The Consumer Welfare Cost of Cable 'Build-Out' Rules
31 Pages Posted: 16 Aug 2005
Date Written: June 2005
Firms that wish to offer wireline, multichannel video programming services in direct competition with cable incumbents are being faced with calls by those incumbents and policymakers to "build-out" to entire communities as a pre-condition of receiving a franchise. This "build-out" requirement is often incorporated into the local cable franchising process, which the FCC over a decade ago called "the most important policy-relevant barrier to competitive entry in local cable markets." In this Policy Paper, we show that build-out mandates are actually counter-productive and serve primarily to deter new entry, increase the profits of incumbents, and harm consumers. With both a theoretical model and an empirical simulation, we show that build-out rules cause new video entrants to bypass certain communities entirely and sharply lower the number of communities in which new network construction would be profitable. We show that consumer welfare is likely to be higher with "free entry" policies that impose no build-out requirement.
Keywords: cable franchises, build-out requirements
JEL Classification: K23, L10, L50, L96, 031, O33, 038
Suggested Citation: Suggested Citation