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Business, Free Enterprise and Constitutional Issues; Pro-Life and Pro Second Amendment. Susan Lynn is a former member of the Tennessee General Assembly. She served as chairman of the Government Operations Committee and the Commerce Committee. She holds a BS in economics and a minor in history. She is the Chairman of the American Legislative Exchange Council's Commerce Task Force.

Sunday, April 22, 2007

Deal Breaker

Of all the issues large and small one matter seems to be a deal breaker in the question of whether we will have competition among television service providers. Build-out, or forcing a company to build-out service to unprofitable areas, is a point so contentious that inclusion may make or break the future of the bill currently before the Tennessee legislature.

The legislation has been amended to address most of the cities’ fears. However, the cable company, and the lobbyists for the cities, are insisting that build-out provisions are an issue of fairness for consumers and must be strong. They insist that state franchisees shouldn’t be allowed to pick over urban areas leaving rural areas without service. Yet for years, the practice has been to establish local franchises in densely populated areas with forced buildout only to those rural areas on the fringe.

The bill's sponsor claims that build-out stipulations prevent competition in the market and should not be included; he sights the FCC's recent directive concerning the detrimental effects local franchising has had on competition.

This deal breaker needs to be examined.

Logically, cable’s dogged insistence upon build-out doesn’t really make sense. Why would anyone insist that their competitor be required to build their network out everywhere? If another newspaper came to town, established newspapers wouldn’t insist that they be “forced” to set up distribution citywide. Such insistence would only make it easier for customers to buy the new product.

The answer is simple, because cable knows build-out cannot be accomplished; the large capital investment associated with building-out a video network is too cost prohibitive to be accomplished based on any artificially mandated timeline.

In the past, the first cable provider in an area faced expensive build-out demands but customers eagerly purchased the new service. Total market share, higher rates and avoidance of unprofitable market areas balanced the expensive demands of building-out. Traditionally, second-comers don’t find the same eager customers that the first provider did, so the expenses associated with build-out requirements are more difficult, if not impossible, to recoup in an effective timely manner.

Another question; why should the lobbyists for the cities care about build-out? They claim it is an issue of fairness. But most city residents already have at least one TV service provider. This bill won’t deprive them of programming. As new networks establish in a neighborhood, customers will have a choice of providers.

In reality, the build-out provisions meant to provide fairness have another "beneficial" side effect; increased franchise fees. Cities receive a franchise fee based on gross revenue of up to 5%. Costly build-out serves to inflate rates and franchise fees. However as noted, for second-comers, build-out keeps most out of the market entirely. Thus build-out requirements serve to reduce the risks of competition; lower rates, lower gross revenue and lower franchise fees.

Broad statewide build-out requirements will only serve to increase rates or possibly even prohibit any competition; one would expect the opposition to demand this deal breaker.

Like any business, TV service providers must be able to take advantage of economies of scale. If competitors tried to live up to broad build-out requirements, rural communities, currently without any television service provider other than satellite, would probably not be able to afford the rates build-out would produce.

Even without build-out, next-comers will have a hard time gaining market share unless they offer a spectacular product - which the competition will then compete with. Ultimately, consumers will be the winners in this scenario.

Build-out is a deal breaker that increases rates short term and long term by stemming competition. Without competition, innovation is slow, and rates are kept high long after the capital investment costs have been recouped.

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