Does Video Delivered Over a Telephone Network Require a Cable Franchise?

Abstract:     
The current wave of telecommunications reform stands to significantly affect the provision of video over telephone networks. Several states have enacted legislation to promote the provision of video services by competitors, including telephone companies, and federal legislation regarding video franchising is also under consideration. We examine whether, on legal or policy grounds, video services provided over a telephone network should be regulated as a traditional cable service or whether a different approach is warranted. We evaluate the history of cable regulation and the services that Congress envisioned to be regulated when it first drafted legislation establishing a regulatory framework for cable television services in 1984. We then examine numerous differences between video services delivered over a telephone network and those that Congress envisioned when regulating cable television service in 1984 and in subsequent years when it revised the Cable Act of 1984. Finally, we find that municipal franchise requirements for video services provided over telephone networks would reduce consumer welfare. We estimate that, upon ubiquitous deployment by telephone companies of fiber networks to provide video service, cable customers living in areas not yet overbuilt by a wireline distributor of multi-channel video programming would enjoy the benefits of lower prices of roughly $7.15 per month, or $85.80 per year. A five-year net present value of the annualized savings would be roughly $26.52 billion (assuming a five percent discount rate). To the extent that direct broadcast satellite operators respond to lower cable prices with price reductions of their own, the net present value of the welfare benefits from telephone company entry into the market for multi-channel video programming distribution would increase by roughly 50 percent, to nearly $40 billion. We estimate that, even without considering any welfare gains owing to higher quality, these consumer welfare gains from entry exceed the potential loss in franchise fee revenues to municipalities by a factor of nearly three to one.

Keywords: video over telephone, cable franchise, municipal franchise, Cable Act

JEL Classifications: L5, L96

Accepted Paper Series