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Testimony on Franchise Fee Reform

Good afternoon.

My name is Sean Parnell, Vice President of External Affairs for The Heartland Institute. Heartland is a non-partisan, non-profit think tank located in Chicago. We are the publisher of InfoTech & Telecom News, which features the research and commentary of dozens of other think tanks and policy experts around the nation on technology and telecommunications, and is mailed monthly to every state legislator in the country.

Telephone companies such as SBC, Verizon and BellSouth are preparing to roll out video services, either over digital subscriber lines (DSL) or new fiber optic transmission systems. This will benefit consumers, because telephone companies will join cable, satellite, over-the-air broadcast, and other providers of video services, increasing competition in this market.

The entry of telephone companies into video will lead to innovation such as different types of services and different types of programming packages than cable, satellite, and other video providers have offered. For example, while the cable and satellite companies have not yet offered channels individually,  known as “a la carte”  programming, the phone companies may choose to meet this apparent customer desire. Allowing competitive market forces to bring  a la carte  programming into the video market is a far preferable alternative to using regulatory force, as the FCC has, unfortunately, recently suggested.

Telephone companies entrance into the market will spur new innovations when it comes to movies-on-demand, on-line tournaments for gamers, and different types of service bundling, such as family-tier programming. And, in fact, it may not be the telephone companies that produce these innovations —

it is just as likely that cable, satellite, wireless, and other providers respond a new competitor by developing and offering new and better services and better pricing.

One way to speed the introduction of video competition in states is to allow state governments to grant statewide franchises. Texas revised their law this summer and granted Verizon a statewide video franchise. Verizon has begun fiber optic service to residents in Keller, Texas, and it plans to begin rolling out competitive video services throughout Texas next year.

Understandably, cable companies have generally opposed franchise reform of this nature because it would put them at a competitive disadvantage. They would rather see telephone companies have to go through the same local franchising process that they presently are required go through.

Requiring telephone companies to face the same regulatory hurdles presently faced by cable companies, however, would be a mistake. The only possible outcome of forcing telephone companies to deal individually with tens of thousands of towns nationwide would be to delay or even prevent their entry into the market. Lost to consumers would be the benefits of innovation, competition, and lower prices.

One criticism raised by opponents of statewide franchising  is that phone companies are only interested in serving so-called high-value customers. Only the most well-to-do in each market will have an opportunity to purchase video service, we are told. This concern, however, is largely misplaced and unfounded.

Video delivery involves investment in infrastructure upgrades, neighborhood by neighborhood. It makes perfect business sense for any company to begin those upgrades in areas where it can see substantial early return. Consumers with greater disposable income are a natural segment to target out of the box.

There is plenty of precedent for this in other markets. Anti-lock brakes, for example, first appeared on Mercedes-Benz models. Today they are standard on almost all makes and models.

As IP video deployment continues over the coming months and years, there is every reason to believe service will extend to consumers in all areas, and probably at lower prices, because economies of scale kick in. This is a common economic effect, where so-called  early adopters,  pay high prices at the beginning of a product s rollout, allowing prices to fall as the product moves into the mass market.

In addition, I would like to agree with what Rick Cimerman of the National Cable & Telecommunications Association said in his remarks: the market for video services is highly competitive, and should telephone companies and cable companies fail to provide access to video to some neighborhoods, there are yet other providers who do not share the same geographical limitations that cable and telephone companies may. Wireless, satellite, and over-the-air broadcast options would continue to be available to any such market that is not served by cable or telephone.

The most important result of telephone companies  entry into the competitive world of video is that it provides an opportunity to revisit the entire concept of franchise fees. The term franchise itself implies a licensed or regulated exclusivity, something that cable and telephone companies no longer have. Franchise fees are a relic of a telecommunications market that no longer exists.

Perhaps it is time to phase out the notion that a service provider must pay a local municipality for the right to deliver a specific set of services to residents. DirecTV and DishNetwork deliver video via satellite, yet they do not pay franchise fees. Netflix delivers video entertainment by mail and iTunes delivers video programming over the Internet, yet they do not pay franchise fees. A brick and mortar video rental store pays sales and property taxes, but under the same terms as other retailers. They are not assessed special fees because they provide video entertainment.

It makes sense that both cable and telephone companies must pay cities fees for right of way. These presumably cover the use of streets and conduits where cable run, and the cost of pedestrian and traffic disruption when digging is required. Since the city legitimately incurs costs, some form of compensation is justifiable. However, these costs should be standardized and non-discriminatory, just like sales and property taxes. Beyond recovering legitimate costs related to right-of-way access, however, franchise fees should be ended for cable, telephone, and other  service providers.

Elected officials are seeking policy goals that promote competition and consumer choice in the video market. Given all the concern about the lack of broadband penetration throughout the nation, here s a chance to address it. Phone companies have video technology that they believe will succeed in a competitive market. It serves all to streamline and deregulate the process so they can offer their services. Creating a legal structure for statewide franchising of video services is a good first step, and an even better step would be to end the process of requiring franchise agreements in competitive markets so that cable, telephone, satellite, wireless, brick-and-mortar and other providers are all able to compete on a true level playing field that benefits consumers.

Thank you.