David
G. Tuerck
September
1991
Cable
subscribers should watch out: Congress and local governments
want to "help" them by reregulating cable television
companies. In July the Federal Communications Commission issued
a ruling that represents the first step toward the reregulation
of cable TV rates. The new ruling permits local governments
to regulate markets with fewer than six local broadcasters.
Under FCC rules in effect since cable TV was deregulated in
1987, regulation was permitted only if there were fewer than
three local broadcasters. The new ruling increases the fraction
of cable systems subject to regulation from just a little over
zero to more than 60 percent.
Further
trouble lies ahead in the form of a US Senate bill, "The
Cable Television Consumer Protection Act of 1991." This
bill forces cable TV operators to offer programming developed
at their own expense to their competitors. It also expands the
power of local governments to offer or deny cable franchises
and gives the FCC new powers to regulate rates.
Proponents
of the bill say reregulation is needed as the result of rate
increases and service problems that initially followed deregulation.
After deregulation basic cable rates did rise faster than the
rate of inflation and customers had problems with service. On
the other hand, the cost per channel for basic service has remained
about constant as operators have increased significantly the
number of channels offered. Cable operators have invested several
billion dollars in new programming and distribution methods.
And industry leaders have promulgated new customer service standards.
While
these developments are of interest to cable TV customers, they
do not explain the impetus behind reregulation. The impetus
comes, not so much from consumers, but from the municipalities
that have made themselves the principal beneficiaries of the
cable TV franchise system. Under that system a cable operator
must obtain a franchise from the local government to go into
business. To get a franchise, the operator must typically give
local programmers free access to its system and pay the local
government 5 percent of gross revenues.
Cable
operators now pay local governments more than $700 million a
year in franchise fees. That is more than $1 per month on every
subscriber's bill. The fiscal crisis facing many state and local
governments is likely to increase this amount, as the franchise
fee is seen as an increasingly attractive source of revenue.
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Ironically,
though, head-to-head competition is just what local governments
don't want. Once a second operator enters a market, the
whole idea of a cable franchise collapses and, with it,
the possibility of charging a franchise fee and extracting
other benefits for local government.
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Massachusetts
municipalities have sponsored legislation that would
permit them to impose franchise fees without having
first to ask permission of the state legislature. One
proponent of this legislation complains of cable operators
who "generate huge revenues and give very little
back to towns they operate in."
For
cable operators, therefore, the squeeze is on. As Congress
pushes on one side for reregulation, local governments
push on the other for more franchise fees. Ironically,
this puts the squeeze on consumers, too, as franchise
fees and the burden of dealing with local bureaucracies
and special interests drive up cable companies' costs
and rates.
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Defenders of this state of affairs argue that cable TV is a
"natural monopoly." According to this argument, a
cable TV operator must make a substantial initial investment
in its distribution system to serve a particular market. After
it makes that investment, almost all of its distribution costs
are fixed. No prospective competitor will attempt to compete
with an established operator for its customers, and a established
operator will be in a position to extract monopoly rates and
profits.
Reregulation
is, by this argument, necessary for keeping rates down. Franchise
fees are necessary to make sure the operator "gives back"
something to the locality it serves.
Experience
shows this risk is real: There are instances of head-to-head
competition between alternative cable operators serving the
same market. Ironically, though, head-to-head competition is
just what local governments don't want. Once a second operator
enters a market, the whole idea of a cable franchise collapses
and, with it, the possibility of charging a franchise fee and
extracting other benefits for local government.
Moreover,
cable will increasingly face competition not only from over-the-air
local broadcasters, who provide their television for free but
new, emerging technologies. Microwave systems that deliver dozens
of channels are sprouting up in many cities, aided by new fee
rates designed to encourage their development. And direct broadcast
satellites are scheduled to launch in the years ahead.
The
solution to the cable TV "problem," then, is not reregulation
by cities, but less city regulation. Cities should encourage
alternative cable operators, as well as alternative distribution
systems like satellite master antenna television, direct broadcast
satellite television and multichannel multiport distribution
systems.
And
Congress should let the marketplace work. It is time to take
the squeeze off cable TV operators and their customers.
David
G. Tuerck is executive director of the Beacon Hill Institute
and chairman and professor of economics at Suffolk University.
This article first appeared in The
Boston Globe September 10, 1991.
Format
revised on 18 August, 2004
