The Benefits of Cable Competition in Wisconsin
By Christian Schneider
Table of Contents:
I. Executive Summary
For decades, video service has been static in the way it delivered television programming to homes. Either a household watched local channels via antenna, or the cable company provided service to their home through a dedicated wire. The very nature of cable programming created a "natural monopoly," in that it was costly and duplicative for competing cable companies to run their own second cable into a home. This gave cable companies a great deal of power in setting rates and dictating programming to subscribers.
Due to the monopolistic nature of cable service, local governments sought to regulate the activities of cable providers. Thus, the "municipal cable franchise" was born. A cable franchise is an agreement between a municipality and a cable provider that grants exclusivity within a municipality to the cable company in exchange for a fee and requirements to serve certain areas. In 1984, the federal government granted the Federal Communications Commission authority over cable and authorized municipalities to administer franchises.
New technologies in video service have rendered the justification for municipal cable franchises obsolete. Telecommunications companies have developed networks that provide cable-quality video over broadband networks. These networks use phone lines existing in nearly every home to deliver video service, rather than the traditional coaxial cable. These phone companies now seek to provide meaningful competition to cable companies, which currently have government-mandated protection for their market.
Wisconsin has now become the battleground for a fight between companies seeking to provide the new broadband video service and the traditional cable companies looking to preserve their franchising agreements. Telecommunications companies argue that competition is good for consumers, leading to the potential for cable rates dropping, customer service improving, and programming choices increasing when a new video provider enters a market. Municipalities and cable companies argue that the existing cable franchising structure should be applied to these new video providers to maintain municipal revenues and provide a "level playing field" for competition.
This study concludes that competition will be beneficial for Wisconsin consumers in a number of areas. First, prices for cable service will likely drop as they are forced to compete with less expensive broadband video services, while a standardized franchise would hold the line on fees and other giveaways, the cost of which are passed on to consumers. According to a 2004 study by the U.S. General Accounting Office (GAO), cable consumers in markets with wire-based competition saw an average cable bill rate drop of 23% when competition was introduced. Furthermore, the Federal Communications Commission (FCC) found 15.7% savings for communities with wireline competition. If similar savings are realized when broadband video offers competition in Wisconsin, expanded basic cable customers could see annual savings of between $82.80 and $149.01, depending on their cable market and rate of savings.
Secondly, consumers will see increased choices in programming when more video services are allowed to compete. In 2006, millions of Green Bay Packer fans were unable to watch the team's final home game against the Minnesota Vikings, as few local cable companies carried the NFL Network. In most cases, consumers didn't have the opportunity to watch the game, since cable was the only option they have. Once more competition is allowed in the video service industry, there will be more opportunities for customers to receive the programming they want.
Finally, competition would improve customer service as their video provider would have to fight for customers against a very real competitor. Additionally, consumers will be afforded better technology in video and data service as new video providers compete to deploy service to their marketplace.
Whether real competition can occur in the video market depends on the extent to which the state can facilitate entry into markets for new video companies. While competition is universally recognized as a good thing, municipalities and cable companies have a number of tools at their disposal to deter new video providers from offering service in their markets. The only way meaningful competition for video services can take place is if new providers face as few obstacles as possible in setting up their service.
This report will discuss the history of cable franchises in Wisconsin and the current status of state law regulating franchise agreements. Additionally, this study will investigate some of the franchise reform efforts taking place in states around America, how those efforts could be beneficial in Wisconsin, and discuss some of the issues pertinent to whether increased competition can help Wisconsin consumers. Finally, this study discusses the effects that wireless technological developments could have on networks that are currently being built.
One doesn't need to look too far or for too long to see examples of how quickly the technology industry moves in today's society. Consumers who buy a new computer or cell phone often find their purchases obsolete within a month. Phrases like "YouTube" and "Google" become universal phrases in the American lexicon within weeks.
Despite the explosion in new and exciting technologies, many people have yet to catch on to the benefits of these new developments. All over the country, teenagers collectively roll their eyes when their hopelessly unhip parents instruct them to get off their "e-mail machines" or not to spend too much time on "the interwebs."
Unfortunately, those parents are often light years ahead of the government in their understanding of the potential of new technology. The inherent structure of the multiple levels of U.S. government is designed to foster cautious and deliberate debate, with a variety of built in checks and balances to thwart capricious actions.
In the case of quickly evolving technology, the deliberative nature of federal, state, and local governments can often hinder important investment in and development of new technologies. Often times, up-to-the-minute technologies are forced to abide by outdated laws, which thwart their utilization.
Such is the case in the field of cable television franchising. For decades, cable television franchises have been forced into franchise agreements with municipalities for the right to provide service within that municipality's borders. In many cases, these agreements were enacted to protect local broadcast stations from the competitive threat posed by "distant television signals."1
In exchange for the monopoly of service to that city, town, or village, the cable franchise has agreed to pay a fee based on a percentage of their income to the municipality. Thus, both parties have been able to achieve their goals - the municipality receives cash to pay for local government channels, public access programming, and for other governmental services. The cable company is provided access to the public rights-of-way and has a built-in customer base, which they can serve without fear of competition.
The very nature of cable technology made these agreements possible. Providing cable programming means running a cable into a subscriber's home, which creates a "natural monopoly." As a result, cable companies have been subject to speculation that they have taken advantage of their noncompetitive agreements and raised rates regularly on their customers. According to the Federal Communications Commission, cable rates nationwide increased by 93% in the ten-year period between 1996 and 2006.2
New technology, however, is making the old set of state and federal laws governing franchise agreements and fees moot. Technology exists that provides video content over broadband (BSP) networks, and mainstream telecommunications companies have spent billions of dollars to develop such systems. Cable companies and municipalities are arguing that these types of video services violate the franchising agreements they have signed, and are making efforts to prevent implementation of the new services.
In December of 2006, the City of Milwaukee filed a lawsuit intended to prevent AT&T from providing their new 200-plus channel "U-Verse" product without a franchise. The City maintained the new service violated the terms of Time Warner's franchise agreement with the City. AT&T, disputes that their service is considered "cable television," under federal law, and believes that they should be allowed to provide the service without paying the franchise fee to the City.
Supporters of franchise deregulation argue that introducing competition into municipalities currently served by monopolistic cable franchise agreements will force rates to drop, thereby benefiting consumers. They also argue that cable companies that have chosen to provide new telephone service aren't bound by the same telecommunications regulations they are (to promote competition), so the reverse should be true when phone companies enter the video delivery service business.
Opponents of changing the current agreements argue that permitting competition will weaken franchise arrangements and will deprive municipalities of much needed revenue. In addition, public access and government information channels funded by municipalities worry that the alternative video services will not carry their content, and that they will lose revenue if franchise fees were eliminated.
Cable television service has been an issue in Wisconsin since April of 1951, when the City of Rice Lake first proposed a cable television system. In the years that followed, cable programming gained popularity in rural areas, where cable provided programming to geographic areas that were unable to receive over-the-air broadcasts.
Soon, cable systems began to spread to metropolitan areas. By 1972, there were 72 cable systems operated by 49 companies and serving 72,818 subscribers. That same year, Governor Patrick Lucey convened a 52-member task force on cable service to study the increase in cable popularity and to make recommendations to the varying levels of government that could possibly regulate cable franchises.
This commission, headed by future Governor Lee Sherman Dreyfus, issued a report in 1973 that touched on some of the important issues that would surface with regard to cable franchising in the years ahead. Most notably, the commission recommended that local governments should be allowed to charge cable franchises fees "for the cost of regulation and to pay for other services, but these other services are limited to those related to public access programming."3
When initially authorizing cable service, most municipalities had developed a process by which cable companies responded to an RFP (request for proposal).These RFPs generally provided exclusivity to a cable company within the municipality's borders, in exchange for a fee set by the municipality and charged to the cable provider.
In the years following the Lucey Commission report, disagreements surfaced as to the purpose of franchise fees. Municipalities saw franchise fees as compensation for the use of their rights-of-way, and for the right to do business within their borders. Under this scenario, cities believed that the amount of franchise fees should be negotiated in the contractual process.
On the other hand, cable companies thought franchise fees should merely be a reimbursement to municipalities for the regulatory costs that they actually incurred. Cable companies thought the revenue collected by local governments should be spent on cable-related municipal expenditures. Cable companies believed that the "compensation theory" supported by the municipalities was merely a way for cities to buy more fire trucks and police cars using revenue paid for by cable television customers.
Prior to 1972, there were no nationwide limits set on the fees a municipality could charge - one court case reported a franchise fee as high as 25%.4 In 1972, the Federal Communications Commission (FCC) imposed a three percent limit on the amount of franchise fees that could be charged by a municipality. The fee could be raised five percent if a local government demonstrated a regulatory need to do so, and if the FCC granted a waiver. Naturally, local governments opposed this action as an infringement on their ability to negotiate local franchise fees. Cable companies also complained that too many waivers were being granted, and that the higher franchise fees granted through the waivers were being used as general purpose revenue.
In October of 1979, the Wisconsin association representing local cable operators decided that they wanted to test the legality of franchise fees. A cable company in Ripon, Wisconsin, filed a lawsuit in 1982 (Ripon Cable Co. v. City of Ripon) in an attempt to have the three percent franchise fee declared invalid.
The Ripon Cable Company claimed that the fee imposed by the City of Ripon constituted a municipal income tax, which was expressly forbidden by state law. Furthermore, the cable company argued that the fee was in excess of the city's cost for "reasonable police power regulation."5
In 1984, the Fond du Lac Circuit Court sided with the cable companies on both counts and declared franchise fees invalid. This decision sent shock waves throughout the state, as cable companies began withholding their franchise fees, or paying them in protest. Municipalities immediately began looking for a new venue to challenge the court ruling, hoping to find a more favorable outcome.
Also that year, Congress passed the Cable Communications Policy Act of 1984, which significantly altered regulation of cable companies by local governments. The Act pre-empted all local rate regulation, required that a business be franchised as a cable company before they could provide cable service, and prohibited phone companies from entering the cable television business.6 The Act increased the cap on franchise fees to 5% of an operator's gross revenues, gave local governments more leeway in the use of the fees that they collected, and allowed cable companies to pass the fee on to their customers.
Additionally, the 1984 Federal Act appeared not only to explicitly declare franchise fees legal (in contrast with the Ripon decision), it also removed restrictions on how those fees could be used. Buttressed by the new law and a lawsuit filed against a cable company by the City of Sheboygan, Wisconsin municipalities sought to have this new interpretation codified in state law.
The state law change the municipalities sought came in the 1985 Wisconsin biennial budget. The original budget as proposed by Democratic Governor Tony Earl didn't contain the franchising provision, and passed the Democrat-controlled Assembly without the new change. However the Senate, also controlled by Democrats, made some substantial changes to the Assembly version of the budget. Senate Amendment 137 was a lengthy amendment that touched on a number of state issues, from hospital rates to mining regulation.
The budget bill provision wholly adopted the municipalities' position regarding franchise fees, including municipalities' right to charge them and to use the proceeds as general purpose revenue. The provision also grants municipalities the right to own and operate cable stations. (See Appendix A for the full text of the amendment).
Then-Assembly Minority Leader Tommy Thompson attempted to amend the Senate provision to prohibit franchise fees from being used as general revenue to local governments, instead requiring the fees to be used on cable-related regulatory spending. Thompson's amendment failed.
The budget bill was signed into law by Governor Earl on July 17th, 1985. By October 1st of that year, a group of legislators had already introduced a new bill seeking to undo the brand new franchising provision of state law. 1985 Assembly Bill 506, a bipartisan bill whose authors included Democrat Richard Shoemaker and Republican Thompson, would have repealed the ability of local governments to require cable companies to pay franchise fees for general revenue purposes. The bill made it to the Assembly floor, but was never brought up for a final vote, and died at the end of the 1985-87 session.
While Wisconsin law to this day remains tied to the Telecommunications Act of 1984, the federal government has since begun to retract anti-competitive portions of the 1984 Act. In the years following the 1984 Act, Congress recognized that while the number of subscribers to cable television continued to increase, competition among cable providers remained virtually non-existent. With a lack of meaningful competition, cable companies were able to increase rates with impunity. As a result, increases in cable rates far outpaced inflation in the late 1980s and early 1990s.
With this fact in mind, Congress passed the Cable Television Consumer Protection and Competition Act of 1992. In the 1992 Act, Congress stated that it wanted to promote the availability of diverse views and information, to rely on the marketplace to the maximum extent possible to achieve that availability, to ensure cable operators continue to expand their capacity and program offerings, to ensure cable operators do not have undue market power, and to ensure consumer interests are protected in the receipt of cable service. Pursuant to the Act, the FCC was ordered to adopt regulations to further these goals in order to foster more competition and lower rates for consumers.
In 1996, Congress again revisited the issue of monopolistic practices within the telecommunications industry. The Telecommunications Act of 1996 primarily revised aspects of telecommunications regulation, allowing smaller phone companies to enter the long distance telephone market, while also permitting long distance companies to enter local markets once a series of requirements were met. Additionally, the 1996 Act allowed phone companies to provide video service, and conversely allowed video companies to provide phone service, while also phasing out price controls on cable service. However, the 1996 Act did not address the use of municipal cable franchise agreements, which remain the most significant blockade to true deregulation of the cable industry.
In contrast to the flurry of activity in the 1980s and mid 1990s, telecommunications laws have remained relatively unchanged for the last decade. It has been commonly accepted that cable companies must obtain franchises with municipalities in order to offer cable service. This framework has worked well for both cable companies (who receive exclusive rights to a market) and municipalities (who receive a healthy financial free from the cable company, via their customers).
That arrangement, however, is changing rapidly. In Wisconsin, new broadband video providers have begun setting up services to provide video, internet, and other interactive features through phone lines, rather than the traditional fixed cable route. It is the technological advances that have permitted the alternative delivery of traditional programming. This competition is straining Wisconsin's regulatory structure, including Wisconsin statutes.
©2007 Wisconsin Policy Research Institute, Inc. P.O. Box 487 Thiensville, WI 53092