Government regulations force millions of Americans to pay too much for cable television. If you live in a city with only one land-line cable television provider, you are likely to be one of them. While telecommunications consumers have benefited from falling prices caused by competition over the past ten years, cable customers have not. In fact, cable rates have increased by nearly 60 percent since 1999. According to Gene Kimmelman, a vice president of Consumers Union, since the Telecommunications Act of 1996 went into effect, cable rates have increased at approximately two and a half times the rate of inflation.
Reforms in the franchise process are currently being discussed in U.S. House and Senate committees. They are considering reforms such as nationwide franchise regulation, statewide franchising, and forming joint committees with states to lower regulatory burdens. Although these reforms might result in more competition and may benefit consumers in the short-run, more systematic deregulation is needed.
One obstacle to reducing government barriers to competition is public perception: Consumers see that telecommunications markets are more competitive and innovative than they were ten years ago, but they dont see that those markets could be made even more competitive and innovative, ensuring greater long-term benefits.
Increased competition from cable and internet providers prompted recent mergers by Verizon and MCI and by SBC and AT&T. At the same time emergence of Voice-over-Internet-Protocol ushered in new competition in voice communication from firms like Cox Cable, Comcast, America Online, and Microsoft. As a result, since 1999 long-distance telephone prices have declined 30 percent and wireless prices have fallen by 20 percent.
As technology evolved to include new competitors in the telephone business it has also allowed traditional phone companies to enter the television programming market. Unfortunately, local governments have protected cable companies from competition, and consumers are paying the price.
To provide television service, cable companies must receive franchise permission from each local government in each region they wish to serve. Some local governments wish to create monopolies by limiting cable provision to a single local provider.
Even when governments allow new entrants into the market, the process of securing permission in multiple communities is so cumbersome that it is a significant barrier to competition. Ed Whitacre Jr., the CEO of AT&T, claims the approval process routinely takes between 12 and 18 months in each community. Securing permission from the approximately 2,000 local franchises they wish to serve would take seven and a half years even if they managed to sign one agreement every business day of the year!
The original rationale for limiting a region to a single cable provider was that a single company could serve a region more cheaply than multiple companies because of the high cost of installing transmission lines. Governments could then regulate rates so consumers would benefit. However, limiting competition and regulating rates has actually served to stifle innovations and increase costs.
Texas has led the nation in reforming the cable franchise process. Last year the state offered statewide franchise licenses so that companies wouldnt have to negotiate on a city-by-city basis. On March 2nd the American Consumer Institute released a survey of the results. They found that in newly competitive markets, new companies have already captured a 20 percent market share. Half of all people who switched providers saved an average of $22.30 a month, and those who stayed with their original provider and reported saving money after competition was introduced, reported an average savings of $26.83 a month. In a more systematic study of nationwide cable rates published last April, the U.S. Government Accountability Office found that introducing wire-line cable competition reduced cable rates by 16.9 percent.
Government regulations cannot keep up with the pace of technological change. The Telecommunications Deregulation Act of 1996 could not anticipate the technological developments that have integrated voice, video, and data communications over the past 10 years. Government simply cannot adjust its regulations and policies fast enough. To instill long-term competition in the cable industry, franchising should be abolished and the industry should be thrown open to competition from any wire or satellite provider capable of attracting customers. Open competition would bring consumers lower prices and allow the markets competitive process to foster new technological innovations.
Benjamin Powell is a Senior Fellow at The Independent Institute, Director of the Free Market Institute at Texas Tech University, and former President of the Association of Private Enterprise Education. Dr. Powell received his Ph.D. in economics from George Mason University. He has been assistant professor of economics at San Jose State University, a fellow with the Mercatus Center's Global Prosperity Initiative, and a visiting research fellow with the American Institute for Economic Research. Benjamin is also the editor of Housing America: Building out of Crisis.
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