Criterion Economists Analyze the Competitive Effects of Telephone-Company Entry into Video Markets

November 9, 2005

On November 9, 2005, Criterion economists Robert W. Crandall, J. Gregory Sidak and Hal J. Singer released a report that analyzes the competitive effects of telephone-company entry into video markets in terms of prices and quality of service. The authors begin by reviewing the franchise process for cable services. Next, they describe the reaction of cable operators to entry by DBS providers and wireline overbuilders. Cable television providers responded to DBS entry by investing heavily in their networks to offer enhanced services, including digital video signals, high-speed Internet access, HDTV, and telephony. By contrast, cable operators responded to targeted entry of wireline overbuilders by decreasing their prices significantly. Both responses have generated large increases in consumer welfare. Crandall, Sidak and Singer also examine how local cable franchising requirements would serve as an entry barrier that would undermine the ability of telephone company entrants to compete effectively with cable operators. They explain why franchise requirements would have adverse consumer welfare effects in the related markets of voice and broadband as well. Upon entry by telephone companies into the local MVPD markets, the authors estimate that all cable customers who live in areas not yet served by a wireline overbuilder (roughly 93 percent of all cable households in the United States) would enjoy the benefits of lower prices of roughly $7.15 per month, or $85.80 per year. A five-year net present value of the annualized savings would be roughly $26.52 billion (assuming a five percent discount rate). To the extent that DBS providers respond to lower cable prices with price reductions of their own, the net present value of the welfare benefits from RBOC entry into MVPD markets would increase by roughly 50 percent, to nearly $40 billion. Finally, the authors explore the potential economic justification for the imposition of additional fees for a telephone company’s use of the rights-of-way, which the telephone company already has the right to use. They conclude that with minor exceptions, there is no incremental burden to the municipality from a local telephone company’s use of those rights-of-way to offer video service provided over a telephone network. Crandall, Sidak and Singer also conclude that to the extent that the local telephone company is required to pay any franchise fee, the appropriate percentage should be significantly less than five percent.

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