The FCC and Franchise Reform

When the FCC released its Section 621 Order last week, ostensibly pre-empting local franchise authorities on what they could and could not include in their agreements with cable TV and phone companies, the two sides broke predictably. Chairman Kevin Martin, the Republican appointee of President George W. Bush, and his two fellow GOPers, wrote of the need to break down barriers to entry that still exist within the franchising process, despite past efforts by the FCC to bring them in line with the spirit, if not the letter, current federal cable TV law. The two Democrats, Michael Copps and Jonathan Adelstein, let their dissent be known. Martin is right but not because he’s a Republican. The pity is that fight over video franchise reform, like network neutrality, is largely political. I can easily imagine, in some inverse dimension, that a Democrat FCC chairman is in favor of franchise reform while a Republican minority lines up against it. After all, William Kennard, FCC chairman under Clinton, clearly understood the way technology was changing the regulations and was quite pro-market. And in the past, Republicans have had issued with federal pre-emption. Martin is right because he understands the way video entertainment is changing. Competition stands to boost bandwidth, choices and services. He’s also correct to ask if the Cable Act and the FCC’s earlier requirements really working to spark competition. Economists such as Thomas Hazlett have doubted it for a long time. Hazlett is particularly critical if build-out requirements, which are specified in the name of creating a “level playing field,” but in fact have the opposite effect. Hazlett wrote in a 2006 paper:

“A widespread provision in existing cable franchises states that the operator is required to build-out any part of the market where density is thirty homes per mile or more (average U.S. cable density is approximately 100 homes per mile). Assuming standard industry costs for a state of the art system and national averages for penetration (subscribers per home passed) and gross operating profits produces a financial analysis showing that a monopoly cable franchise can expect to break even at just under 30 homes per plant mile, i.e., below the density of the build-out requirement. But using precisely these numbers to gauge the entry of a competitive firm reveals that break even build-out occurs at about 65 homes per mile. With only about half as many anticipated subscribers and prices expected to decline by at least fifteen percent, the entrant is heavily taxed by imposition of a provision that costs the incumbent monopolist nothing, as the territory “required” to be built would be profitable to serve on its own.”

In addition to build-out requirements, the FCC specifically came out against negotiation delays and “nonprice concessions,” the practice of extracting as many municipal freebies as possible from the franchisee, ranging from parking lots to swimming pools. Besides, how long can this model keep up? Statewide franchising is a step in the direction of deregulation, at that alone makes it praiseworthy. It will accelerate competition, but in the long run, it essentially migrates a local regulatory regime to the state level, especially when PEG channels and build-out requirements are retained. The overall significance of the FCC ruling is that it attempts to push local franchise authorities to deal with media delivery in 2007. Whether the FCC is successful is another thing. But groups like the National League of Cities, which continue to fight for the status quo, may not only be on the wrong side of debate, they may be caught on the wrong side service evolution. Internet and TV are melding. PEG channels may indeed be costly and unreasonable when there’s YouTube. I’ve written before that the local franchise model is tied to the cable model developed more than 40 years ago. While the era of the programming grid may not be over, many people don’t watch “regularly scheduled programs” anymore. Ironically, if franchising rules keep the cost of competitive entry high, that by itself may accelerate the push for alternate means of video delivery, starting with various forms of IPTV. The ultimate franchise “reform” may turn out to be slow devaluation of franchises over time.