Cable Television

A 1969 Oakland, California, city ordinance called for bids for a community-antenna television (CATV) franchise to provide cable television for residents (Williamson 1985). The city was authorized to inspect the franchisee's property and books and to terminate a franchise for noncompliance after 30 days' notice and a public hearing. The city also retained the right to buy the CATV system at the cost of reproducing it.

Rather than soliciting bids immediately, a city agency engaged in preliminary discussions with prospective franchisees and community groups. After 10 months, the city told five applicants that it would receive their bids. These bids had to cover providing various television and radio services, serving all areas of the city, paying the city the greater of 8 percent of gross receipts or $125,000, and providing the city with certain free connections and services (including studio facilities for originating programming). The city set time limits for providing the service and allowed requests for rate increases annually. The franchise contract was to last for 15 years.

The lowest bid, by a local company, Focus Cable, was for a monthly connection fee of $1.70. The next lowest bid was for $3.48, and Tele Promp Ter Corporation bid $5.95. Tele Promp Ter eventually entered a joint venture with Focus, which lacked financial resources. In exchange for providing the financing, Tele Promp Ter obtained an equal partnership, which it could convert to a majority interest immediately and exercise options to obtain 80 percent of the stock. Presumably Tele Promp Ter became involved in supplying basic services for 30 percent of its initial bid, because it expected to make profits from providing special programming and other services at a higher rate.

Within 18 months of the initial city ordinance calling for CATV, the franchise was awarded. Focus requested and had approved a rate of $4.45 per month for the special programming, so that the combined rate for both services was $6.15 per month. Focus soon requested a reduction in the penalties for not completing construction in time, not connecting all households, and providing only a single cable instead of the dual cable originally specified. The city negotiated with the company instead of trying to find another firm (for fear of embarrassment if that firm also proved unsatisfactory) or shifting the franchise to public ownership.

Probably the most serious problem with the bidding system was that bidders only had to specify the rate for the basic service and not for the "futuristic" special programming services. Over 90 percent of subscribers took both services and thereby paid 3 1/2 times more than the specified basic rate. The wide spread in bids for the basic service raises the question of whether Focus's bid of $1.70 was even close to per-unit production costs. Sufficient complaints about quality were received that an outside firm was engaged to test the degree of compliance of the service with technical requirements. Thus, the uncertainty and enforcement difficulties resulted in a system providing lower levels of service at possibly higher prices than initially envisioned—but at least bidding occurred. In Manhattan, in contrast, two companies were awarded noncompetitive, 20-year CATV franchises.

Granting more than one franchise may have substantial rewards. Where cable firms compete, rates average 18 to 24 percent less than those charged by monopolies.

During the early 1980s, municipalities could regulate the rates of cable TV. In 1989, such regulation was abolished in most areas. Within two years, according to a government study, rates increased an average of 26 percent. Jaffe and Kanter (1990) find that in big cities, where there are many TV channels, the deregulation had little effect. In contrast, in smaller cities, the deregulation allowed rates to rise. Rubinovitz (1993) estimates that deregulation allowed basic rates to rise by about 18 percent in real terms. The right to regulate cable was reintroduced in 1992. In 1993, the FCC adopted a formula that required cable rates on most systems to be reduced by 10 percent from levels of the preceding September. In 1999, federal regulation of cable company rates ended.

SOURCES:

Andrews, Edmund L. "FCC Orders Cuts in Cable TV Rates: Eases Rerun Rule." New York Times, April 2, 1993: 1.

Jaffe, Adam B., and David M. Kanter. 1990. "Market Power of Local Cable Television Franchises: Evidence from the Effects of Deregulation." Rand Journal of Economics 21:226-34.

Marshall, Jonathan. "Cable TV Competition vs. Regulation." San Francisco Chronicle, April 7, 1992: A1 and A8.

Rubinovitz, Robert N. 1993. "Market Power and Price Increases for Basic Cable Service Since Deregulation." Rand Journal of Economics 24:1-18.

Williamson, Oliver E. 1976. "Franchise Bidding for Natural Monopolies--In General and with Respect to CATV." The Bell Journal of Economics 7:73-104.

------. 1985. The Economic Institutions of Capitalism. New York: The Free Press.