You have just sat down to watch Monday Night Football, and during a commercial break
you learn that cable television rates will be increasing next month. The cable firm’s
ad assures you that the rate increase is necessary to cover the costs of updating the
delivery system and that you will receive more channels in the bargain.
What you don’t know is that the headline you read the next day in your local
newspaper–"City Government Negotiates Exclusive Franchise With Cable Giant
TCI"–hides the true nature of the deal. In truth, the local government will,
in all likelihood, collect a franchise fee from the cable firm that is either a fixed
amount or a percentage of revenue. In other words, monopoly rights have just been sold in
exchange for a payment. This scenario runs regularly in communities throughout Michigan
and the rest of the United States every year.
In Sacramento, California, a cable operator had to plant 20,000 trees to secure his franchise.
Local governments have been selling cable firms exclusive franchises within specified
geographic areas since the early 1960s. Today nearly all cable firms have exclusive
franchises in their respective service areas. And their customers pay higher prices for
the monopoly. Nationwide, only 3% of 67 million cable subscribers can select from
competing cable companies.
Why have local governments sold monopoly rights? The most frequent answer given by
politicians is that it is efficient to have a single service provider because of economies
in distribution. They point out that bidding for the monopoly franchise right is a good
method to ensure the most efficient service provider gets to offer you the service. The
more plausible answer might be that this is an easy way for public officials to make a few
easy bucks without directly taxing their constituents.
The temptation is hard to resist: Give a firm a monopoly and then require the monopoly
to share its monopoly profits. From 1980 to 1990 the cable industry paid local governments
$3.3 billion in franchise fees. Even nine years ago, the figure topped $715 million. Local
governments have plenty of political cover for this transaction. After all, the cable firm
is the bad guy because it is charging outrageous prices. The profit collected by the local
government takes place behind the scenes.
Roof-mounted dishes can replace cables for receiving television signals. Companies such as DirecTV are competing with local cable franchises for viewer dollars.
Local governments may also mandate nonmonetary, or "politically correct,"
concessions from operators for franchise rights. In Sacramento, California, a cable
operator had to plant 20,000 trees to secure his franchise. Another in Miami had to
provide $200,000 in annual funds to the local police department for an anti-drug abuse
Some municipalities protect their franchisees jealously. In 1992 the city of Lansing
lost a court battle that it began with the Trappers Cove apartment complex. Trappers Cove
provided its own satellite dish system to tenants instead of the local cable franchise.
Lansing appealed the decision and a lengthy legal battle ensued, eventually resulting in a
State Supreme Court decision in favor of Trappers Cove.
Is the exclusive franchise system in the consumers’ best interest? The answer is a
resounding no for several reasons.
First, in an unpublished study, economist Thomas Hazlett estimates that franchise fees
increase cable rates between $1.29 to $1.88 per month per subscriber. In addition, a
Federal Communications Commission survey found that cable systems with monopolies charged
an average of 65 cents per channel while cable companies facing competition charged just
Second, the evidence is clear that when there is competition among cable providers,
consumers pay lower rates and enjoy a higher quality of service. Allentown, Pennsylvania,
for example, has had two competing cable service providers for over 20 years. If you are
dissatisfied with the rates and/or quality offered by one firm, you simply dial the
telephone to switch to the other firm’s service. Consumers there rely on market
competition to keep rates low, not on the contractual promises made by the monopoly to the
Here in Michigan, Ameritech now competes head-to-head with companies such as
Tele-Communications, Inc. (TCI) in the city of Troy. Ameritech’s entry has caused TCI
to lower its rates and improve the quality of its service.
And that is not all. Ameritech also reports that its competition with cable companies
led Time Warner to cut its rates for the most popular channels it offers–CNN, ESPN,
and MTV–by 5% in Wayne, Michigan. Ameritech also added nine channels. In Berkley,
Michigan, prices dropped by 29% when TCI (now owned by AT&T) saw it would be facing
Coldwater, Michigan, is taking an opposite tack. City officials, with voter backing,
decided to increase cable competition by getting into the business of cable themselves.
Linden Cox, a manager at the Coldwater Board of Public Utilities suggests that if
small-town governments don’t provide the competition, no one will. "It comes
down to offering choices," he said.
But choices can be offered without municipal involvement, as evidenced by Wayne and
Berkley. If other telecommunication firms and electrical service providers begin to use
their distribution systems to offer video programming, the competition will become quite
fierce, driving prices down and quality up–unless local governments continue to
negotiate exclusive franchising agreements. This could cut consumers out of serious future
The remarkable growth of satellite-based services such as DirecTV offers consumers a
competitive alternative to the services provided by the local cable firm. Indeed, the
competitive presence of this wireless technology in the video programming market
eliminates the monopoly power of the cable firm.
More good news: Cable competition may be taking root in Kalamazoo. The Kalamazoo
Gazette recently reported that the Kalamazoo City Commission approved a new franchise
agreement with Cablevision of Michigan that is not exclusive, which means other cable
firms can compete in the area.
Michigan policymakers have it in their power to allow competitive forces to deliver the
highest quality video programming service to consumers at the lowest possible price.
Technology makes it possible for consumers to get their video programming service from a
variety of competing service providers, if only local governments will allow these firms
to enter the market.
Let consumers decide what is in their best interests.