Two Cheers for California’s Cable Franchise Reform

Consumers get more choices for Internet, cable and phone services

The market for cable television and broadband services may experience a significant change if a bill recently passed by the California Assembly becomes law. The legislation, A.B. 2987, sponsored by Assembly Speaker Fabian Núñez (D-Los Angeles) and Assemblyman Lloyd Levine (D-Van Nuys), would reform the anachronistic cable franchise system by eliminating the costly practice for providers of obtaining cable franchises city by city. The change is intended to open up cable competition to telephone companies and others and offer consumers greater choice and lower cable bills.

Several other states have passed similar cable franchise reform laws, and the U.S. House of Representatives just last week passed legislation (H.R. 5252) that would allow companies to apply for a nationwide television service license.

Currently, a cable provider would need to gain the approval of over 500 separate franchises from local governments to provide service across the entire state. The TV franchising process alone typically takes 6 to 18 months, resulting in significant costs. Reduction of these costs is expected to open up competition, leading to greater choice and reduced prices for cable television, high-speed Internet access, and Internet-based phone services.

A 2005 study analyzing FCC data on competitive and noncompetitive cable markets found that subscription rates for basic and expanded basic services averaged 16 percent less in competitive markets. In addition, a January 2006 Bank of America study concluded that when new competitors have entered a cable market, existing providers have dropped prices by 28 to 42 percent. Moreover a 2006 Phoenix Center study estimated that if cable competition were to be delayed another four years, consumers will end up spending $30 billion more nationwide than under a more open market with franchise reform, including $3.1 billion just in California.

Even though Congress prohibited local governments from granting exclusive franchises after December 4, 1992, monopolies persist in most areas because of the artificially high barriers to entry caused by unnecessary existing regulations. Today, only a few areas of the state have multiple video operators, largely because of the high costs to enter the market. It should come as no surprise that cable rates have increased nationally by 86 percent over the past 10 years, while voice and data services have realized significant price decreases.

The benefits of A.B. 2987 notwithstanding, it is not without its drawbacks. While it eliminates the city-to-city quest for franchise approval, instead of abolishing the practice altogether, it centralizes franchise approval authority in the Department of Consumer Affairs. Thus, providers still must seek the government’s permission to conduct business.

Cable providers will also still be subject to numerous “public interest” regulations. They would still be forced to carry a number of “public, educational, and government” channels (or contribute a portion of their gross revenues to support such programming) that their viewers may not want or that may not be economically justifiable. Furthermore, government will continue to dictate where providers may offer their services through “anti-redlining” provisions that force providers to offer all services to all areas, not just higher-income neighborhoods. Competition makes this less of a concern today than it did 30 or 40 years ago anyway, but companies should have the right to do business where they want and to offer new or higher-quality services to higher-income areas to test new technologies and more quickly recoup their investment costs. After all, digital and on-demand cable service is hardly an unalienable right!

Perhaps the greatest concern, however, is that the concentration of franchise power in the state could actually lead to higher franchise costs and more burdensome regulation in the long run. One of the common complaints of cable and telephone companies is that local governments often engage in extortion by conditioning franchises on payments for numerous pet projects or social causes that may have nothing to do with the franchisee’s business. The possibility arises that. if the state is experiencing a budget crunch or an influential politician has a program he wants others to pay for, a cable company could not do business within the entire state unless it agreed to pay the requisite tribute.

While A.B. 2987 represents a step in the right direction, it does not address the heart of the problem: government regulation itself. Replacing one set of regulations with another set of slightly more efficient or less burdensome regulations is always welcome, but in this case doing so still preserves the general regulatory structure that has led to artificially high prices and has stifled both consumer choice and cable and broadband investment. To truly benefit consumers and businesses, policymakers must strike at the root of the problem and eliminate such unnecessary regulation altogether.

Adam B. Summers is a policy analyst at Reason Foundation. An archive of his work is here and Reason’s telecom research and commentary is here. This column originally appeared at the Libertarian Perspective.