Ending Cable Monopolies Would Benefit Consumers

(The commentary below is an edited version of an Op-Ed published in the Sunday, Oct. 1, Flint Journal.)

Legislation pending in the state House would streamline the process of obtaining a cable TV franchise, which is the permission a company needs to offer services. If enacted, the measure would promote competition among video providers, which would greatly benefit consumers. Unfortunately, local government officials are attempting to block reform with false claims and twisted facts.

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From the time cable lines began replacing TV antennas four decades ago, municipalities have required cable firms, such as Comcast, to obtain franchises under the assumption that cable service was a "natural monopoly" in need of taming. This local regulation, which was never justified, has become destructive now that there are assorted technologies and service providers that consumers could choose from — if given the chance.

Municipal officials promise to negotiate in good faith with prospective competitors. No doubt many would. But there are 1,200 franchising authorities (governments) in Michigan. Requiring a firm to negotiate with each municipality in which it wants to do business constitutes an enormous obstacle to competition. House Bill 6456 would instead create a uniform statewide franchise to streamline the process.

Evidence abounds that franchising by cities and townships costs consumers. Cable TV rates in markets without meaningful competition run as much as 25 percent higher than in competitive markets. According to my analysis, per-channel cable rates in southeast Michigan have undergone, on average, an annualized rate of increase that is nearly 38 percent above the inflation rate from 1991 to 2006.

Local officials say they must control franchising to regulate the use of public property on which network infrastructure is located. In fact, the pending legislation would not diminish this authority. They also argue that local franchising is necessary to prevent cable companies from "redlining" poor neighborhoods. But the legislation would maintain service quotas for low-income households. So, what’s the problem?

The most egregious deception, however, is the claim that reform would rob municipal budgets of franchise fee revenue, thereby jeopardizing vital services. In reality, franchise revenues would increase. Competition spurs lower rates, and to the extent that rates drop, current customers are likely to upgrade their service, while households that currently don’t subscribe will do so.

Researchers Robert W. Crandall and Robert Litan concluded that competition would increase the number of video subscribers between 29.7 percent and 39.1 percent. Consequently, franchise fee receipts would increase by between $249 million and $413 million per year nationwide, they found.

Michigan lawmakers would also do well to remember that cable operators pass the cost of franchise fees paid to local governments directly to customers. Any attempt to artificially inflate franchise revenue would constitute a tax hike. As it is, Michigan municipalities already collect $38 million annually in franchise fees — along with a slew of other perks, such as free air time.

Where franchise reform has been adopted, the benefits have been both immediate and substantial. The recent passage of statewide franchising in Indiana, for example, prompted AT&T to announce an expansion of high-speed DSL service to 33 rural communities. An analysis by the Perryman Group projects more than $3.3 billion in new telecom investment for Texas.

Much of the local franchise regulation in force today was fashioned in the 1960s and 1970s — the cyberspace equivalent of the Stone Age. Besieged by plant closings and job losses, Michigan cannot afford to reject reforms that would benefit consumers and promote high-tech investment in the state.

Diane Katz is director of science, environment and technology policy at the Mackinac Center for Public Policy.