Laying Cable and Competition

Bresnan Cable Truck

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.

DirecTV Dish

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 campaign.

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 48 cents.

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 local government.

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 competition.

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 savings.

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.