no viable technology provided true competition to the array of services available through cable during the 1970s and 1980s. The further development of competing technologies and services over the next two decades, however, created viable alternatives that weakened cable’s de facto monopoly status.
"As competition continues to embed itself in the industry, the future for the video marketplace looks bright for customers and providers alike. Officially breaking the monopolistic stranglehold that cable companies enjoy over consumers by eliminating exclusive cable franchises would significantly brighten that picture."