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Ellig Cable Franchising Feb 2006
Ellig Cable Franchising Feb 2006
Ellig Cable Franchising Feb 2006
Ellig Cable Franchising Feb 2006
Ellig Cable Franchising Feb 2006
Ellig Cable Franchising Feb 2006
Ellig Cable Franchising Feb 2006
Ellig Cable Franchising Feb 2006
Ellig Cable Franchising Feb 2006
Ellig Cable Franchising Feb 2006
Ellig Cable Franchising Feb 2006
Ellig Cable Franchising Feb 2006
Ellig Cable Franchising Feb 2006
Ellig Cable Franchising Feb 2006
Ellig Cable Franchising Feb 2006
Ellig Cable Franchising Feb 2006
Ellig Cable Franchising Feb 2006
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Ellig Cable Franchising Feb 2006

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  • 1. Video Franchising Regulation Jerry Ellig Senior Research Fellow
  • 2. Brief pre-history
    • Cable often had monopoly franchises
    • 1987-99: On-again, off-again price regulation
    • Local authority can now regulate “basic” price only if cable lacks effective competition
    • Franchising in 1992 Cable Act
      • Monopoly franchises prohibited
      • Local authority may not “unreasonably refuse” to award a competitive franchise
  • 3. What’s up now?
    • New entrants claim franchising is still a barrier
    • Proposed federal legislation
    • 2005 Texas legislation
    • Ongoing FCC proceeding
      • FCC claims authority to define “unreasonable”
      • Seeks comment on what should be considered unreasonable
    • Senate Commerce hearings
  • 4. Basic elements of franchising
    • Firm gets permission to use rights-of-way and enter market
    • Franchise fee (capped at 5%)
    • “ Nonprice concessions”
    • Price regulation of basic service if effective competition is absent
  • 5. Economic justifications for franchise monopoly
    • Unsustainable natural monopoly
      • Never proven, frequently refuted
      • Requires effective price regulation
    • Specific capital and risk reduction
      • Unclear if possible in theory
      • Never proven
      • Requires effective price regulation
    • Management of rights-of-way
      • Requires pricing or rules, not monopoly
      • Irrelevant for entrants already using rights-of-way
  • 6. Actual effects of franchise monopoly
    • Market power raises price
    • Nonprice concessions raise costs
      • 16% of capital and 11% of operating costs in 1984 survey
    • 5% maximum franchise fee raises price
  • 7. Wireline competition (FCC data 2002-04)
    • “Monthly rate” 12-15% lower with competition
    • 6-7% more channels
    • Price per channel 19-21% lower
    • Digital tier 3-6% lower
    • 5-7% more digital channels
    • Price per digital channel 6-12% lower
  • 8. Raw averages may mislead
    • Some markets may be mis-classified
    • Need to control for other factors affecting prices
    • GAO study addresses both problems
  • 9. GAO analyses
    • 2004: cable rates 16 percent lower with direct wireline competition, after controlling for other factors
    • Paired case study finds 15-41 percent rate difference
    • Consistent with 20 years of government and independent research finding wireline competition lowers cable rates
  • 10. Total wealth transfers $8.4 billion Total $2.4 billion Franchise fees $113 million Price increase for digital tier $5.9 billion Price increase for basic, extended basic, and equip
  • 11. Deadweight loss (value consumers lose due to decreased consumption)
    • Market power: $1 billion
    • Market power + franchise fees: $1.7 billion
    • Does not include effects of nonprice concessions
  • 12. Total Consumer Costs
    • Market Power: $7 billion
    • Market Power + Franchise Fees:
    • $10.1 billion
  • 13. Caveats to our estimates
    • “ Partial equilibrium” estimate of market power effect
    • Assumes pass-through of franchise fee
    • Excludes effect of nonprice concessions
    • Some benefits may accrue to satellite TV customers
  • 14. Local authorities’ incentives
    • Municipal governments discovered that they could extract substantial rents by awarding licenses on favorable terms to the applicant. In the 1960s, New York Mayor John Lindsay proclaimed cable franchises “urban oil wells beneath our city streets.” This produced a decided bias in favor of monopoly, which would improve expected returns and so raise the “bid” from prospective applicants.
    • -- Thomas Hazlett
    • Cable Television , in Handbook of Telecommunications Economics: Technology Evolution and the Internet, Vol. 2, (Sumit K. Majumdar et al. eds., Elsevier Science 2006).
  • 15. “Unreasonable” practices?
    • Refusal based on natural monopoly, risk reduction, or rights-of-way management unsupported by overwhelming empirical evidence that monopoly is necessary
    • “ Nonprice concessions” unrelated to cable system
    • Excessive delay in making decision (120 days?)
    • Aspects of “level playing field” laws
      • Capital expenditures equal to incumbent
      • Serve all of incumbent’s area
      • Buildout requirement faster than incumbent’s actual buildout
  • 16. What FCC can’t do on its own
    • Provide alternative to local franchising
    • Exempt one-way video with minimal subscriber interaction from franchising
    • Alter costly PEG or other requirements in law
    • Reduce franchise fee below maximum in law
  • 17. For further information
    • Jerry Brito and Jerry Ellig, written testimony to Senate Commerce Committee, available at
    • http://www.mercatus.org/regulatorystudies/article.php/1540.html
    • Research by Tom Hazlett:
    • Private Monopoly and the Public Interest: An Economic Analysis of the Cable TV Franchise, U. Pennsylvania Law Review (July 1986).
    • Duopolistic Competition in Cable TV: Implications for Public Policy, Yale Journal on Regulation (Winter 1990)
    • The Fallacy of Regulatory Symmetry: An Economic Analysis of Level Playing Field Statutes in Cable TV (with G. Ford), Business & Economics (April 2001).
    • “ Cable Television,” Chapter 6 in Handbook of Telecommunications Economics, Vol. II (2005), http://mason.gmu.edu/~thazlett/

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