Cities Should Stay Out of the Cable Business - Multichannel

Cities Should Stay Out of the Cable Business

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At a time when cities are struggling to meet basic public needs, the accelerating trend toward municipal ownership of cable systems is both curious and disturbing, particularly in light of the substantial real losses suffered by many of the more than 100 municipal cable operations undertaken to date.

The traditional justification for municipal forays into cable — the need to subject private cable providers to competitive discipline — rings hollow in light of the growth of competition in the multichannel video industry. Moreover, when cities venture into the risky business of cable ownership, they divert scarce public funds to the provision of nonessential services that can be more than adequately provided by private enterprise.

Legally suspect

Even beyond the obvious financial disincentives, municipal ownership of cable systems treads heavily on important First Amendment separation between government and media, and unfairly threatens the viability of private businesses that do not enjoy the substantial preferences and subsidies that cities bestow on their own systems. Such operations, even when not in excess of cities' legal authority, are fundamentally unwise and unfair, and amount to bad public policy.

Although federal law does not prohibit municipalities from operating cable systems, other legal constraints may exist. A municipality may not provide cable service unless it is authorized
to do so by a given state's constitution and statutes. Cities such as Orangeburg, S.C., and Schuylkill Haven, Pa. — after spending significant sums on proposed municipal cable networks —were forbidden from operating them, because state laws did not authorize the cities to provide cable service.

Even where a municipality has authority to offer cable service, it still must comply with applicable state and local laws. Among them, "level playing field
" laws may mandate that the terms of a newly granted franchise — even one granted to a municipal entity such as an electric department — must not be less burdensome or more favorable than an incumbent operator's franchise.

Municipal entry into cable also carries with it significant antitrust
implications. Federal and state antitrust laws forbid a municipality from competing unfairly with other service providers, through moves such as using its regulatory authority with a heavier hand upon its competitors, or seeking to leverage its lawful monopoly in the provision of one service — e.
g., electricity or water — into another, such as cable.

Nevertheless, some municipalities have pushed the limits,
perhaps emboldened by the
fact that they are immune from
the civil antitrust monetary
damages to which private operators would be subject for the
same conduct.

A city's entry into the cable business also may conflict with its contractual obligations
to a private cable operator. For example, after Jamestown, Tenn., built and began operating a multimillion-dollar cable system, the city was enjoined from operating not once, but twice — first in state court, and subsequently in federal court — because it violated the city's express contractual obligations to its private franchisee. Its appeal to the U.S. Supreme Court was denied, and the city's cable network was left to rust on the poles.

No need for munis

Municipal ownership of cable facilities is, with limited exceptions, unnecessary. Municipalities enjoy substantial authority to regulate cable operators serving their communities.

For example, cities can manage public rights-of-way, collect franchise fees, conduct renewal proceedings, regulate the basic service tier, and discipline franchisees' failure to comply with franchise commitments. Given these powers,
as well as the advent of competition, cities' attempts to discipline private operators through
municipal cable ventures are
generally unnecessary.

No matter how much someone may want his MTV, a cable system — unlike water, sewer or electric service — is not an essential service. Absent a community's inability to obtain cable service from the private sector, a city should direct its scarce tax dollars to essential services that cannot attract private investment, not to the operation of a nonessential, high-risk entertainment-and-information medium like cable that tradi-
tionally has been, and is best,
provided by private enterprise.

It is fundamentally unfair
to use revenues from all taxpayers to fund a nonessential service that only some of the taxpayers will use. Even assuming that a municipal overbuild gained a 50 percent share of a total cable penetration of 65 percent, only one-third of the community's residents would subscribe to the municipal system, even though all
of the taxpayers could wind up paying for any shortfall. In contrast,
virtually 100 percent of a community utilizes public sewage,
electric and water services.

The First Amendment reflects a deliberate choice to keep government out of the ownership and control of media, and to ensure active criticism of government actions by the private media. Against this
backdrop, it is inappropriate to
pit municipal governments as
competitors to private cable
operators.

What occurred in Forsyth, Ga., offers a good example of the constitutionally questionable tactics
that a city can be tempted to employ against a private cable operator with which it competes. When the private operator publicly challenged the financial assumptions underlying the city's overbuild proposal, and criticized Forsyth's use of public funds and tax-exempt bonds, the city slapped a lawsuit on the operator in an attempt to muzzle its free expression.

While the city's lawsuit failed, Forsyth's attempt to silence legitimate criticism is potent evidence of the risk to First Amendment freedoms posed by municipal control of a principal media outlet in a community.

Poor track record

Many of the municipal overbuilds undertaken to date have been motivated by the desire to prime a new financial pump for cities' overburdened budgets. Yet, municipal cable is not a panacea for cities' fiscal woes.

Cable overbuilds are inherently risky ventures that are highly unlikely to become self-sustaining, let alone turn a profit. Too often, cost overruns and overly optimistic revenue predictions have forced municipal operations to resort to the taxpayers for relief. Indeed, several well-respected studies have found that municipal cable systems have performed poorly, have not produced
promised results and have
been saddled with financial
losses and legacy technologies.

Faced with potential public backlash over poor performance, some municipal cable systems have resorted to a variety of questionable practices aimed at disadvantaging their competitors, shoring up their sagging fortunes and sometimes even misleading the public. For example, Wadsworth, Ohio, was reported to have cross-subsidized its cable operations by using plant, employees and other resources of its sister municipal electric utility. That practice not only subsidizes the municipal cable system and keeps its rates artificially low, but improperly shifts the burden of these costs to electric ratepayers, most of
whom won't even subscribe to
the municipal cable offering.

Other cities have gone beyond mere accounting
shenanigans to favor their municipal systems over private
competitors. Paragould, Ark., is said to have initially granted itself a franchise that was more favorable than its private competitor's. Then it threatened to raise property taxes if more residents didn't subscribe to the municipal system. And then — after buying out the competition — it raised taxes on the entire community in order to pay for the million-dollar-plus shortfall in cable-television revenues.

The provision of competitive
cable services requires luring
customers away from incumbent providers and competing
for a fixed number of potential
subscribers. Many cities that
have considered entering these
markets have ultimately decided that the risk is too great. A
few others have chosen to
abandon these increasingly
competitive and complex markets by privatizing municipally
owned systems.

Bad public policy

It is inappropriate for a municipality to wear the hats of both
regulator and competitor. Competition by a municipally owned cable system with a private cable operator — which pays taxes and franchise fees to the city, and is subject to its pervasive regulation — is unfair.

Beyond being just unfair, municipal overbuilds raise substantial due process concerns. Given the twin pressures of stiff competition and the enormous financial and other challenges facing any overbuilder, there will be a strong temptation for a municipality to overcome its disadvantages by increasing the regulatory burden on its private competitor. Assumption of such a dual role subjects a city to an irreconcilable conflict of interest that, at best, will always render its regulatory actions suspect and, at worst, may drive the city to violate its public trust.

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