The market for cable television and broadband
services may experience a significant change if a
bill recently passed by the California Assembly
becomes law. The legislation, A.B. 2987, sponsored
by Assembly Speaker Fabian Núñez (D-Los Angeles)
and Assemblyman Lloyd Levine (D-Van Nuys), would
reform the anachronistic cable franchise system by
eliminating the costly practice for providers of
obtaining cable franchises city by city. The
change is intended to open up cable competition to
telephone companies and others and offer consumers
greater choice and lower cable bills.

Several other states have passed similar cable
franchise reform laws, and the U.S. House of
Representatives just last week passed legislation
(H.R. 5252) that would allow companies to apply
for a nationwide television service license.

Currently, a cable provider would need to gain
the approval of over 500 separate franchises from
local governments to provide service across the
entire state. The TV franchising process alone
typically takes 6 to 18 months, resulting in
significant costs.

Reduction of these costs is expected to open up
competition,leading to greater choice and reduced
prices for cable television, high-speed Internet
access, and Internet-based phone services.

A 2005 study analyzing FCC data on competitive
and noncompetitive cable markets found that
subscription rates for basic and expanded basic
services averaged 16 percent less in competitive
markets. In addition, a January 2006 Bank of
America study concluded that when new competitors
have entered a cable market, existing providers
have dropped prices by 28 to 42 percent. Moreover,
a 2006 Phoenix Center study estimated that if
cable competition were to be delayed another four
years, consumers will end up spending $30 billion
more nationwide than under a more open market with
franchise reform, including $3.1 billion just in
California.

Even though Congress prohibited local
governments from granting exclusive franchises
after December 4, 1992, monopolies persist in most
areas because of the artificially high barriers to
entry caused by unnecessary existing
regulations. Today, only a few areas of the state
have multiple video operators, largely because of
the high costs to enter the market. It should come
as no surprise that cable rates have increased
nationally by 86 percent over the past 10 years,
while voice and data services have realized
significant price decreases.

The benefits of A.B. 2987 notwithstanding, it
is not without its drawbacks. While it eliminates
the city-to-city quest for franchise approval,
instead of abolishing the practice altogether, it
centralizes franchise approval authority in the
Department of Consumer Affairs. Thus, providers
still must seek the government's permission to
conduct business.

Cable providers will also still be subject to
numerous "public interest"
regulations. They would still be forced to carry a
number of "public, educational, and
government" channels (or contribute a portion
of their gross revenues to support such
programming) that their viewers may not want or
that may not be economically
justifiable. Furthermore, government will continue
to dictate where providers may offer their
services through "anti-redlining"
provisions that force providers to offer all
services to all areas, not just higher-income
neighborhoods. Competition makes this less of a
concern today than it did 30 or 40 years ago
anyway, but companies should have the right to do
business where they want and to offer new or
higher-quality services to higher-income areas to
test new technologies and more quickly recoup
their investment costs. After all, digital and
on-demand cable service is hardly an unalienable
right!

Perhaps the greatest concern, however, is that
the concentration of franchise power in the state
could actually lead to higher franchise costs and
more burdensome regulation in the long run. One of
the common complaints of cable and telephone
companies is that local governments often engage
in extortion by conditioning franchises on
payments for numerous pet projects or social
causes that may have nothing to do with the
franchisee's business. The possibility arises
that. if the state is experiencing a budget crunch
or an influential politician has a program he
wants others to pay for, a cable company could not
do business within the entire state unless it
agreed to pay the requisite tribute.

While A.B. 2987 represents a step in the right
direction, it does not address the heart of the
problem: government regulation itself. Replacing
one set of regulations with another set of
slightly more efficient or less burdensome
regulations is always welcome, but in this case
doing so still preserves the general regulatory
structure that has led to artificially high prices
and has stifled both consumer choice and cable and
broadband investment. To truly benefit consumers
and businesses, policymakers must strike at the
root of the problem and eliminate such unnecessary
regulation altogether.