AEI-Brookings Joint Center Policy Matters 06-03

We’re all for Competition, But… John W. Mayo. February 2006.

After over two hundred years of competition generating economic benefits for consumers in the United States, the time honored, if ignoble, job of monopolies seeking to use public policy to forestall competition has grown increasingly sophisticated.  No longer permissible are the old frontal attacks on competition.  Policy officials now routinely reject open assaults on the merits of competition. The result is that proponents of protecting markets from competitive pressures have been forced to become more creative in their arguments.

No better current example exists than the arguments presently being made by the cable TV industry to forestall the advent of broad platform competition across telephony, broadband Internet and multi-channel video services delivery.  Specifically, the opportunities facing modern telephone companies to extend their networks to provide video and ultra-high speed broadband Internet access threaten the market power enjoyed by traditional cable monopolies.  To forestall the threat, the cable industry has solicited, with some success, the 33,000 local franchising authorities around the country to delay the ability of modern telephone companies to enter its traditionally monopolistic turf.  Their argument in a nutshell:  “we’re all for competition, but…”

This argument, while significantly more subtle than earlier open attacks on competition, is equally flawed.  First, the argument seeks to too easily dismiss the benefits that consumers will receive from the heightened competition that will occur with early elimination of the policy impediments to entry.  These benefits from competition, far from speculative, are readily demonstrated.  Where competition has been permitted either by traditional cable overbuilding or by the early expansion of local telephone companies into video markets, cable TV rates have fallen and service quality and offerings have risen.   Indeed, a GAO assessment found that the entry of a broadband service provider offering video service “induce[s] incumbent cable operators to respond by providing more and better services and by reducing rates and offering special deals.”

Frankly, this should come as no surprise.  It is the predictable consequence of competition wherever public policy eliminates regulatory and governmental barriers to entry.   Recently, two independent studies have sought to quantify these benefits. A Phoenix Center study found that American consumers stand to lose $8.2 billion if regulatory barriers, such as local franchise requirements, delay video entry by just one year.  Total losses increase for each year of delay and would climb to a total of almost $30 billion if market entry is delayed for four years, the study added.  Another study by Criterion Economics examined the economic effects of entry by telcos into video markets, finding welfare gains to consumers from entry of $5.8 billion in the first year and $26.5 billion over five years.  The cable industry’s attempts to give these benefits “the back of the hand” notwithstanding, they simply cannot be ignored.

The second problem with the “We’re all for competition, but…” argument is embedded in the details of the “but…”.  Specifically, the industry and local franchising authorities have argued that if barriers to entry facing modern telecommunications firms are removed, the results will be: (1) selective entry that will deny the benefits of video choices to some consumers, and (2) reduced franchise fee revenues for cities and counties that serve as local franchising agents.  Thus, the cable industry and the local franchising authorities have urged that Congress impose “reasonable build-out requirements” on new entrants and requirements that entry “avoid fiscal harm to local governments.”  In addition, the cable TV industry and the local franchising authorities seek to maintain the mind-numbing system of 33,000 separate franchising processes for entry by the telcos into video.

Collectively, these requirements would significantly delay, denigrate and deny entry by telcos and the benefits of the competition they would bring to the video marketplace.  As Senator Ensign recently observed, “[I]t makes no sense having 30,000 local cable-franchise authorities continuing to issue video franchises as if they were in a monopoly situation.”  Moreover, while the introduction of competition is actually likely to expand commerce and revenue flows to local franchising authorities, it should be emphasized the goal of competition is market efficiency and consumer choice, not a guaranteed revenue flow for any entity.  Finally, competition develops by efficient entry, with firms entering at a small scale and building out as customers and revenue are secured.  The imposition of “build-out” requirements upon new entrants would mandate that new entrants spend billions of dollars to enter the market without corresponding revenue streams.  The logical choice may very well be simply to bypass altogether a community that imposes buildout requirements so that no member of the community experiences the benefits of competition.   The end result would be balkanization of telecommunications and video markets.  That result may delight the cable industry, but it would be a competitive travesty that undermines consumer welfare.

Congress presently has the opportunity to unambiguously embrace competition in the emerging broad platform of telecommunications, Internet and video through the removal of policy barriers to entry.  It should avail itself of this opportunity, no “ifs”  “ands” or , especially, “buts”!

John W. Mayo is Professor of Economics, Business and Public Policy at Georgetown University's McDonough School of Business and Executive Director of the Center for Business and Public Policy.