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Press Release

    Telecom Competition Comes to Indiana

    05/23/2006

    This article was originally published in the June 1 edition of the Budget & Tax News

    Implementing a plan for sweeping telecommunications deregulation, on March 14 Indiana Gov. Mitch Daniels (R) signed into law House Enrolled Act 1279, which the Indiana House and Senate had both passed by strong margins.

    State Sen. Brandt Hershman (R-Wheatfield), the bill's sponsor, promised "consumers will be the direct beneficiary of the process through greater competition and availability of the latest video technologies." He added, "With this reform, we could be first in the nation and one of the top destinations for telecommunications investment."

    The new law streamlines the state's regulations governing entrance into video programming--or cable television, as it's more commonly known. The law's most prominent feature allows video service providers to acquire just one statewide "franchise," or license, that allows them to offer video programming anywhere in the state.

    Local Franchising Costly

    Before the reforms, video service providers in Indiana had to negotiate a franchise for each locality before offering television service to that area. As part of those agreements, municipalities required video service providers to pay a "franchise fee"--a tax of up to 5 percent of gross revenues--donate PEG (public, educational, and governmental) access channels, and provide a host of other miscellaneous "public services." There are hundreds of franchise areas in Indiana.

    Telephone companies have enthusiastically supported laws abolishing local video franchises. According to Walter McCormick, CEO of USTelecom, local franchise laws hinder phone companies from offering video service efficiently.

    "Technology has also made it possible for voice providers to offer video," McCormick said on March 30 in testimony before the U.S. House Energy and Commerce Subcommittee on Telecommunications and the Internet. "But an archaic governmental system that was meant for a time when technologies were segregated, rather than converged, is a barrier to competitive entry into video."

    Cable Defends Franchises

    The cable television industry, which has lobbied against video service deregulation, insists meaningful competition can exist even with local franchise laws intact. Kyle McSlarrow, president of the National Cable and Telecommunications Association, testified to Congress, "The telephone companies have had a decade to enter the video market." He cites several instances in which municipalities quickly granted telephone companies video franchises, and he concluded, "the existing franchise process is not a barrier to entry."

    "Focus on the debate between cable and phone misses the point," said Wayne Brough, vice president for research and chief economist at FreedomWorks. "Franchise regulations arose during an era when cable television providers were viewed as a 'natural monopoly' in the video service market. They were in response to concerns that cable companies would abuse their monopoly status to harm consumers.

    "But with robust competition from satellite and telephone companies," Brough continued, "it doesn't make sense to treat every television provider as a monopolist. Local franchise laws have outlived their original purpose, and are significant barriers to competition."

    Consumers Will Save Millions

    According to "The Economic Impact of Telecom Reform in Indiana 2006," a study by the Digital Policy Institute at Ball State University, competition in television will "save existing Indiana cable subscribers between $131 million and $262 million annually" while creating roughly 20,000 jobs.

    Advocacy groups, however, remain concerned the new law does not include any "build-out requirements," which force video providers to build networks to rural and low-income areas. Jeannine Kenney, a policy analyst for Consumers Union, contends, "without reasonable requirements that telephone companies build out their video services to all consumers within the community telephone companies will be free to redline middle- and low-income neighborhoods, denying competition to consumers who most need cable rate relief."

    Less than a month after the bill's signing, AT&T announced an expansion of its video services to 33 rural Indiana towns. Brough said this is evidence build-out requirements are unnecessary.

    "It doesn't make economic sense for video providers to ignore a large portion of the market," Brough said. "At the same time, build-out requirements may make the cost of entering the market prohibitive for smaller companies, hurting competition in the process."

    Reforms Catching on Elsewhere

    Indiana is the second state to deregulate the video programming industry in such a comprehensive fashion. Last September, Texas passed similar statewide franchise reforms. As in Indiana, the debate was marked by acrimonious lobbying campaigns by cable, phone, and consumer groups on both sides of the political aisle.

    After the Texas law went into effect, more than 120 new video franchises were granted. AT&T announced it would invest in $800 million worth of new broadband networks covering every town in its service area. In areas of the state with new competitors, rates dropped by as much as 25 percent.

    This April, Kansas adopted video franchise reforms modeled after those in Indiana and Texas. The legislatures of Florida, Iowa, Michigan, and Missouri are currently considering similar deregulatory legislation.

    Arpan Sura (asura@freedomworks.org) is a researcher at FreedomWorks, a grassroots organization with more than 800,000 members nationwide.