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The Cato Review of Business & Government


Wiring the Constitution for Cable

Thomas W. Hazlett

Thomas W. Hazlett is assistant professor of agricultural
economics at the University of California, Davis.

What is cable television? To consumers, cable is an opportunity to double and redouble the number of viewing choices. Cable News Network (CNN) beckons with 24-hour news, Entertainment and Sports Programming Network (ESPN) with round-the-clock sports, and Home Box Office (HBO) with first-run movies, comedy, and high gloss specials. Already 51.1 percent of Americans have been liberated form the broadcast networks by subscribing to cable.

Cable is a choice, hardly a necessity (although at least one federal inmate has filed a motion that his uncabled prison cell was an unconstitutional violation of his right to escape "cruel and unusual punishment"). Over 40 percent of households that are passed by cable, pass it up. Moreover, rival choices abound: broadcast television and radio; newspapers, magazines, and books; movie theaters; home satellite dishes; microwaved multichannel pay television packages; and the great competitive predator-the videocassette recorder (VCR). Indeed the Federal Communications Commission (FCC) has determined that "effective competition" exists in the cable marketplace if but one cable company coexists with three or more over-the-air broadcast television channels.

Yet what appears to the consumer to be a nifty new competitor for broadcast television's network triopoly looks, to the local politician, like just another utility operating a local monopoly. Like a utility, a cable company generates a product in one particular location (at the point of its satellite dishes and head-end electronic translating equipment) and sends it by wire to every subscribing home in the service region. The cable is tacked to telephone poles or electric utility poles, or buried in underground conduits. Cables cross avenues and utilize public rights-of-way. Signals are generated and transmitted on an electronic grid, overlaying the landscape to serve a precise geographic plot. To local politicians cable television looks like the telephone company.

The Federal Perspective

Initially the FCC saw cable, from its humble beginnings in Mahoney City, Pennsylvania in 1948, as a useful extension of the household television set. Cable was first used to facilitate reception where long distances or bumpy topography blurred the VHF-UHF band. It seemed to be nothing more than an extremely long antenna wire; indeed it acquired the name Community Antennae Television ("CATV" in industry jargon). Accordingly the FCC, in an unusual show of regulatory restraint, left cable alone in the 1950s.

The FCC's view changed markedly around 1960. Cable was growing and beginning to encroach upon the real television market: broadcast television. The National Association of Broadcasters wielded formidable clout, and to them cable was competition. The FCC received that signal without interference: Competition with broadcasters was bad, and should be suppressed by regulation. The agency saw clearly that enhanced consumer choice was detrimental to its own larger objectives in overseeing radio and television; reducing the "exclusivity" of a broadcast license concomitantly lessened the FCC's regulatory leverage via the licensing process. Cable became just one more of the FCC's heavily regulated industries.

Until the mid-1970s, no cable company could legally build a system to provide more than two new signals to any home within the 50 largest television viewing markets. That is, a company could string cable but it could only sell channels that were already available over-the-air plus two (and one of those had to be from the nearest city). The FCC also drafted a host of arcane and anti-competitive regulations, including the rule that cable systems could not contract with pay channels to show any feature films less than three years old or more than ten, to offer live or even recent sporting events, or to produce any regular series.

Federal efforts to suppress competition from cable ended during the deregulation movement of the 1970s. The shackles were broken by a series of FCC and federal court decisions since 1972, and by the Cable Communications Policy Act of 1984. The importing of distant signals was allowed without limit and programming restrictions were lifted. Moreover, local government control of cable began to be limited. Municipalities were prohibited from collecting any more than 3 to 5 percent in gross cable revenues as a franchise fee; rates charged for the new "premium services," such as HBO, Showtime, the Movie Channel, the Playboy Channel, and the Disney Channel, could not be regulated, nor could basic cable prices; and municipalities were prohibited from stopping cable's new competitors. The FCC now saw the use of many zoning and franchising ordinances as naked protection of cable monopolists to the detriment of consumer choice, and this time it took the side of consumers.

The Picture at City Hall

In the late 1970s, just as the federal government was celebrating competition in cable, a new posse of regulators galloped in to capture the potential benefits of protected monopoly. Federal deregulation had finally given the cable industry something to sell in urban/suburban America, and the big-city franchises looked lucrative. Vast new programming selections-off both satellite and microwave-offered 30, 40, 50 channels of entertainment and promised a profit bonanza. Cable companies lined up at city halls to get permission to install cable in all big-city markets.

For the local politician, the competition for permits was the best cable program of all: the city council would produce its own auction. Municipal authorities could take bids for the right to wire city streets. Bidding would offer political benefits in the form of generous public access and local origination subsidies, and distribution, via equity shares, of legally protected profits. But the quo for these quid would be the exclusive right to supply cable free of competition-and that would require the city government to bar any cable competitor that had not been carefully selected, and charged, for the right of entry. The stronger that monopoly promise, of course, the more enthusiastic the rivalry for the politically awarded franchise.

To strengthen their monopoly promises, cities did suspiciously anti-consumer things, like using zoning ordinances to prohibit private cable systems from crossing private property lines. Private cable systems, called Satellite Master Antennae (or SMATV), and satellite dishes (called TVRO, "television receive only") were rudely quashed by local authorities in many jurisdictions despite the fact that they never encroached upon public property. Dallas attempted to keep a SMATV operator from competing with its established cable monopolist. The City and State of New York attempted to disrupt the state-of-the-art, 108 channel SMATV system brought in by the developer of the world's largest apartment building, Co-op City in the Bronx.

After years in court, these governments lost. After all, private, not public, property was at stake. Yet the incentive to intervene remained. As John V. Lindsay said, as mayor of New York City, cable franchises "were urban oil wells under our city streets."

With local officials acting as monopoly creators and protectors, the bidding for franchise rights became frenetic. Cable companies offered huge, exotic, space-age systems; generous fees to cities; vast payments to community groups; and healthy political contributions on either side of the table. They also routinely offered cable stock to well-connected city hail dons, a practice called "rent-a-citizen." One councilwoman in Denver claimed that during her city's wild 1982 franchise competition, the only person she personally knew who did not own cable stock was the coach of her son's little league football team-but then, he did not live in Denver. In Milwaukee, a company angling for the cable award retained two local political consulting firms, one to pitch its case, the other not to pitch any competitors'. Little wonder that, after a nationwide FBI investigation turned out case after case of franchising abuse, U.S. District Court Judge Susan Getzendanner commented in 1985 (while sentencing a Washington lawyer for making illegal payments to a suburban Chicago town official), "I think it was a bribe, and apparently what goes on in the cable industry all the time."

The Price of Urban Oil

The consumer welfare costs of lobbying for and receiving a franchise can amount to between 20 and 30 percent of the average customer's bill. If the typical cable consumer pays $25 a month for basic service and one premium channel, $5 to $7 of that can, in the bigger (more political) cities, be attributed to politically imposed costs, most of which are pure economic waste: $1 for the Cubs and Dodgers on WGN; 5 cents for the mayor and his friends; 20 cents down the drain.

There are other problems with cable franchises too. As the eminent constitutional law scholar from the University of Chicago Law School, Professor Philip Kurland, has noted:

At one time local politicians saw cable television as one big barrel of pork out of which they would enrich their communities and, occasionally at least, themselves. . . . It was for them the solution to unbalanced budgets and high bond rates. It was to be a cornucopia. Unfortunately for them, however, in taking this view they overlook two things: reality and the Constitution.

The reality is that the great promises of cable systems that entertained your kids, mowed your lawn, and paid your taxes were not realistic. For 7 example, the 1982 Sacramento franchise, awarded to United Tribune Cable Company, included, among other things, a promise that UTC would plant 20,000 trees and spend "$90 million in construction projects, local studios, and job training programs." When the franchise proved 5 economically unfeasible, residents of Sacramento went without cable for several more years.

Politicians found that negotiations before an award were easy. The promises flowed like cheap wine. But after the franchise was announced, a period of renegotiation usually ensued. The proud and even boastful cable franchisee would ever so meekly announce that all those fabulous features it had wanted to provide were really quite reckless financially and, indeed, impossible; it just had to be let off the hook. The next step was what those in the cable business refer to as "give-back" talks.

Customarily, two franchises are negotiated-one that the people see and applaud, "Film at 11," and another that the local politicians and the cable businesses later work out quietly, replete with give-backs. In 21 of the 30 largest television markets in the United States, cable franchises have been renegotiated after initial franchisings. Eight of those 21 were renegotiated before a single home was wired. This process routinely lasts two to four years, and sometimes far longer. Philadelphia has had four rounds of franchising since the late 1960s and, as of 1986, still had no cable. New York City, despite a series of studies and commissions of cable in the late 1960s, was only 20 percent wired as of mid-1987.

Milwaukee may be typical. As Channels of Communication magazine wrote in March 1986 of Milwaukee's franchising decision, "The goal was to base their selection of cable operator, as much as possible, on the merits of the bids." But how do you politically evaluate a service as complex, dynamic, and subjectively valued as cable television? "To many aldermen," the magazine noted, "the two [final] bids [of six cast] promising to build sophisticated systems and charge attractive rates were essentially identical. So the politicians went with what they knew best, which was politics. Warner Amex had a magnificently well-wired team." As the lawyer for the losing competitor conceded, "Why would you want to take what was regarded as a great prize and award it to strangers from somewhere else?" The magazine concluded, "The dream had been to pick a cable operator on the merits. The reality was that, without any illegality, politics carried the day."

Two important footnotes complete the message of Milwaukee: First, the 108 channel system called for in the franchise was renegotiated to a 54 channel system seven months after the award, and instead of 61 channels of basic service for $4.95 monthly, customers ended up with 35 channels for $11.95. That is a give-back. Second, on July 13, 1986 the Milwaukee Journal reported that the FBI had announced it was investigating allegations that "hundreds of thousands of dollars were funneled into Milwaukee for cable payoffs during 1982"-the franchising year. One councilman had already resigned.

The Constitutional Question

Beyond the political economy of cable franchising is its raw rub on the US Constitution. What exactly does it mean to have local officials presiding over the question of who will be allowed to enter the local cable television business? Cable companies are no longer simply community antennae; they are editors and publishers-selectors of news, information, and entertainment services. Increasingly they cablecast local news in competition with broadcast television, radio, and newspapers.

Imagine a local government commissioning a "needs assessment" study, issuing a request for proposals, hiring a consultant to evaluate those proposals, holding public hearings-and then awarding a single newspaper franchise to the company which best served the needs of the community. This would be unconstitutional even if the government study concluded that only one local newspaper was economically efficient or likely to profitably survive. The courts, including the Supreme Court, have strongly affirmed the First Amendment rights of cable operators as electronic publishers. Courts are now viewing cable television not as a public utility, tightly controlled and accountable to local or state government, but as the equivalent of a newspaper-a view radically at odds with the way in which cable is franchised in literally thousands of US communities.

As legal protection emerges for competitors to challenge incumbent monopolists, cities typically respond that cable is a "natural monopoly." Their franchising process is not the creation of exclusive privilege, they argue, but merely a good faith effort to limit the ravages of market-mandated monopoly, and to force franchise holders to serve community interests. But no newspaper could be licensed on the premise that, due to the "special economics" of the industry, monopoly was natural. In the 1974 Miami Herald v. Tornillo decision the US Supreme Court unanimously established that the First Amendment trumps "natural monopoly." And if local governments have sought a good faith suppression of monopoly power, why have they been so diligent in their efforts to suppress competition or so reluctant to relinquish control over entry when their ability to control rates has been taken from them?

Whether "natural monopoly" is a legitimate reason to franchise cable, and if so, whether this justifies the government's denial of competitive entry are questions with profound constitutional implications for the 5,000 or 6,000 municipal franchises currently cablecasting in America. In 1987 these questions went to a jury in Pacific West v. City and County of Sacramento. In a trial stretching over two months in federal district court, a jury of six heard voluminous testimony. They were told by the plaintiff that the right to compete in cable was not a privilege to be auctioned off by local politicians, that cable television was electronic publishing, and that suppression of entry was no less than government censorship. At the same time, they were told by the defense that the government had acted on behalf of the community-just as it had in creating a police force and a fire department-in getting Sacramento citizens the very best deal possible in cable. They were told that cable television was a "natural monopoly," and that, since competition would be wholly ineffectual, the people were lucky that their elected officials had selected the best firm, at the best terms, to provide services to them.

At the conclusion of the trial the jury was asked by the judge to answer some key questions: "Is 'head-to-head' competition among cable television systems unlikely to occur and endure in the Sacramento market? In other words, is cable television a 'natural monopoly' in the Sacramento market?" The jury answered, "No."

"Was 'natural monopoly' a sham used by defendants as a pretext for granting a single cable televisions franchise?" The jury answered, "Yes."

The first American jury to look at the cable franchising process in light of the First Amendment found the monopoly award odious-a "sham."

Those findings came in June 1987. In July, before the judge's verdict had even been entered, the City and County of Sacramento surrendered. Upon advice from the county's own lawyers, the cable commission opened Sacramento's 350,000 home marketplace to competition. (Similar verdicts quickly followed in Palo Alto and in Santa Cruz.) A newcomer must acquire only a license that sets forth standards regulating use of public rights-of-way, much like the standards that housing developers and commercial builders must comply with, and that guarantee their liability for using such rights-of-way. As of this spring competitive cable entry had forced the incumbent to slash prices and race to wire long-neglected neighborhoods. The market is now open.

Conclusion

Lucas Powe, professor of law at the University of Texas, has written in his brilliant new volume, American Broadcasting and the First Amendment, that the US experience with licensing the electronic press has been a disheartening failure. He demonstrates that we have corrupted free and open debate in the 20th century in just the way the founding fathers feared when they objected to licensure by the British Crown in the 18th century. Powe sees the compromising of television and radio as a painful but wasted lesson:

Has anything been learned form our more than half a century's experiment in regulating broadcasting? Is we could go back to the beginning, would we do it differently…? The history of cable regulation, from cable's inception in the late 1940's to the Cable Communications Policy Act of 1984, suggests that the answer is a resounding no.

Until the California decisions become the law of the land, the status of cable remains that of unregulated, franchise monopoly. Under the Cable Act of 1984 cities have been unable to control pricing or commercial offerings of cable operators (except a small number of systems in outlying areas). An official at the FCC recently noted, without a hint of irony, that there are just two things municipal cable officials may not regulate: one is price, the other is service. While the penchant to bar competitive entry into local cable markets makes little sense from the perspective of consumer welfare, cities still routinely leverage their police powers to capture the political dividends associated with controlling ownership rights to a lucrative medium. But auctioning the right to speak is not wholly within the spirit of the First Amendment. As Powe alerts us, "A city may protect its streets, but it may not control who sends messages or what messages are sent. Only the fact that cable is a newer technology could mystify this truth."

Perhaps the cable mystery is being solved. Courts, and particularly juries, will not like what they see when they tune in to municipal franchising on cable's new First Amendment channel. The right to compete in cable, as to publish a newspaper or to speak in the park, is not well served when awarded at the pleasure of incumbent office holders. This theme is in its 201st year of reruns. It is older than the first satellite, and far ahead of the first Cubs' or Braves' game. Indeed we can thank the founding fathers for handily wiring our Constitution for cable.

Selected Readings

Borsuk, Alan. "The Deal That Made Milwaukee Grimace." Channels of Communication
     (March 1986).
Hazlett, Thomas W. "Private Monopoly and the Public Interest: An Economic Analysis of the
     Cable Television Franchise." University of Pennsylvania Law Review (July 1986).
Lee, William E. "Cable Franchising and the First Amendment." Vanderbilt Law Review (May
     1983).
Powe, Lucas. American Broadcasting and the First Amendment. Berkeley: The University of
     California Press, 1987.



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