Tag Archives: franchise fees

Taxing Broadband

Cities have been petitioning the FCC to ask it to revisit the issue of the ‘mixed-use’ rule that blocks municipalities from assessing franchise fees on broadband revenues. Several cities recently petitioning the FCC to revisit the prohibition against applying the fees to broadband. Cities argue that franchise fees are not taxes, and instead are fees that help cities to manage their rights-of-way.

The municipal (or state) franchise fee is capped at 5% of retail cable TV revenue, and cable companies typically tack this fee onto every cable bill. Cities have been seeking a way to replace sinking franchise fees since the traditional cable industry started to bleed customers. The cable TV industry has lost 32 million customers since the end of 2017, a decrease of over 36% of all cable customers.

The ability of the FCC to block franchise fees was affirmed by the U.S. District Court of Appeals for the 6th Circuit in 2021. That order stems from an FCC appeal of a ruling by the Oregon Supreme Court in 2016 that allowed the city of Eugene to expand the franchise fee to cover broadband revenue.

The biggest complaint from cities involves what they call cable company arbitrage. A big percentage of cable company bills still include a bundle of services, and cable companies get to decide how much of a bundle is subject to the franchise fee. Customers have been saying the same thing, and most customers with a bundle of services have no idea what they pay for each individual product inside the bundle.

The arbitrage issue is decreasing over time as the number of customers buying a bundle is decreasing as cable subscriptions drop, but the largest companies still had almost 57 million traditional cable subscribers at the end of the third quarter of last year. Surveys that my consulting firm has done during 2023 show as many as half of customers in some markets still use a bundle, which is down from over 70% a few years ago.

I can sympathize with cities that have seen a big reduction in franchise fees. However, there wasn’t a peep out of cities for the decade when franchise fees soared as cable customers and revenues grew quarter after quarter. Some cities also increased the franchise fee rate until the FCC mandated that it can’t be higher than 5%.

It’s hard to say if cities are fairly compensated by these fees for maintaining their rights-of-ways. I’ve been in the industry for a long time, and I’ve never had anybody explain to me exactly what that means in terms of effort. I know that some cities have been using the franchise fees for functions other than rights-of-way, such as maintaining local public access programming or just shuffling the fees into the general city coffers.

The industry must be at least a little worried that the FCC might change its mind on the issue. NCTA – The Internet & Television Association filed a strong response to petitions filed by cities. This association includes the largest cable companies, and it urged the FCC to ignore the city’s requests to revisit the mixed-use rule.

The FCC has also been under pressure to assess a fee on broadband revenue to fund the soon-to-expire Affordable Connectivity Program (ACP). If Congress decides not to renew the discount plan for low-income households, many have been arguing that the FCC can tackle this under the Universal Service Fund, which is currently funded with a fee on telephone revenues.

In a tax-crazy world, it’s amazing how ISPs have been able to fend off these kinds of fees. While such fees are typically added to customer bills, ISPs argue that the government shouldn’t be doing anything to make broadband too expensive. That’s rich in an industry where the biggest cable companies have raised rates every year for a decade.

Preempting Local Government

In May the House Energy and Commerce Committee marked up nineteen pieces of telecom-related legislation, which means the bills can move forward to the full House for a vote. Today’s blog looks at one bill in particular because it represents what I’m seeing as a new trend of actions taken by big ISPs to preempt the authority of local governments.

The bill is H.R. 3557, the American Broadband Deployment Act of 2023. This legislation would preempt a host of current rights of local governments to manage public rights-of-way for telecom infrastructure. This applies to both wireless infrastructure like towers, but also to landline infrastructure like fiber, huts, and cabinets.

The legislation includes a long list of changes aimed at taking local government out of the business of controlling telecom infrastructure deployment.

  • The bill establishes a 60-day shot clock for local governments to consider requests for rights-of-way. If the local government doesn’t approve a request within that time, the request is ‘deemed’ to be approved. Further, once a project is deemed to be approved, the carrier or ISP can proceed with construction without further notice to the local government. It appears that would give builders the ability to bypass local inspections, traffic control regulations, etc.
  • The legislation would give ISPs and carriers the ability to install facilities anywhere they choose and bypass local zoning rules. This would also eliminate local requirements to hide, conceal, or disguise infrastructure in historic neighborhoods.
  • The legislation imposes a complicated formula for calculating and justifying any fees, with the overall goal of greatly lowering fees.
  • One of the most intrusive changes is that the legislation would place all disputes at the FCC rather than in local courts. This would force local governments to battle disputes in D.C. rather than locally. This would upset a 35-year long truce between Congress and local governments that allows disputes on local-related issues to be heard in local courts.
  • Eliminates cable franchise renewals and eliminates the ability of local governments to require rules such as an ISP having to serve the whole community, the local government requiring PEG channels, or the local government requiring customer service standards.
  • The biggest killer is that the law would give holders of franchise agreements the ability to cancel the agreement without losing any rights-of-ways included in the agreement. This would also kill local franchise fees, a major source of revenue for many governments. Perhaps the most severe provision is that franchise contract holders can eliminate any contract provisions they deem to be commercially infeasible.

There is a mountain of bills in the House this year, and there is no way to know the chances of this coming for a vote. However, there are several telecom bills that have bipartisan support, and bills like this one could be attached to such bills. This includes a bill that would renew the FCC’s authority to hold spectrum auctions and a bill that would stop federal grant funding for broadband infrastructure from being taxable.

To me, this bill is part of an ongoing effort of cellular carriers, cable companies, and big telcos to restrict the ability of local governments to affect the construction of infrastructure. These big companies have already been successful in recent years in eliminating regulation. The cellular companies already got relief from the Ajit Pai FCC that made it a lot easier to place cell sites. This law would codify that change so that a future FCC can’t change it. The large ISPs were successful in getting the Ajit Pai FCC to eliminate most broadband regulations.

This bill is going for a home run to eliminate local regulations these big companies don’t like. I’ve written recently about regulatory capture, and this is an ultimate example of changing the laws to get what the big monopoly providers want. This law would eliminate franchise fees, allow carriers to put infrastructure anywhere they want, and pay low fees in doing so.

More proof of the degree of regulatory capture in the telecom market is that there are no equivalent efforts to change local government control of other kinds of infrastructure like roads, factories, buildings, etc. This bill is the ultimate example of the biggest companies in telecom flexing their power and influence to bypass some of the last vestiges of regulation.

Windstream Adding YouTube TV

Windstream announced earlier this year that it is now offering YouTube TV to customers as an alternative to its traditional cable TV offering. The company has not yet fully ditched its traditional Kinetic TV offering, but this is a first step towards doing so. As more small cable operators look at the math of staying in the TV business, I’m expecting we’ll see a lot more ISPs considering the same transition. There are a lot of implications for converting traditional cable TV to a streaming service.

Regulatory. While regulation of traditional cable TV isn’t a massive burden, all regulatory requirements disappear with a conversion to a streaming service like YouTube TV. There are a several annual FCC filings required by cable operators that would disappear. If a cable operator is paying local franchise fees, they can avoid the monthly reporting of customers and revenues to local tax authorities.

Taxation. The biggest external change from such a conversion would be that the cable operator no longer has to collect and remit local franchise fees assessed on cable service which vary across the country between 3% and 6%. The cost of collecting taxes and fees and of dealing with tax authorities disappears for the cable operator.

The biggest implication of this change is that local communities could see franchise fees dry up overnight. I would expect a cable provider like Windstream to withdraw and cancel their franchise agreements if they fully adopt YouTube TV. If the primary cable provider in a town makes this conversion, then franchise fee payments dry up immediately. Franchise fees are an important part of balancing local government budgets, particularly in smaller towns.

Cancelling franchise agreements also means that all of the local obligations that come with a cable franchise disappear. The cable provider would no longer provide a PEG channel to show local government meetings and other local content. Any subsidies for local government iNets for bringing connectivity to city halls and schools would disappear.

Operational. There are huge operational savings for ISPs that make this conversion. Most of my clients that offer cable TV tell me that 60% or more of calls to customer service are about the cable product. Eliminating traditional cable means reducing customer service calls and reducing truck rolls.

Getting out of the traditional cable business also means getting out of the settop box business. There is a huge operational savings from not having to keep a settop box inventory and keeping boxes operational. Installations get much easier when there is no settop box to connect.

Broadcast Fees. There are also implications for the larger cable market. Online services like YouTube TV are not required to comply with FCC channel lineups and they can offer whatever packages they negotiate with programmers. This means many networks will no longer be carried and will lose the revenue for every customer that makes this conversion. This becomes cord cutting at the corporate level and as 200-channel lineups get shrunk to 70 channels, a lot of monthly fees to programmers evaporate.

If you look at the YouTube TV line-up, you’ll see the most popular networks. For example, the service includes the primary Discovery channel, but not all of the ancillary Discovery channels that come with a traditional TV subscription. This is true throughout the line-up as the service concentrates on the most-popular channels only.

Profitability. The biggest change is to profitability. I expect that if Windstream fully calculated the cost of being in the cable business that they would show no margin or a negative margin. All of the ancillary costs of extra truck rolls, dealing with settop boxes, tracking and reporting franchise fees and taxes, etc. can add up.

I don’t know what YouTube TV will pay to a cable provider like Windstream, but it can’t be much – no more than a few pennies on the dollar. Nobody would make this transition to get rich from the commission fees, but rather to avoid the costs and the hassles of remaining in the traditional cable business.