shim
bannergifinrootfolder

 

 

 
 

Time to leave cable TV alone

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.

 


   
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.
 

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.


   


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

   
shim