Executive Summary

Advances in technology now make it possible for both cable firms and telecommunications companies to provide voice, data and video services to most homes and businesses. This constitutes a dramatic change from the days of cable dominance in the video market, and that of the "Baby Bells"[1] in telephone service. What hasn’t changed, however, is the franchise regime that has long limited access to the local market and thus inhibited competition. In this paper, we examine the effects of this obsolete regulation on consumers and the economy, as well as the myriad benefits of reform.

Until recently, it was widely assumed that cable service constituted a "natural monopoly." Since the 1940s, many municipalities have required cable service providers to obtain a franchise in order to operate. These regulatory instruments typically delineate the rates, terms and conditions of service, including the use of public rights-of-way in the deployment and maintenance of network infrastructure.

Local officials imposed franchise obligations on cable firms to protect consumer welfare. In so doing, however, they fostered the very market power that franchising was intended to tame. Unfortunately, municipal franchising has evolved from a means to protect consumers to a regulatory advantage that protects the incumbent cable operator from competition. Indeed, our survey of cable rates in many Southeast Michigan communities shows that those rates have, on average, experienced an annualized rate of increase that is nearly 38 percent above the annual inflation rate from 1991 to 2006.

Much of the local franchise regulation in force today was fashioned in the 1960s and 1970s — the Cyberspace equivalent of the Stone Age. But the emergence of alternative video technologies has prompted franchise reforms in California, Texas, Virginia, Indiana, Kansas, South Carolina and North Carolina in recent months. Legislation now pending in the Michigan House would replace municipal franchising with a statewide uniform franchise. If enacted, the reform promises to ease market entry for newcomers and, therefore, promote competition in video services.

In the following pages, we briefly examine the history of cable TV and the regulatory whipsawing that has plagued the industry since its very early years. This section is followed by an overview of market conditions for video services. We then turn to the particulars of municipal franchising, including its underlying assumptions, market effects and economic pitfalls. We conclude with an analysis of pending legislation and recommendations for reform.

Given the time we spend viewing television — more than eight hours per day per household, on average — franchise reform would have a significant impact on millions of Michigan residents. If successful, consumers stand to gain far greater power over the cost and quality of video service. Otherwise, we will continue to experience ever-higher cable rates and miss out on remarkable new video functionality made possible by technological progress.