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.