Cato Policy Analysis No. 40 August 7, 1984

Policy Analysis

The First Amendment Versus
Municipal Regulation of Cable Television

by William E. Lee

William E. Lee is an associate professor in the Henry W. Grady School of Journalism and Mass Communication at the University of Georgia.

Executive Summary

There's nothing Tony Ammaturo would like better than to come home from a hard day's work, prop up his feet, pop open a beer and watch an uncut movie over a cable television channel. Ammaturo, who lives in Philadelphia's Germantown section, can't do that, but his neighbor down the street can. His neighbor lives just across the city line in suburban Montgomery County, where local officials have done something Philadelphia officials have not been able to for almost 20 years--agree on a cable television franchise.[1]

Ammaturo's disappointment is not unique, for the growth of cable television is constrained by municipal officials in cities throughout the country. Where cable is permitted, municipalities extract services such as public access channels in exchange for use of rights-of-way. In recent years, as municipal demands have become increasingly onerous, cable operators have sought legislative relief. To this end, Senate Bill 66, passed in 1983, and H.R. 4103, approved by the House Commerce Committee on June 26, 1984, and currently before the full House, restrict aspects of municipal cable regulation. This paper briefly explores the franchising process, defines the appropriate scope of municipal cable regulation, and examines the likely effects of both bills.

The Process and Problems of Cable Franchising

"I don't believe the first amendment -- and this is a harsh thing to say -- I don't believe it is the primary concern of cities." Seattle Mayor Charles Royer[2]

Cable franchising in most communities is premised upon the assumption that cable is a natural monopoly. Consequently, most municipalities intervene in the market and do not permit two cable companies to compete directly for subscribers. Instead, municipal officials select the "best" applicant for a government-conferred -- and government-protected -- franchise. Generally, communities begin the franchising process by studying community needs and then issuing a request for proposals, which describes the system and services the community desires, and asks the applicants to submit their financial qualifications, proposed construction plan, rates, and services. After bids are submitted, municipal officials engage in an evaluation of the bids which can be highly subjective and politicized. When a winner is selected, the municipality and successful applicant negotiate a franchising agreement.

Several aspects of cable franchising warrant discussion. Cities exercise monopoly power in the franchising process. Because they are awarding a generally de facto exclusive franchise, they are able to extract extensive nonrevenue-producing services, such as access channels, from the winning firm. In many instances governmental appetites for such services are nearly insatiable, and cable operators cater to those appetites in exchange for a government-protected franchise. This process generally takes place in an unreal economic environment. Drew Lewis, head of Warner Amex Cable Communications, attracted national attention recently by seeking alterations in franchise agreements to avoid multimillion dollar losses. "We promised more than we should have and charged less than we should have, and the bottom line is that we have a serious problem," he stated.[3] A cable consultant blamed both cities and cable companies for the economic problems of recently awarded franchises: "For the companies, the strategy was 'Let's get the franchise now and worry about the costs later.' For the cities, it was a process forced by politicians trying to look good -- pork barrel politics on a local level."[4]

In effect, the municipality and cable company form a partnership, with the city preventing other cable firms from entering the market. Some communities, however, can support competing cable companies or are developing to the point where head-to-head cable competition is possible. Municipal governments are generally unwilling to franchise additional cable companies, in part because competition will lessen the city's market power to demand pork barrel prizes like access channels. Moreover, a city with a significant stake in cable may try to impede the entry of competitors to cable such as SMATV, a video service for apartments.[5] One of the major lessons from the FCC's misguided efforts to protect over-the-air television from cable competition is that it is difficult to make "a sustainable and convincing case for protecting the public from competition."[6] Yet current municipal franchising practices create forces that, if unchecked, might seek to protect the public from competition but thereby inhibit innovation.[7]

Current franchising practices are also a highly inaccurate method of determining which applicant will supply the best mix of price and service. The bids in franchise proposals are based upon projections of market penetration and construction costs. Projections for both factors are combined to determine proposed subscriber rates. The proposed rate is a key factor in selecting the winning applicant. Often the actual market response and construction costs do not conform to the bid projections. For example, in Dallas, Warner Amex's actual construction costs may exceed the projected costs by more than $100 million.[8] When the projections are incorrect, subscription rates must be raised. Consumers may then question whether the city has selected the "best" bid.

Several aspects of cable franchising also violate the First Amendment rights of cable operators.[9] Municipalities commonly assess highly subjective attributes such as an applicant's "character" and the nature of the applicant's proposed programming service. This contrasts with the constitutional doctrine that subjective criteria may not be applied when deciding who uses public rights-of-way for expressive purposes. The evaluation of content also permits the government to discriminate among prospective speakers on the basis of their messages. If a cable applicant proposes nonobscene sexually oriented programming, city officials may select another applicant who offers more "appropriate" programming. This contrasts with the constitutional doctrine that the government must remain neutral in the marketplace and not interfere with the distribution of constitutionally protected expression. Finally, the conditions for granting a franchise often require that the operator surrender some of its freedom to determine the programming offered. Yet the doctrine of unconstitutional conditions requires that the government not grant or deny benefits on a basis that infringes on constitutional rights.

Neither S. 66 nor H.R. 4103 corrects the major problems of current franchising practice. Under the provisions of both bills, municipalities have the authority to demand access channels in exchange for use of public rights-of-way.[10] Although both bills prevent municipalities from requiring the provision of particular programs, neither bill prevents local authorities from basing their franchise awards upon subjective factors such as an applicant's character and the nature of the applicant's programming proposal.[11] Finally, although cities are empowered to grant multiple franchises, neither bill requires that they do so when the market is capable of supporting cable competition.[12]

When it favorably reported S. 66, the Senate Commerce Committee observed that the "degree and detail" of municipal cable regulation has increased to the point that "there is no longer a reasonable relationship between local regulation and cable systems' use of streets and rights of way."[13] Unfortunately, both S.66 and H.R. 4103 contain provisions that are not related reasonably to the use of rights-of-way. Before considering the problems created by the bills' franchise fee, rate regulation, and renewal provisions, this paper explores the scope of regulation of other forms of communication using public rights-of-way.

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