Assessing the Case for Cable Franchise Reform

SSRN Electronic Journal, 2000

Traditional phone carriers have announced ambitious multi-billion dollar plans to bulk up their networks with fiber in order to deliver a range of new services, including multi-channel video in competition with video incumbents. This competition promises to benefit consumers through lower prices, enhanced services and expanded choices from both incumbents and new entrants. Actual market entry, however, faces a significant barrier in the form of local franchise requirements that are delaying entry and could postpone competition for a substantial period of time. For that reason, public policymakers are being urged to speed the delivery of new services to consumers by reforming the franchise process.

Between 2005 and 2008, 19 of the 50 states of the U.S. reformed the franchising process for cable television, significantly easing entry into local markets. Using a difference-in-differences approach that exploits the staggered introduction of reforms, we find that prices for "Basic" service declined systematically by about 5.5 to 6.8 percent following the reforms, but we find no statistically significant effect on average price for the more popular "Expanded Basic" service. We also find that the reforms led to increased actual entry in reformed states, by about 11.6% relative to non-reformed states. Our analysis shows that the decline in price for "Basic" service holds for markets that did not experience actual entry, consistent with limit pricing by incumbents. To control for potential state-level shocks correlated with the reforms, we undertake a sample-split test examining changes in local markets which faced a greater threat of entry (because they were close to a prominent second entrant); we find larger decline in prices, for both "Basic" and "Expanded Basic" services, in areas likely to be more keenly contested. Our results are consistent with limit pricing models that predict incumbents respond to increased threat of entry (without actual entry taking place), and suggest that the reforms modestly benefitted consumers in reformed states.

SSRN Electronic Journal

Firms that wish to offer wireline, multichannel video programming services in direct competition with cable incumbents are being faced with calls by those incumbents and policymakers to "build-out" to entire communities as a precondition of receiving a franchise. This "build-out" requirement is often incorporated into the local cable franchising process, which the FCC over a decade ago called "the most important policy-relevant barrier to competitive entry in local cable markets." In this POLICY PAPER, we show that build-out mandates are actually counter-productive and serve primarily to deter new entry, increase the profits of incumbents, and harm consumers.

Yale Journal on Regulation, 1990

Most cable television systems in the United States operate as monopolies, typically obtaining an exclusive franchise from a municipality to exploit consumer demand within a specified service area. Unlike most traditional public utility regulators,' however, local municipalities cannot set the rates charged by the local cable monopolies that they establish. 1 While exclusive franchises are the overwhelmingly dominant market structure in the cable television industry, direct competition between normally monopolistic cable television companies-a phenomenon referred to as an overbuild because both companies have placed cable systems in the same geographic area-currently occurs in at least three dozen jurisdictions nationally. Overbuilding is an important form of market rivalry both on its own merits and because of the public policy considerations surrounding the regulation of the cable television industry. From an industrial organization perspective, overbuilds pit firms in duopolistic competition,' characterized by geographically clear service areas, economies of scope and density, and non-salvageable investment. Even in this type of market environment, the policy alternative of free entry may still offer a mechanism for proconsumer discipline of local cable markets where rate regulation is either ineffective or infeasible. Furthermore, the practice of granting exclusive licenses to cable

SSRN Electronic Journal, 2000

In response to federal efforts to reform the local cable franchise process, state and local governments have argued that proposed legislation will reduce local franchise fee revenues by at least $300 million per year. As demonstrated in this POLICY BULLETIN, however, the introduction of competition for multichannel video services promises to significantly increase gross industry revenues and therefore could substantially increase local franchise fee collections. Specifically, this POLICY BULLETIN finds that if wireline, local telephone company entry into the multichannel video industry is successful, then gross taxable revenues from the wireline multichannel video industry will increase by an estimated 30%. Commensurately, effective proentry video policies would allow the local franchise fee percentage cap to be lowered (or the revenue base narrowed) significantly without doing any harm to local government franchise collections. This POLICY BULLETIN estimates that a reduction in the franchise fee cap from 5% to 3.7% would be revenue neutral. However, this "competition dividend" will only occur if wireline entry happens and, therefore, reform of the cumbersome and anticompetitive video franchising process is crucial to ensuring that such entry occurs.

Telecommunications Policy, 1993

Even If all legal entry barriers were eliminated, telephone companies would face dim prospects for competing with cable televlslon operators In the transport of video services, at least during thls decade. This situation arises because the economic characterlstlcs of flbre-based Integrated broadband networks of Interest to telephone companles are not promlslng. Unless the demand for switched video Is strong, households will continue to be served separately by cable television networks and by swltched narrowband networks durlng the 1990s.

Media Economics: A Reader., 2004

Business and Politics, 2000

Formal regulatory parity can entail counterintuitive effects. In a series of state statutes, municipal governments have been directed to issue cable TV franchises to new competitors only after (a) formal hearings considering the 'public interest ' in competition; and (b) imposing terms and conditions which are at least as burdensome as those contained in the incumbent's franchise. While billed as 'level playing eld' laws, economic theory, an important case study in Connecticut, and a probit analysis of Ameritech's cable franchise acquisition strategy suggest that these statutes actually tilt the eld against entrants.

Review of Industrial Organization, 1996

In devising rate caps under the 1992 Cable Act, the FCC measured the effects of market power in cable TV by comparing overbuild franchise areas (served by more than one cable operator) with monopoly areas. This paper draws attention to, and corrects, several shortcomings in the FCC's analysis. We conclude that the overbuilds' rates are, on average, 12 percent lower than monopoly rates (and not 16 percent as estimated by the FCC, a difference of approximately $700 million in terms of annual cable revenues). Furthermore, overbuild operators offer better service quality than monopoly systems; the average overbuild offers upto 34 percent more non-broadcast channels.

comm, 1983

This study is an investigation of the economies of scale in cable television operations, and of the variation in these economies over the range of output. The results are intended as an empirical clarification of the question of whether cable television is a "natural" monopoly, an issue with significant public policy interest; its implications will be. discussed first. The American television industry is presently undergoing rapid change. Where once there was a limit on viewing options imposed by the scarcity of electromagnetic spectrum, confining most viewers to a handful of channels that were dominated by three competing distribution systems, cable television is emerging now as "the television of abundance," (Sloan Commission, 1971). Yet ironically, the market structure of "abundant" cable television is more restrictive than that of "scarce" conventional television, since the present franchising system has created a series of local cable distribution and programming monopolies. This raises concern about a cable operator's ability, if left unconstrained, to charge monopolistic prices to subscribers, and, more significantly, to control the content of dozens of program channels. A variety of reform proposals have therefore been made, seeking to impose some of either conduct regulation, public ownership, common carrier status, or competitive market structure. The latter approach, in particular, has been taken by the Federal Communications Commission. After eleminating most of its conduct regulations over the past two years, the FCC's current philosophy is to rely on and encourage inter-media competition between cable and other video technologies.' A second and distinct competitive approach is to rely on intra medium competition among cable companies. In New York State, for example, a recent Governor's Bill, based on recommendations by Alfred Kahn and Irwin Stelzer (1981), seeks to open each cable franchise area to additional cable companies, thereby reducing their local monopoly power. The possibility of such entry, however, is based on the assumption that more than one cable company could successfully operate in a territory. But such competition is not sustainable if