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Video Franchise Reform Would Support Competition and Consumer Choice in Pennsylvania

SB 1247 would bring lower rates for consumers and greater choice of services

Steven Titch
August 8, 2006

Good afternoon.

I would like to thank Senator Wonderling, Senator Rafferty and the Pennsylvania Senate Communications & Technology Committee for the opportunity to speak to you today about video franchise reform and Senate Bill 1247, the Cable Choice and Competition Act.

I serve as telecom policy analyst for the Reason Foundation in Los Angeles. The Reason Foundation is a non-profit, non-partisan organization that supports ideas and public policies that promote free market-based approaches to commerce, with an emphasis on minimal government intrusion, low taxation and respect for market mechanisms.

It is important that legislation recognize how cable TV service in Pennsylvania has evolved from its obsolete past of regulated monopoly into an era of consumer choice—and it takes positive steps to bring consumer choice in cable to more Pennsylvanians more quickly.

Let's state this as simply as possible: video franchise reform means competition for cable TV service. Competition means lower prices for consumers.

Texas became the first state to pass video franchising reform last August. Because they were able to go directly to the state capital for permission to deploy video services anywhere in the state, Verizon and AT&T were able to accelerate their rollout. Consumers saw quick results.

With a statewide video franchise in hand, Verizon in January rolled out its FiOS fiber-optic video service in Keller, Plano and Lewisville, three communities near Dallas. The local cable provider, Charter Communications, immediately dropped its prices. Verizon priced its FiOS TV service at $43.95 a month for 180 video and music channels. The company also offered a 35-channel plan for $12.95 a month. Shortly thereafter, Charter began offering a bundle of 240 channels and fast Internet service for $50 a month, compared to $68.99 it had been charging for the TV package alone.1

Consumers noticed. Market researchers noticed.

According to a Bank of America research report, Battle for the Bundle: Consumer Wireline Services Pricing, "The rollout of Verizon's FiOS service in select markets has elicited thinly advertised, yet highly competitive pricing responses for incumbent cable providers."

For the purposes of their market research, the authors took the role of Texas consumers inquiring about area cable TV service. They discovered that when they mentioned the competing FiOS service to cable competitors, those cable companies were willing to quote lower prices on the phone.

The consumer experience in Texas followed the trend in other markets where cable competition has been introduced. Because franchise reform can cut months off process by which competitors attain permission to enter markets, it is a terrific idea. Where ever there is video competition, consumers see a break. In Florida, for the first time in a decade, Comcast is not raising rates in Manatee and Sarasota counties, according to a report last week in the Miami Herald. The reason: Verizon already has introduced cable services in Manatee and is close to a franchise agreement in Sarasota.

In a new report, Yale M. Braunstein, a professor at the School of Information at the University of California at Berkeley, cites FCC measurements of competitive and non-competitive cable markets that found subscription rates for basic and expanded basic services were on average 16 percent lower in the competitive group. Using the data as a baseline, Braunstein predicts cable competition franchise reform will save California consumers between $690 million and $1 billion.2

In a recent study, Thomas W. Hazlett, professor of Law and Economics at George Mason University, explains "Were head-to-head wireline video rivalry, now offered to just under five percent of U.S. households, to extend nationwide, annual benefits to consumers are estimated to approximate $9 billion, with overall economic welfare increasing about $3 billion per year."3

Unfortunately, in most states today, including Pennsylvania, video service providers are faced with the prospect of negotiating individual franchises in scores, if not hundreds, of individual cities, towns, and villages. Despite the documented consumer benefits of cable competition, local officials appear bent on preserving the older, much slower processes.

But who wins? Officials in Roselle, Ill., ordered AT&T to halt a network upgrade for 180 days so the town could make a decision on the video franchise implications. That's six months more residents of Roselle will have to wait for more choices and lower rates consumers elsewhere are enjoying. What's worse, the Roselle delay is part of a coordinated effort by at least 11 other local communities in suburban DuPage County to stop telephone companies from upgrading their networks until exact franchise rules can be determined.4 It's an example of what most communities across the country can expect if franchise reform is blocked.

In arguing for local control of franchising, local governments stoke fears that the city or town will lose a valuable revenue stream, that they will lose control of right-of-way, that they will lose local programming, or that that new entrants will discriminate against less affluent communities.

But let's look at these objections a little more closely.

SB 1247 does not take franchise funds away from local franchise authorities. Local franchising authorities still receive payments directly. Local authorities also retain their right to audit franchisee accounting data. Local authorities may lose some of the "perks" that have come from their leverage as exclusive franchise authority—free cable service for City Hall, a parking lot, other assorted concessions could once be passed on to consumers without fear of consequences because of the franchise monopoly regime. At the same time, however, competitive entry does mean new revenues from another "franchisee." It's hard to see local revenues being choked off under this bill.

SB 1247 does not pre-empt any local authority or jurisdiction over use of right-of-way.

SB 1247 calls for statewide franchisees to provide public, educational and government (PEG) channels and franchisees must provide a means of connection from PEG studio facilities to the head-end.

The most controversial aspect of franchise reform bills, including SB 1247, is the lack of a build-out requirement for new entrants. But this is part and parcel of the competitive environment in which cable services now operate.

For cable companies, build-out requirements were a condition of exclusivity. Although we use the term rather freely now, that's what "franchises" were once all about. The term franchise itself implies exclusivity over a certain territory. The entry of competition ends that exclusivity.

Market mechanisms will now take over – delivering services to all segments of the population, just as competitive businesses do in other sectors. Local governments do not impose build out requirements on supermarkets, video stores, chain restaurants or other retailing establishments. The reasoning is that no business deliberately choses not to serve entire swaths of a local market.

The same holds true with competitive cable services. There is demand for these services and new companies are investing millions in infrastructure to meet it, not ignore it. They are doing so by offering less expensive services, more options and more innovative technology. Every sale is important because they are beginning with zero market share.

Further, it's fundamental marketing practice to target underserved customers first. For one, the cost of acquiring first-time customers is much lower than trying to lure away those captured by an incumbent. It's not to say competitors won't target those customers, but to restrict investment and marketing to one group is poor business practice.

Indeed, this has borne out on practice. Benefiting from franchise reform in Indiana, Verizon chose to begin deployment of its FiOS service in Ft. Wayne not in the city's tony Sycamore Hills neighborhood, which is surrounded by a Jack Nicklaus-designed golf course, but in the low-income Hanna-Creighton neighborhood.

"Hanna-Creighton…beset by vacant lots and decaying homes – is on track to be among the first areas in the Midwest to have Internet service that at its slowest download is 89 times faster than a traditional dial-up modem. At its fastest, the fiber-optic network is 536 times faster," according to the Ft. Wayne Journal-Gazette.5

AT&T, meanwhile, perhaps with an eye toward offering future connectivity, has announced a $100 million grant program aimed at providing low-income households with PCs and Internet access. The national program, administered by the AT&T Foundation, aims to offer two years of free high-speed Internet access and affordable computers to qualifying households as early as the end of this year.6

In creating a statewide video franchising structure, Pennsylvania will join legislatures in eight other states, plus the U.S. House, that have passed such measures in the past 12 months—with bi-partisan support increasing with each vote. It's because legislators—and their constituents--don't have to look far to see the benefits. The choice is straightforward: Lower rates for consumers accompanied by greater choice of services, or retention of an obsolete system that reinforces a regulated monopoly and accompanying high rates. We urge the Pennsylvania legislature to support competition and consumer choice.

Thank you.



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