Telecom & Cable Regulation

Aftersimmering on the back burner for months, the debate over video franchise reform came to a rapid boil over the past two weeks, with developments seeming to bubble up on every front. Last Friday, the FCC held a meeting in Keller, Texas–not so coincidentally the site of Verizon’s FIOS TV launch last fall. At the meeting, the Commission officially adopted its annual report on video competition. On the following Monday, comments were filed in the FCC’s proceeding on whether local franchise authorities are unreasonably limiting competition by in delaying application by (former) telephone companies. Then came Tuesday’s hearing in the Senate Commerce Committee, where–you guesed it–video competiton was the issues of the day. Add to that the nearly ubiquitious advertising campaign launched by Verizon and AT&T for cable choice, and the issue was nearly impossible to avoid.

Will anything come of all this? Perhaps yes. Senator Ted Stevens–the Commerce Committee chair, made news by expressing sympathy for telephone company entry into the cable TV markets, and saying he’d soon introduce a bill to reform franchise rules. That’s good news. But what would it say? Earlier this month, Sens. Burns and Inouye teamed up to release a set of “principles” for franchise reform, which called for elimination of “unnecesary” delays in franchising, but also warned of writing a “blank check” to new entrants, and endorsing a “deliberately structured dualism” with a strong local role in regulation. Get past all the buzz words, and that’s a pretty weak brew of reform.

The Burns-Inouye principles were met (also this week) with counter-statement from a surprisingly diverse group of six senators, including Republicans John Ensign and John McCain and Democrat John Kerry. This statement, stressing the consumer benefits of broadband called for congressional action “this year” to reform franchising. This “gang of six” letter gave a nod to some continued local role, but the overall implication was clear–local regulators are slowing down competition, hurting consumers, and Congress should step in to stop that.

After this week, video franchise reform seems to have real momentum. In the Senate, the next move is up to Sen. Stevens, who’s bill is expected soon. The question is: will he take this opportunity to push for real change, or stick with politics as usual? Stay tuned.

SHARE: 8 comments

Jerry Ellig and I have been working on a study of cable franchising for the Mercatus Center that looks at the cost of franchising to consumers and what the FCC, Congress, and the states can and should do about it. Yesterday we released the bulk of it as a comment to the FCC’s franchising proceeding and as testimony to the Senate Commerce Committee, which will hold a hearing on the issue tomorrow. So if you’d like a sneak peek at the full study, check out our FCC comment as well as our Congressional testimony (PDF), which has legislative recommendations that aren’t in the comment. Our main conclusions:

• Cable franchising costs consumers over $10 billion annually in higher prices and forgone benefits. By constraining competition, local video franchising imposes significant costs on two groups of consumers. Current cable subscribers pay higher prices than they would pay if there were competition, and potential customers forego cable TV service because they believe it is too expensive at current prices.
• The FCC has the authority to preempt local franchising authority practices that act as barriers to entry and should do so.
• An even better solution would be for Congress or the states to get rid of franchising altogether or streamline it as Texas has done.

SHARE: 6 comments

Here’s another example of the ever-increasing competition in the telecom industry: BusinessWeek reports that Rupert Murdoch is considering investing a billion dollars to transform the DirecTV satellit network, which currently allows only one-way transmission of high-bandwidth content, into a full-fledged broadband network offering voice, video, and data service. That would put it squarely in competition with the cable industry and the Baby Bells, both of whom are moving toward that same type of “triple play” broadband service.

If Murdoch follows through with this, and if the Baby Bells roll out fiber-optic networks as planned, that will mean that most homes will have at least three options each for voice, video, and data services.

Actually, there are more choices than that: there are already a half-dozen mobile phone companies competing for voice business. For video, consumers have the option of broadcast TV, which now features crystal-clear picture due to digital transmission. And Internet Giants like Google, AOL, and Apple seem to be announcing new Internet video options every month. And for data, there are dedicated lines available at the high end, and dial-up modem access at the low end of the market, not to mention a growing number of WiFi hotspots. In short, the typical consumer has a dizzying array of choices for all of his telecom needs.

Why exactly are we still regulating these industries as though they’re natural monopolies?

SHARE:

Over at Brainwash, I argue that the best outcome libertarians can hope for from the telecom reform debate is probably for Congress to do nothing.

The question Congress ought to be asking is: “why are we regulating these industries at all?” Telecommunications regulations are traditionally justified as a way to limit “natural monopolies,” but there don’t seem to be any monopolies left. A sensible telecom reform would repeal the anachronistic regulations that draw increasingly meaningless distinctions among voice, video and data services. Instead, Congress is headed in precisely the opposite direction. In September, the House released a draft of proposed telecom legislation that would create three new categories of service: Broadband Internet Transmission Service (BITS), Broadband Video Service (BVS), and Voice Over Internet Protocol Service (VoIP). Each of these services would be subject to its own set of arcane regulations, which are largely focused on shoehorning 21st-century services into a 20th-century regulatory framework.

Obviously, it would be great if Congress saw the light and passed genuine deregulation. But I think the odds of that are very, very low. And as I argue in the essay, the 1996 Telecom Act is now so out of touch with reality that it amounts to de facto deregulation, as the FCC just doesn’t have the authority to regulate the latest technologies. Let’s hope it stays that way.

SHARE: 2 comments

James’s post in defense of a la carte makes me think that a big part of what’s going on in this debate is ambiguity and confusion regarding what exactly counts as “a la carte.” As my recent article suggests, most a la carte activists seem to imagine that, if the standard cable tier gives you 50 channels for $50/month, then you should be able to buy 10 channels for $10/month, or one channel for $1/month.

That is, of course, absurd. It would be great for consumers if it were possible, but the problem is that the cable companies would go bankrupt. It costs a lot more than $1 to deliver that one channel to the customer’s home. That’s why, if forced to adopt a “pure” a la carte model, channels would have to set the per-channel cost much higher than $1–probably more like $5-10 per channel. It should be obvious that consumers wouldn’t benefit from that.

But if we relax our definition of “a la carte,” it’s possible to imagine a model that could work. Consider a world in which every subscriber pays a $40 access fee, and then chooses channels “a la carte” for 25 cents apiece. This is, technically speaking, an a la carte system, and it would probably work just fine: at 25 cents apiece, most consumers would probably take 30 or 40 channels, roughly approximating the status quo. This could plausibly be called an “a la carte system,” and it might work just fine.

Now consider a third system, with one minor change: the cable company decides to throw C-SPAN into the basic package for free, and tacks on 6 cents to cover the subscriber fee. (If I remember correctly, this is what C-SPAN charges per subscriber) My question is: has this ceased to be an a la carte system? After all, consumers are now being “forced” to buy C-SPAN in order to get other cable channels. But it’s hard to imagine cable customer being outraged at a 6-cent hike in their bills.

What’s going on is that your monthly cable bill is actually paying for two things: the programming and the infrastrcture necessary to deliver the programming. What people don’t seem to understand is that the infrastructure is by far the largest fraction of the bill. According to this article, the average cable bill is $45 for 64 channels. Of that, $45, only $14 goes to cable networks for the cost of content. The remainder, $31, goes to cover the cable company’s own costs.

To bring this back to James’s article, I suspect the systems the Baby Bells are rolling out will be “a la carte” only in the third sense described above. There will doubtless be a basic access fee that will apply to everyone who gets the service. There’s also likely to be some content, such as C-SPAN and PBS, included for free with the basic IPTV service.

But the fact is, the current cable industry is already a la carte in this sense. There’s some content available with the basic package, and then there is other content–“premium” channels, pay-per-view content, on demand movies–that is offered “a la carte.” The only difference is a matter of degree: the Baby Bells might be putting less content in the “basic” bundle, while the cable companies are putting more.

If that’s how we’re defining the terms, it’s not clear what’s being argued about. Of course a la carte, defined in this loose sense, “works.” No sane person would claim otherwise. The debate is whether “pure” a la carte, in which there is no “basic” bundle, can “work.” I think the answer to that is clearly no, and I’ll be shocked if the Baby Bells ever offer such a pricing structure.

SHARE: 24 comments

The idea of a la carte pricing for cable television has taken a beating since Kevin Martin suggested it in a congressional forum a few weeks ago. (For some good pieces by my TLF colleagues, look here, here, and here. It’s clear that a la carte pricing is no free lunch for consumers (no pun), and that there have long been good business reasons for maintaining a system of packaging channels. But nothing ever stays the same in fast-changing tech markets, and that may apply to cable pricing as well. In a just-released Heritage Foundation paper, I argue that while regulation to force a la carte would be unwise, there’s a good possibility that the markeplace–without regulation–may soon provide it. Specifically, new competition by former phone companies Verizon and AT&T could upset the cable pricing applecart, and perhaps lead to a la carte pricing–or something close to it. As explained in the paper:

Continue reading →

SHARE: 2 comments

So I’m working on a paper on cable franchising and was reading the FCC’s latest proposed rulemaking on the topic (PDF). In it they claim the authority to preempt local franchise regulations that are barriers to entry. They FCC finds authority to do this in Section 621(a)(1) of the Communications Act, which states that local authorities “may not unreasonably refuse to award an additional competitive franchise.” So far so good.

I get to the last item in their “authority” section and there they ask, “Finally, we seek comment on possible sources of Commission authority, other than Section 621(a)(1), to address problems caused by the local franchising process. For example … could the Commission take action to address franchise-related concerns pursuant to Section 706?” So I ask myself, what’s Section 706? Imagine my surprise when I turned to that section and found, “SEC. 706. [47 U.S.C. 606] WAR EMERGENCY–POWERS OF PRESIDENT.” The section goes on to say that in time of war the president can commandeer the airwaves and other communications facilities, etc.

This has got to be a typo. Right?

SHARE: 8 comments