Anaheim vs. The Sacred Cow of Franchise Fees, Part II

Fresh thinking about video franchise fees continues to flow from Anaheim. Sunday’s edition of the Orange County Register endorsed Mayor Curt Pringle’s call for an end to video franchise feesââ?¬â??the percentage of revenues service providers pay local cities and towns for the “right” to supply residents with TV programming. Pringle has called this an unnecessary tax and the Register agrees.

Anaheim Mayor Curt Pringle, in another of his moves to deregulate his city, told us he is working to take the government out of deciding who’s a winner in telecommunications, allowing the marketplace to determine usage and rates among providers of cable, satellite, Wi-Fi and phone company services ââ?¬â?? and any new technology that comes down the digital pike. Mr. Pringle said Anaheim approved an agreement with AT&T in March that charges no “fees.” And it is negotiating a new cable contract with Time Warner Cable that also will charge no “fees.” He said the city will lose more than $1 million in such “fees” a year by canceling its 5 percent cable “franchise fee.” But the gain is that his city is not stuck with a late-20th century regulatory model, but will enjoy a deregulated 21st century, streamlined model. He pointed out that these “fees” actually are not paid by the companies, but by customers. “There shouldn’t be a policy of encouraging which technologies have an advantage,” he said. Exactly. We suspect that, by making his city a model of telecommunications innovation, property values and business revenue increases well could generate enough new taxes to make up for the “lost” fees.

Pringle’s suggestion that cities begin to wean themselves from franchise revenues is sound advice. Cities would do well to remember that local franchise fees are not tied to all video revenues, just the revenues that are collected via cable TV model. Franchise revenues are safe as long as the service provider uses a local satellite head-end to receive hundreds of programming channels and pipe them down the cable to area homes. Should programming delivery shift to a Web-based client-server model , where the cable box works more like a web browser than a TV channel tuner, subscription-based Internet video could replace today’s downlink-and-transmit model. Under the way franchise rules work, cities can no more collect a franchise fee on these revenues any more than they can on any other on-line transaction. It is not hard to imagine a point where cable and telephone companies shift programming delivery to regional or national server farms owned and operated by a separate subsidiary, say “AT&T Content Aggregation Services,” or “Comcast Programming Inc.” These subsidiaries would compete with other third party aggregators, like iTunes, CBS Innertube or Netflix. The problem for cities is ,under this arrangement, video revenuesââ?¬â??the source of franchise fees–have been divorced from the local service provider. From a corporate point of view, AT&T and Comcast may still be programming distributors, but they won’t be managing delivery in a way that makes franchise fees possible. Don’t scoff. In addition to Innertube, which gives insight on how networks might use the Web for video services in the future, the Connecticut Department of Utilitiy Control this week tentatively ruled that AT&T’s video services ââ?¬â?? because they are IP-based and operate closer to client-server, are exempt from franchise fees.