The Case For Video Franchising Just Got More Difficult

The new year may bring some more traction on video franchise fee reform. Texas led the way last year, passing a bill that gives Austin the authority to grant statewide video franchises, eliminating the need for a would-be competitor to negotiate terms with every political subdivision in the Lone Star State. Virginia has similar legislation on the docket. An omnibus reform bill that could be introduced as early as this week in Indiana reportedly includes a statewide video franchising provision. As the telephone companies begin to deploy DSL platforms robust enough to support broadcast quality video (AT&T) or full-blown fiber-to-the-home (Verizon), the prospect there being more competition for the local cable company has intensified pressure within state legislatures to speed the franchising process along. Even consumer advocates, not always the industry’s best friends, like the idea. The downside for municipalities, of course, is that it takes control of a captive revenue source out of their hands. While the Texas bill is indeed speeding competition to consumers (see my Dec. 22 entry “BPL Takes Another Step”), it was at heart, a compromise bill, uniformly granting cities and towns a five percent kickback on revenues accrued from video services. So while the franchising process was accelerated, at the end of the day, Texas did little but migrate the same questionable regulatory mechanism from the local level to the state level. Questionable because the reality of competition, converged services and Internet video downloading raise new issues about the how appropriate, effective or fair a video franchise fee regime is. Diane S. Katz, policy analyst at the Mackinac Institute for Public Policy in Michigan made some excellent points in her recent testimony to the National Council of State Legislatures and American Legislative Exchange Council. Now, given news this week from the Winter Consumer Electronics Show, it becomes easier to see how video franchise fees stand to become a discriminatory tax on one class of providers, while providing an arbitrage opportunity for consumers and programming distributors. This week at CES, Starz, the premium cable network, announced it would be offering a $9.99 a month subscription service, called Vongo, that will let users download movies over the Internet to anyone of several devices. Other programmers are developing similar services, all of which raise the question as to who, if anyone, should be paying special fees for the “right” to offer video services via the Internet. For example, in Texas, if AT&T were to partner with Starz to deliver movies over AT&T’s DSL lines as part of an AT&T branded video over DSL service, an AT&T customer would pay a 5 percent franchise tax on each on-demand download. If, however, that same AT&T DSL customer downloads a movie from Starz’ Vongo service, which is marketed and billed separately from AT&T, no “franchise fee” could be assessed. This is just one of the problems this franchise structure creates. In essence, it penalizes co-branding and co-billing of video delivery via the Internet. According to the Wall Street Journal, AOL, ESPN, MTV and Comedy Central all have plans to make fee-based video content available via the Web. Because the content will be designed to download via IP to any device via any type of wired or wireless network, and then port to a TV, it will be extremely difficult to define “video service provider” let alone collect revenue-based fees on downloaded video.