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Press Release

    Cable Needs Competition, Not Monopolies

    04/28/2005

    A considerable debate has emerged surrounding Rep. Phil King’s recent bill, H.B. 3179, which has become the fault line in a battle between those trying to preserve a government-granted monopoly and the would-be competitors seeking to break into the market. Much of the early rhetoric targeted the “communications fee” in the bill, but this is just a sideshow to the much more important question of whether or not cable television will face new competitors in the marketplace.

    To be sure, the communications fee has been a key concern for municipalities desperate for revenues, but in an emerging competitive market that is based on risk rather than monopoly privilege, it may no longer make sense to deputize communications providers as tax collectors. The revenues fund the general budgets of these municipalities and have little to do with the provision of communications services. The fees may better be viewed like any other tax that individuals must pay, and, as such, they should be put forward to allow taxpayers an opportunity to vote on what they view as the appropriate tax burden. This may be why the section on communications fees was stripped from the bill that ultimately passed the House Regulated Industries Committee by a 5 to 0 vote.

    This shifts the focus of attention to the heart of the bill, which determines the ability of phone companies and other video service providers to offer video services in markets where cable television claims a monopoly. The revolution in telecommunications is breaking down barriers and monopoly providers no longer have the protection and guaranteed profits that once existed. Wireless telephone service is surpassing land lines, cable companies are providing telephone services, and now phone companies want to provide video services. Given the degree of competition, entering new markets entails a risk that did not exist when each monopolist tended its own fields and paid the state or local government for the opportunity to do so in a risk-free monopoly environment.

    In today’s market the lines have blurred. Testifying before the U.S. House of Representatives about competing against phone companies in the broadband market, Robert Sachs, President of the National Cable and Telecommunications Association. stated the FCC “should adopt ‘deregulatory parity’—that is, the Commission should remove regulatory constraints, not add new ones.” When discussing whether cable companies should be required to comply with regulations that applied only to phone companies, Sachs went on to say, “Imposing those legacy regulations—and the costs associated with them—on cable for no reason other than to achieve regulatory parity will harm consumers by raising the price or lowering the quality of cable modem service. It would provide a disincentive for new investment (emphasis added).

    This advice holds true in the current debate in Texas, and that is what the efforts to reform and modernize telecommunications in Texas are attempting to do. This time, however, cable companies are the ones facing the threat of competition. Cable companies oppose H.B. 3179 because it would open their monopoly franchises to a powerful new source of competition from video services over fiber optic phone lines. One way to stifle this threat is to impose new regulatory burdens on any potential competitor. Raising the costs and uncertainties facing potential rivals would undoubtedly make entry cost-prohibitive. Cable’s call for any new entrant to be required to build out to the entire existing cable franchise before it can service one new customer is an attempt to impose legacy regulations on the emerging new market. But today’s market is different. New entrants make investments with no guaranteed rate of return; they do not have a monopoly that ensures they will recoup their costs. They must compete with incumbent cable companies as well as satellite providers.

    This is not the first time cable companies have attempted to thwart competition through regulation. In the 1980s, “level playing field” laws emerged that prohibited municipalities from granting licenses to additional cable television operators “without imposing franchise requirements as ‘burdensome’ as those levied on the first entrant, and typically requir[ing] formal public hearings to determine the impact of the new rivalry.” While these laws purported to establish regulatory symmetry and promote the public interest, the ultimate effect was to limit competition to the detriment of consumers. As Thomas W. Hazlett of the American Enterprise Institute and George S. Ford of Z-Tel Communications note, “As a matter of firm strategy, pursuing a faux symmetry in regulation can successfully divert policymaker and administrative processes from promoting competitive entry. The success of incumbent cable suppliers in enacting LPF [Level Playing Field] statutes in key cable battleground states is notable.”

    Cable rates have risen by 42 percent over the last five years. Competition from phone companies provides a powerful remedy to unchecked rate increases. Without competition, the status quo dominates, and there is diminished pressure to keep cable rates low.

    In the market for broadband deployment, the cable industry has clearly supported deregulatory parity. This is a sound policy that ensures an open and competitive market. This should also be the policy for all telecommunications policies, including competition for video service providers. This should be endorsed as a guiding principle in the efforts to modernize the telecommunications market in Texas. As cable association president Robert Sachs noted, the goal should be to “regulate down, not up.”