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Franchising Détente: Is it Possible?

  Progress Snapshot
Release 1.25 December 2005

by Ray Gifford *

This year's version of the telecom regulatory wars is local video franchising. Before, the narrative had the big old bad Bell companies (unsuccessfully) trying to hold off competition from competitive phone providers with cries of "cream skimming," "redlining," and regulatory asymmetry. This year's war has cable companies trying to block Bell intruders from video with cries that, without local franchises, there will be "cream skimming," "redlining" and regulatory asymmetry. It remains a tired narrative, but not without its truth.

These past few months have seen the FCC issue a Notice of Proposed Rulemaking concerning franchising, the gist of which is to try to speed up competitive entry into video markets. Earlier, the Bell video entrants triumphed in Texas with a law that allows immediate statewide video franchising, surpassing the slow and costly city-by-city process. Similarly, bills in Congress like the Blackburn franchising bill and the Barton staff draft (V. 2.0) evince congressional momentum to hasten Bell entry into video markets.

More competition is of course better for consumers. Despite some rather exaggerated and unavailing attempts by the Bells to attribute rising cable rates to quasi-monopoly rents as opposed to increased services and programming costs, the core argument is correct: more entry and more competition, more quickly is better for consumers. Therefore, the Bell-inspired effort to speed up video market entry is to be welcomed.

At the same time, the cable providers are justified in protesting the one-sided thrust of many of these efforts. Like AT&T's complaints about long distance market entry and the Bells' complaints about CLEC entry into telephony, the move to allow quick entry into video comes with a degree of opportunism. Regulatory asymmetries that hold incumbents captive to old franchising rules and burdens, while allowing new entrants to avoid those burdens, contain manifest inequity. Furthermore, they dampen the very competitive vigor that more competition is supposed to bring.

It is true that cable companies through franchises assumed certain 'universal service' and public interest obligations (like PEG channels). These franchising obligations are analogous the provider of last resort and universal service obligations that the Bells assumed under state public utility laws. Universal service obligations inherently involve some sort of cross-subsidy, for otherwise no such obligation would be necessary. But competition, it has been wisely said, [1] is the enemy of cross-subsidy. Accordingly, both local franchising authorities and incumbent firms need to realize that the days of using franchises to accomplish universal service are over. You can have a universal service mandate, or you can have competition, but you cannot have both and expect true competitive outcomes. More to the point, experience shows that universal service is better accomplished through competition than government subsidies.

The answer then is to make video entry quick, easy and as costless as possible for all providers - incumbents and newcomers. While localities deserve compensation for use of their rights-of-way and the prerogative to regulate that access, franchising as it is practiced goes far beyond this modest legitimate end. Instead, franchising - if it is to continue to exist as all - should be a simple access to rights-of-way agreement, with possibly a temporary tax - euphemistically called a "franchise fee" - to ease the transition for localities. But, in the end, franchises are archaic regulatory devices that should be done away with for all providers. If there is an issue in replacing "franchise fees," that is properly a tax policy question of whether video service should be taxed differently by localities than any other good or service.

But what of the cable incumbents' legacies of increased costs to meet that "universal service" obligation? Notionally, if the costs can be quantified, there could be some sort of entry payment to share those costs equitably. However, this seems unnecessarily complicated, is an entry barrier in and of itself, and is not something we did when new entrants joined long distance or local telecommunications markets; nor in the case of satellite entry into video markets. Instead, a rough justice principle - like we applied in the telephony situations - would hold that the incumbents have inherent advantages conferred by being the first entrant. Customers in these markets are "sticky" and not readily dislodged. Transitions to a competitive market are not possible to achieve with perfect equity. Regulatory hangovers are inevitable, so the goal should simply be to minimize the most glaring ones where possible without creating new complexity. At the very least, the burden should be on the incumbent to quantify any costs associated with asymmetrical regulation, and to propose a solution to rectify this asymmetry.

Room for Détente?

There is still a hope for détente in the franchising arena, no matter how naïve that may sound. It is to be expected that companies will use the regulatory and political process to gain advantage and disadvantage their rivals. But the continued game of regulatory trench warfare - attack for regulatory advantage here, hunker down to defend a core market through keeping regulatory barriers there -- is costly and only forestalls the inevitable. In every communications market since the 1980s, policymakers have opted rightly for more competition. What's more, regulatory trench warfare is distracting. The competition here is for the consumer - his eyes, ears and keyboard-clattering fingers. Use of regulation to protect markets shows contempt for consumers and a lack of confidence in a firm's ability to compete for that customer. Concentrate on winning the competitive battle, and success will follow.

The FCC has plotted a direction toward more competition, faster. This is a salutary policy direction and should be embraced by all players, cable and Bell . These firms intuitively understand that competition in the digital age is not about the old discrete video, telephony and newer Internet access markets, but rather for the converged market. In that market, it follows that it is better for all players to compete in a stable, defined legal universe governed by property rights and private contacts, rather than one of constant and indefinite regulatory intrigue.

Détente is possible if all players unite to remove regulatory burdens and barriers for all providers equally. This may take vision beyond immediate, short-term advantages. All the same, the ardor of forces that would continue regulating pipes as public utilities is not flagging; to the contrary, it is only morphing into new catchwords like 'net neutrality' and mandatory interconnection. Continuing squabbles where providers argue for regulatory freedom for themselves, but continued burdens for rivals, or worse, burdening all players with old regulations diminishes the credibility of those arguing for regulatory freedom and property rights. Franchising détente is not just salutary, but necessary if this vision is to prevail.


* Raymond L. Gifford is President and Senior Fellow at The Progress & Freedom Foundation. The views expressed here are his own and do not necessarily reflect those of The Progress & Freedom Foundation, its officers or Board Members.

1. Attributed to former Antitrust Division Chief Economist Lawrence White by former FCC Chief Economist Joe Farrell




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