Nobody thinks of drawin' the distinction between honest graft and dishonest graft.…There's an honest graft, and I'm an example of how it works. I might sum up the whole thing by sayin': "I seen my opportunities and I took 'em."
Just let me explain by examples. My party's in power in the city, and it's goin' to undertake a lot of public improvements. Well, I'm tipped off, say, that they're going to lay out a new park at a certain place. I see my opportunity and I take it. I go to that place and I buy up all the land I can in the neighborhood. Then the board of this or that makes its plan public, and there is a rush to get my land, which nobody cared particular for before.
Ain't it perfectly honest to charge a good price and make a profit on my investment and foresight? Of course, it is. Well, that's honest graft.
—George Washington Plunkitt.
Look at that pathetic prefabricated cube sitting there in your living room. All those wires, transistors, electrodes—and to what high purpose? BJ and the Bear chasing CHiPs for a glimpse of Farrah Fawcett's hair or Donahue's smirk or Loni Anderson's "profile" or Tom Snyder's haw-haw-haw-haw so Real People can Be a Pepper and say Hello Larry on the Love Boat. Is this the best substitute for a little dose of some late-night sleep-inducer?
Perhaps your mind has wandered to a far-off land, where a dapper Latino and his pint-sized deputy sit you before what looks in every respect like your television set—until you turn it on. "Wow!" you say (but not, "That's Incredible"). For you find, not two to seven channels of the kind of programming that gave the boob tube its name, but scores of simultaneous program choices, of programs that only a few thousand people are expected to watch; and you discover at your fingertips a mysterious two-way communication capability to use this machine as a home security system or to shuffle money out of your savings and into your checking or to pick up a few shares of IBM or to vote some rascals into office. Only on Fantasy Island?
If you're one of America's 18 million cable television subscribers, you know better. But what you, and the three-quarters of the nation's television victims who do not get cable, might not know of is the enormous battle over cable television off stage. Because every facet of cable—who provides it, who gets it, what you see, and what you pay—is the prize in a frantic scramble by big-time political interests in every city hall in America. From Pittsburgh to Houston to Los Angeles, the cable television business is proving that a brilliant consumer-pleasing innovation is only as good as the political system it serves.
The Shape of the Era to Come
When one samples the delicious menu cable is cooking up, it is easy to see the records being made in the race to feed. The cable technology bonanza has ignited the creation of whole networks to deliver nonstop sports (ESPN and USA Network); 24-hour news (Ted Turner's interesting Cable News Network will soon be challenged by Westinghouse Broadcasting); first-run movies (by several firms, including Home Box Office, Showtime, and Movie Channel); la-di-da cultural events on no less than five ritzy networks (including CBS Cable, ABC Arts, and Bravo) that have already swiped, by outbidding, half of PBS's national programming (including the highly acclaimed BBC menu); a batch of old-movie stations; exotic/erotic programming stations; an educational all-children's service without sex or violence (Nickelodeon); an Italian-American network that broadcasts movies starring Marcello Mastroianni, Sophia Loren, and Gina Lollabrigida; Black Entertainment Television; Spanish-speaking networks; and even channels where representatives of consumer product manufacturers are invited to demonstrate and discuss their goods for 5 to 30 minutes at a time.
And entertainment is but the opening volley in the cable revolution. As Fortune magazine notes, "The television set will eventually do other things besides sit there passively, waiting to be watched. Companies are already testing data-transmission devices and energy-load management systems that will all be hooked up through the TV set by cable. If properly instructed, your set may soon be capable of turning on your washing machine at 3:00 A.M., when the demand for power is low. Indeed, as the expansion of television continues, these last thirty years may be nostalgically remembered as those days when the television set was just a television set."
Two-way transmissions now in production will permit thousands of voters in a community to cast ballots simultaneously on local referendums or other issues, and systems now in limited use bring home security service, in conjunction with a private security firm in the neighborhood, into a new generation altogether. The "electronic cottage" hi-tech world will, as reported in Business Week, "fundamentally change the way people shop, bank, work and communicate, since it will permit them to do all of these things without leaving their living rooms. They will be able to call up on their video screens the news on any selected topic, as well as a wide variety of continuously updated information on such subjects as airline schedules, and stock and commodity prices."
Cable TV systems require wires to be strung throughout the audience area from hub receiving stations that capture signals from satellites. These cables connect individual television sets to the cable system just as phone lines connect your telephone to Ma Bell's circuits. Traveling either below the ground or above, often utilizing existing telephone or utility poles, these lines ordinarily deliver the customer between 30 and 110 channels.
(Over-the-air pay television, on the other hand, emits signals from a transmitter placed in the locality and "descrambled" by an electronic receiver that plugs into the television set and must be bought or rented from the local "subscription television" (STV) company. Pay television channels are sold one at a time and are generally limited by regulation to only one or two channels in each market area. And finally—if we can ever use that word in this industry—there is the ultrarevolutionary, super-space-age, mega-hip innovation just now peeking around tomorrow's corner: the direct broadcast satellite (DBS), whereby the individual customer can purchase a parabolic dish antenna for a couple of hundred bucks and tune in hundreds of television channels (perhaps more?), direct from where only space shuttles roam.)
It is regulatory manipulations, however—a complicated labyrinth of incentives and disincentives—that will, when all is said and done, steer the course of the era to come. This direction will not be planned by but will definitely be influenced by the political agencies: while changing the course of the technology, the "authorities" still have little idea where their hands-on policy will take the industry and even less appreciation of the forces of science and consumer demand that will compete with their wishes in determining this unknowable outcome.
Popping the Chains at the FCC
There are two broad layers of regulation in the cable TV industry: local and national. Each cable franchise must gain the approval of the local jurisdiction in which it operates; on a national scale, the Federal Communications Commission (FCC) must decide what the various communications services will be allowed to do and not to do.
The national market is subject to the actions of Congress and federal regulatory agencies. The FCC has territorial "rights" to regulate the emerging technologies and has acted with characteristic energy and foresight in exercising those rights. Their first move in this field was to throttle pay TV for a decade. Between 1968 and 1972, for example, the FCC buried cable (or prohibited companies from burying their cable) in the 100 largest metropolitan markets and slapped on such burdensome requirements (including a ban on movies that were less than three years old) that cable was grounded almost everywhere else, as well.
In a delicious irony, however, the FCC now has taken the lead, along with that great political fund-raising group, the US Congress, in pushing cable deregulation and television competition. In an FCC study released in late 1980, the agency found that efforts to introduce higher-quality programming and greater diversity through direct federal regulation of television had failed. The two-year, 3,700-page investigation conceded that FCC policies had "served effectively to limit television to a system dominated by three over-the-air advertiser-supported networks." Commission Chairman Charles Ferris responded enthusiastically: "We should actively use these findings as mandates to encourage more competition and new services; in short, to create more choices for the viewing public."
Ferris, a Carter appointee, has since been replaced by Mark Fowler, a Reagan appointee. And it is Mr. Fowler's concurring opinion that, where his predecessors began the task of "deregulating," he will finish the job by "unregulating." The FCC has recently loosened the rules governing over-the-air pay television, for example; is beginning to license low-power TV stations; and is talking, over network opposition, of unleashing direct broadcast satellite.
The great lure for the national deregulators is the rich cornucopia of product that awaits. Considering solely the entertainment aspects of the medium, television has long been the turf of none but the most subterranean of intellects. Nothing intrinsic to the electronic box as television set mandates this, however. What has short-circuited your TV set's foray into the world of high drama has been the FCC soldering of the wires.
TV critics often mistakenly attribute the forum's antisophistication to the commercial ownership of the companies who provide the offerings. But Shakespeare sells well in the book stores, as do lesser literary virtuosos, and these saints of the homogenized aesthete simply burst forth in every other commercial medium that has escaped regulatory strangulation: newspapers, magazines, movies, plays—even AM/FM radio, which the FCC has grasped, but not completely gagged.
The Great Leap Forward taken by cable technology is to expand our number of programming options radically beyond the point where FCC restrictions on VHF, or even UHF, channels can have much impact. The difference between 3-channel service under the FCC's restrictions and 50 channels under cable's New Possibilities technology is nothing other than a dramatic reduction in the opportunity cost of using up any one channel. When consumers have but three choices, a network that broadcasts Luciano Pavarotti at the Met is throwing away the opportunity to keep tens of millions of customers watching some lesser, more broadly appealing, fare. Big audiences are still important with the 50-channel option, and the most production money will characteristically be spent on the highest-rated shows, but opportunity costs are a fraction of what they were. Using one station for opera becomes feasible when it does not have to outbid all but two competitors; now it only has to outbid all but 49. Reader's Digest is top 3; Psychology Today, top 50—deregulation is diversity.
Science, in short, has de-FCC'd television. As one city official familiar with the new technology puts it, "Cable TV's success lies in its ability to provide steak and specialty foods to smaller numbers of people in numerous categories," as opposed to the "McDonalds and Jack-in-the-Box" fare of the network big three. The message is so compelling that the federal regulators—always the last to know—have caught the spirit and now rush to pop the chains and free the competition.
Competition the Political Way
Yet, with the future so well received by the feds, the dividends from this space-age fantasyland on the end of your TV's "on" switch are being pilfered at the local level. The very opportunities that offer an explosion in consumer choice offer local authorities—and those who have pull with the authorities—a chance to snare a prime-time piece of the action. Just as the FCC has abandoned its restriction of output, local governments have jumped in to fill the "void" with their own.
The cable franchise permit is the how. While most localities do not issue "exclusive" franchises, they do issue only one. They call it a nonexclusive franchise so that they have the option to issue another "nonexclusive" cable license should the first company not perform to specifications, but the understanding, always implicit, is that no other will be issued unless a serious breach occurs. The reason, incidentally, that one must have a city or county permit to put in a cable system is that such a project entails digging below public streets or stringing cable on utility poles. It is from their jurisdiction over government-owned streets and rights-of-way, not by any authority over the provision of television services, that the locals are permitted to permit.
It is only recently that a tiny shadow of a doubt has been cast over this power to regulate. In January the Supreme Court threatened to upset the applecart with a decision that the city of Boulder, Colorado, may be sued under federal antitrust laws for holding up a cable firm's planned expansion. But the last word is not in yet: a lower court is still to decide whether the Boulder city council actually winked at the antitrust edifice in this instance.
The cable industry has been mute about the decision—but not the city pols. Within days, the National League of Cities had raised cries of outrage and promised to run straight to the state capitals or even to the US Congress to obtain relief from the Supreme Court position.
Why the fuss? All the uninitiated bystander need do, in order to understand the locals' panic at the idea of having the regulatory rug snatched from under them, is to look at the "competitive" process by which franchises are awarded.
Let's listen in on one such award hearing: for the Scottsdale, Arizona, cable franchise ("nonexclusive," naturally), October 17, 1981. Held at the Scottsdale Senior Center, the hearings pit eight fierce competitors against one another. They have all submitted their bids to the city council, and the council staff has made its ratings and recommendations. Today, the task for each competitor is to respond to these findings and to sell the cable committee on the merits of the best proposal.
There are a lot of blue suits in this room, and, as could be expected, where you find blue suits you find lawyers, lots of lawyers. Most of these lawyers come from far away, but they all seem to know the local community, and to know—and work with—a lot of people who are the local community. In fact, the Scottsdale Pilot, only two days prior, boasts a big advertisement for Capital Cities Cable: "Meet Our Local Stockholders," it beams.
The public is invited and, as always, the "public" is in attendance, sort of. Representatives of the public are in attendance, that is, and they can ravage an applicant. To wit:
QUESTIONER: You show (in the franchise application) only six hours of local programming per week, which is considerably lower than any of the other applicants.
APPLICANT (Times-Mirror Cable): Yesterday (a city official) told us that nobody watches it. Times-Mirror says that the demand just isn't there right now. If the demand were to rise, we would up our local programming.
QUESTIONER (different from before): Do you mean that you would increase your programming if it would help sell more subscriptions?
TIMES-MIRROR: Yes. If there were an interest in this, we would be right there to expand our coverage.
Times-Mirror did not win the Scottsdale franchise. And how could they? They weren't even playing in the ballpark. Scoring in the cable monopoly game works just as in any other in the economic marketplace: goods go to the highest bidder. But make no mistake about the difference between bidding for consumers with actual product on the barrelhead and bidding for a franchise monopoly with a "proposal for community service," In the former, consumers view the competition and volunteer their dollars for the selection that they believe fulfills their own needs. The political franchise authority, however, gets to make quite a different choice: What company's offer should the citizens of my community want to pay for?
And so it is that local government regulation does not eliminate competition in the cable business; it simply shifts the competitive battleground. Instead of outdoing one another to entice customers, firms fight to lure the politically powerful. The rivalry is just as intense, but it leads to a vastly different set of demands being satisfied.
A Not-So-Natural Monopoly
Before viewing the high drama of the political competition for a monopoly franchise, an intermission is in order. For it might occur to the mere and actual consumers of television services to ask why they must settle for one and only one cable company. Must the coming of cable be as a monopoly franchise?
While the important word in this question appears to be monopoly, the key word is, in fact, franchise. The presumption of local regulators is that cable is, by its technical circumstances, a "natural monopoly"—the high capital investment makes it uneconomic for a second cable company to compete in an overlapping market. Even if this is so, however, it does not automatically mean that a franchise should be granted to the monopolist. The industry argues for such a grant on the grounds that, absent an exclusive entitlement, the necessary investment capital would not be forthcoming. On the other hand, the same industry sources claim that, for a second firm, the costs are not justified by the returns from being number two, meaning that the market would only support one cable firm per area, and a de facto monopoly is assured. So why must we enforce a monopoly where monopoly is a certainty?
If the logic appears shaky, the empirical test of the proposition is devastating. The necessary and sufficient counterexample to the hypothesis is visible for viewing in the metropolis of Phoenix, Arizona. Dissatisfied with the one "nonexclusive" cable franchise it had issued in 1976 to American Cable Television—the firm had failed to connect more than a small percentage of the city to the cable—the city council voted in June 1980 to allow two more firms into the market. Cross Country, Ltd., and Camelback Cablevision eagerly jumped in to compete head-to-head with American—established with a four-year head start. ("Natural monopolies" are presumably immune to such upstart rivalry.)
Another nearby city, Paradise Valley, also dissatisfied with American Cable's progress and service, decided to invite Camelback Cablevision to compete in offering subscriber service, and it has now laid cable there on the very same streets as American Cable. Nationwide, better than 25 cities have head-to-head cable competition. Must cable companies be given monopolies to induce them to lay cable?
(One need not be a ruthless cynic to understand why local officials would argue in favor of their regulating cable TV content, prices, service, and the rest, but the industry argument for monopoly franchising is a thinly veiled plea for protectionism. Regulation is the ever-popular quid pro quo for acquiring monopoly rights. One particularly brassy cable company executive told me that he favors "deregulation" of cable television. When I asked if he thought such open competition would be good for the industry, he unabashedly corrected me: "No, I'm talking about removing the ability of local governments to regulate; I am not talking about repealing our monopoly franchises." Quite a "deregulation.")
Bruce Merrill, president of American Cable Television in Phoenix, remains bitter, outspoken, and angry over the city's decision to allow competition within the franchise area. Two city council members championed competition on the theory that monopoly is bad for consumers. Merrill, however, claims that, even though he received a "nonexclusive" franchise, allowing two more cable companies in the market is ill-conceived. "It's destructive and nonproductive," he feels, "and eventually there will be only one cable system anyway." He boasts that his firm is sure to out-perform the others and, ultimately, buy them out. So why not determine this winner-take-all contest by open, market competition? "Do you use swords or pistols?" rejoins Merrill.
The question is anything but rhetorical. For, while the eventual winner of the bloody cable-fest may be the same under either the exclusive franchise arrangement or the free-market rivalry method, the means to the end will be diametrically different. In fact, the essential reason why Mr. Merrill lost his "understanding," as he puts it, that his 15-year franchise would be exclusive is that the permit, issued in 1976, was close to a no-strings agreement. American did make minor concessions to the city of Phoenix, including provision of a two-way energy communications system; but the firm had little incentive to offer more because there had been no competition to obtain the franchise. It was Merrill's misfortune that, because he was so far ahead of his competition, the city was unable to force him to promise much in the way of politically demanded cable services. The monopoly he got was not one he shared. That was Mr. Merrill's sin.
Divvying Up the Dividends
Do not waste time scrounging the cable industry for those who "ideologically" favor open competition. Any such rotten eggs have long since been sorted out by the selection process of the market. (One can imagine the amazing number of successful franchising operations such a matador would bag, lecturing city councils on the need for competitive enterprise and the supremacy of consumer demand.) What all local politicians who regulate cable and all firms who provide cable "believe" in is: The Community. The proud advertising display of the US Cable corporation (not to be confused with the equally patriotic American Cable Television), provides but one example:
In every neighborhood, town, or village—where US Cable is granted the franchise—the community is all. The company reserves channel after channel for strictly local programming, welcoming the participation of the best talents around—community leaders, artists, entertainers, educators, newscasters. Whatever is happening nearby—a high school band concert or track and field event, a students' play, local council meetings, a holiday parade, every kind of civic event—is wired right into our subscribers living room.
But, while The Community may be all, the important citizens who get to decide on behalf of that community have some definite ideas about who all is to count as The Community. The "average citizen" (you know the sop) is denounced at franchise hearings as "one of the 99 percent who only care about their movies and sports," and the chosen representatives, of course, are out to get something quite distinct. The Scottsdale hearings show what "Community" means to them.
Take, for instance, the proposal of Camelback Cablevision. Camelback was not chintzy. An "executive summary" of its proposal runs to 22 pages and is elegantly produced in glossy, multicolored artistry on the outside and slick, well-groomed copy on the inside. The presentation is smooth and professional, explaining the proposition of cable monopoly so sure-footedly that even a city council member could comprehend it. Beginning with a citation from Alvin Toffler, the pitch wastes little time on what Camelback's 104 channels might serve the viewers; by page five, we embark on the section, "Camelback and the City of Scottsdale in Partnership." At this point, were this presentation transmitted via cable, we'd be ransacking the other 103 channels for a program of interest.
Here the would-be monopolist dishes out huge portions to The Community. The kitchen will be "a fully equipped $400,000 local origination studio in North Scottsdale" and a "$140,000 mobile production unit with 2 color cameras (and) a staff of 27 operational and technical personnel." And the menu—what a meal! "Programs on Scottsdale history…candidate debates during (local) election campaigns…local news shows…fire prevention and safety programs…musical programs presented by Scottsdale musical groups and societies." Who will do the cooking? A board of directors with, as Camelback puts it,
representatives from various segments of the Scottsdale community as follows:
Social Service Health
Public Service (fire/police)
Chamber of Commerce Arts
Members at Large (Two)
Their budget? A cool $26 million over the course of the 15-year franchise, as compared to a 3-year capital cost of $31 million to build the whole system.
Don't turn the channel, because there's so much more! A "professional arts/cultural channel" will broadcast all the culture occurring in Scottsdale. In case of any lulls in activity at the Scottsdale Center for the Arts, roving minicams—blessed with $225,000 in supersonic videotronics, courtesy of the Camelback philanthropists—will be aimed at local art galleries to stir up those pesky little cultures residing in The Community.
Beyond this, way beyond, stretches Camelback's 104-station commitment (although, it may fairly be noted, this is strictly conditional, for the deal's all off if Camelback loses its monopoly interest in The Community). They take us to new, oxygen-thin heights with such contributions as whole channels checked for Public Library Access, Senior Citizens Access, Cultural Interconnect, Youth Access, Business Access/Professional Arts, Health Access, Public Schools (2 channels), Community College (2), Arizona State University (not even in Scottsdale), Educational Access (2), Women, the Christian Broadcasting Network, and Local Government—with "interviews of City staff explaining their various department functions, services and office hours" or "Mayor/Council Breakfast programs" or "Question & Answer 'call-in' talk shows with the Mayor, Council Members, and City staff members." Is the reception getting clearer? Is the picture coming into focus?
Now no one will seriously argue that none of the foregoing services are without justification from the perspective of those consumers who will shoulder the burden of subsidizing them. Indeed, some of the above (particularly the Christian Broadcasting Network) have proven their ability to accrue revenues in excess of their costs (also known, somewhat more earthily, as "profits").
Yet the undeniable pattern that takes shape under cable regulation is that, taken as a whole, breathtakingly vast harvests of plump cable fruit are being plopped on the tables of the politically ravenous. In an almost divinely created conspiracy against the public interest, a very private "public interest" is being decided by a triumvirate of the potential cable monopolists who must offer the fruit if they are to go from potential to actual, the political decisionmakers who may choose the recipient of the franchise monopoly gift, and those well-placed, well-connected individuals who desire to be an active part in The Community. The politicians have their own tastes and preferences, naturally, and would try to indulge them, but they do not operate in an isolation chamber. They have their constituencies to accommodate, such as the movers and shakers in Religion, Education (Two), Social Service.…
Cable TV may have lowered the costs of television air time; it has not reduced the costs of television air time to zero. Each channel sliced and diced from the community for The Community is one less by which the paying viewers will be treated to what they would in fact pay for. The regulations prompting cable systems to shift resources to political pressure groups that are unwilling to bear the costs by outbidding competing consumers for the use of such resources is clearly a wealth transfer. It is a tax, in the first part, on those who pay to support the cable's profitable services. It is a tax in the sense that consumers are prevented from patronizing other firms that might offer, in their view, better cable services at a more reasonable price. This is a monopoly tax. Some of the "tax" revenues are deposited by the cable operator, and the rest are sent right over to The Community via provision of the very services that they would like to utilize but aren't quite willing to pay for (at least not so long as they can get someone else to do that for them). Confusing as the game becomes, that is all there ever is to the joust of cable television franchising: Who promises the biggest buffet on the other guy's tab.
So rock-solid is the sympathy and support for the abstract concept of "programming for senior citizens" or free air time for the "Chicano Orphans Association" that one cable regulator claims she has "never heard anybody stand up and say we didn't need public access channels." At the very same time, she paradoxically observes that "I have heard people say that they've had public access in their town for five years, and nobody has come in to use it."
Recent franchising battles have seen political pressure to "correct" this situation by increasing the franchise's ante in the form of more-expensive, more-sophisticated production equipment. Cable franchisers now "bid" against each other with all kinds of fancy studio and "roving" television production units to make local origination/public access easier. But keep your eye on the bouncing ball. Those production facilities will be paid for, not by viewers of the channels they create programming for (else the firm would offer these services in the absence of any franchise approval process, which they do not), and not by those who receive the facilities for the asking (taking?), but by those who pay monopoly rates for other programming.
The coalition thus established to press for the massive cross-subsidy from those who pay for movies and sports to those who perform on the "local origination talk-shows" is a coalition made in politico-heaven. The cable industry solidly supports the system: with a commitment to lose money on services the political interests demand, the cable corporations receive a monopoly rate of return on the profitable services that the overwhelming majority of television viewers desire. The local pols love the offerings laid at their door: channels devoted to the county tax collector explaining his appraisal techniques, thousands of dollars of "free" TV equipment to publicize (incumbent) legislators' activities, putting politicians in front of television cameras.
Top this coalition off with the third, and perhaps decisive, link in the chain of consumer bondage: the "community activists." The fabulous thing about this obscure phrase is that while you may have a dickens of a time figuring out who speaks for your community, the cable operators have achieved an absolutely fool-proof way of deciding precisely who they are. They go out into the community and offer to put certain groups on the tube for free; the ones who volunteer, they are the community activists. (And if they weren't particularly active before, why they'll become really active now, as lobbyists—er-ah, concerned citizens—to encourage the council to approve your franchise.)
Nothing much is subversive about this procedure, and nothing whatsoever is in the least bit mysterious. If your firm is attempting to lay claim to a gold-mine cable franchise, what better way than to buy off all the local pressure groups with bountiful promises of much of the product you lust to deliver? The one small catch is that someone will pay for your largesse.
Tuning Out the Customers
While virtually every major market in the nation that has cable has only one cable firm per geographic area, one may search the industry high and low for anything approaching a coherent pro-consumer explanation as to why. Mr. Merrill, the president of the lost-monopolist American Cable in Phoenix, adamantly insists that "I don't have to defend that (monopoly) logic. It is almost universally accepted that there be only one cable franchise." When asked to explain this in his own words, he responds, "It would take too much time."
Yet Merrill did find time to discuss his competitors' inconsistency on the topic: Camelback Cablevision is a warm proponent of competition in Phoenix, where they've broken ground in competition with Merrill's American; but when Merrill went into Mesa, Arizona, in 1978 to obtain a second franchise to compete with Camelback, Merrill says, "They opposed me bitterly." (It is also curious that Merrill, who argues for the impossibility of competition, was himself attempting such an impossibility in Mesa.)
Just how prominently consumers figure in the great franchising game can be seen in the reaction to several recent events. In Boston, a bitter franchising competition was won last summer by Cablevision Systems Development Corp., which promised to offer 52 channels to 240,000 Boston TV sets for a bargain-basement $2.00 per month, far less than the $8.00, approximately, that most systems charge for the basic monthly service. The firm openly hopes to sell lots of extra entertainment and news channel subscriptions to recoup its $93-million, 3½-year capital investment.
The franchise award has been attacked, however, as a gimmick: Cablevision Systems, it is charged, will be able to hold up the city for higher rates once they've established themselves as the sole cable operator (the low rates are only guaranteed for the first 5 years of the 15-year franchise). "The low offer was just so that they could get one of the last remaining urban franchises," says industry analyst Anthony Hoffman of A.G. Becker, Inc. "Five years down the line, the people of Boston will be paying as much as they would have paid Warner-Amex (a competing applicant). But Cablevision will have the last laugh, because it got the franchise." The odd note here is, if the consumers save lots of money but it only lasts for five good years, after which they pay what they would have to someone else, why they are seen to be suckers preyed upon by the low-ball bidder who sneaks the "last laugh"?
In Indianapolis, too, consumers have been dropped from the picture. After two "nonexclusive" franchises were awarded for nonoverlapping sections of Marion County, Indiana, in 1981, one of the competitors who didn't get a franchise decided to lay down big bucks on a bet that it's not economically impossible for a second cable company to compete once the first company is established. Robert Schloss, general partner of Omega Satellite Communications, approached the owner of a large apartment complex in Indianapolis who had the option of hooking up with the approved cable firm. Schloss offered the owner a competitive cable package delivered via an on-site "earth station."
Schloss figures he can profitably install such a receiver for a building of 300 units or more. High-density neighborhoods where a row of apartment buildings of even modest size are bundled together offer exciting competitive possibilities with just this technology, because cable firms can compete for business one building or row of buildings at a time. Soon, Omega had 2,000 cable customers.
As usual, the snag to competition was city hall. After city workers last December discovered a secret cable that Omega had inserted through a drainage culvert to connect the systems of apartments across the street from each other, Omega was slapped with an order to back off. Schloss was told to "disconnect his cable," as one newspaper put it, "or the city would save him the trouble." Schloss is now challenging in the courts the city's power to enforce the cable franchise monopoly agreements.
In its own defense, the city charges that firms like Omega simply want to come into the area and "cream-skim" by offering competitive services at low prices to the cheaper service areas (the high-density apartment complexes). The line of reasoning becomes all too transparent. If apartment dwellers find themselves cheaper to serve with cable, why should they be forced to pay higher prices to subsidize the relatively affluent homeowners? With this argument, the city is baldly supporting a cross-subsidy wealth redistribution scheme to prevent poor renters from taking advantage of the benefits of competitive cable.
But this is simply the underlying rationale for all of cable's misguided franchise finagling. When Federal Judge Cale J. Holder ruled in March that he would not grant a preliminary judgment in Omega's favor, it was a victory for the politicians of Indianapolis and a grand defeat for the cable customers who live in apartments, who don't partake of city council meetings for cable broadcast, who would just like to use the cable at a reasonable price for their own purposes.
The only thing approaching a real pro-consumer argument among the forces in favor of monopoly franchising is the claim that the "workmanship" on competitive systems, such as those being constructed in Phoenix, will suffer and, the story goes, will make everyone very disappointed several years from now when they deteriorate to the unserviceable. While this contention's ingenious impregnability to any actual test of the facts is to be admired, what we can say about the experience in competitive Phoenix contradicts it.
Competitors were licensed to enter the market against American because the latter firm was thought to have "dragged its feet" on constructing its system. One city councilman, Jim White, claims that because American Cable had both the Phoenix cable and Home Box Office over-the-air pay-television franchises, the firm was in no particular hurry to build a cable system to compete with its already-established monopoly. Complaints of sloppy construction, a prime concern of local governments, have overwhelmingly been about American Cable, the established firm, rather than the upstart competitors. According to Terry Parker, cable communications officer for the city of Phoenix, "American gets a tremendous number of complaints," while "Camelback's work is excellent."
Parker views the competitive market, after the city's practical experience with the system, as a reasonable way to do business. "When I first heard of us letting new companies into Phoenix to compete with American," she admits, "I thought, 'Why would anybody want to go against an established cable TV company?' But these new firms are out to make money, and they're not stupid—they're coming here because there's a market."
As for the chaos of competition, Parker really hasn't seen any. "There have been no gunfights in the streets," she remarks. "The newspapers ran headlines like 'range wars,' but that has not happened." Crews from rival firms have actually laid cable on opposite sides of the street—without firing a single shot.
For the most part, Phoenix cable construction, which has still reached only a small portion of the city's 270,000 households, is proceeding in nonoverlapping sectors. While no one knows what will take place when the entire city is wired with cable, one cable per neighborhood, it is too early to rule out head-to-head competition. Limited areas have already seen this, in a half-mile-square section of Phoenix and in suburban Paradise Valley. So strong is the industry presumption that overlapping competition is economic disaster that both Cross Country and Camelback, in gaining their Phoenix licenses, assured the city that they would not "overbuild," as it's called in the industry. A Los Angeles cable consultant, Carl Pilnick, however, cites a recent trend for aggressive companies to challenge existing franchise holders, especially the older companies that received their licenses before the big cable boom, in competitive clashes. But some just cannot conceive of this, including American's Bruce Merrill, whose heart will always and forever belong to monopoly, at least in the long run: "I think we will remain dominant and buy the others out."
If we may take him at his word, then, there is no economic reason to keep competition limited to hearings before city council operatives and a great number of political considerations for avoiding this intense sort of "opportunity-seeking behavior." While Merrill cries that "there's no way they'll ever get the politics out of it," he ignores the underlying reason for the politics in it: politicians do the choosing. Consumers, who will pay the tab, get stuck with the choice.
The procedural shenanigans around the nation in awarding these franchises have often reached the point of outright scandal. More than one politician is on the line for damages over conflict-of-interest charges, one cable operator is in jail for bribing city officials, and more socially acceptable forms of bribery—like a potential franchiser in an eastern city flying the city council out West to see its other franchise, with a "pit stop" in Las Vegas tossed in—are nearly the order of the day. In Los Angeles, a current franchising battle illustrates the byzantine politics called forth by cable a la monopoly (see sidebar, p. 32).
Will the Future Be Unleashed?
The silliest shame of all, the catch that will make the more-enlightened generations far in the future howl with delight when told of our folly, is that there is no "cable monopoly"—not in any economic or technological sense. The "cable monopoly," even where only one firm wires a region, is a figment of the regulatory imagination of the Federal Communications Commission. For if the FCC were simply to license a few thousand more commercial television stations for "low power" use (meaning local, not to interfere with distant signals), if they were to license 5 or 10 STV channels in each city, if they were to allow DBS broadcasters to compete for a share of the electromagnetic band, if they were to allow telephone companies to compete with cable firms in the cable business (isn't this a controversial one), and if cable franchises were to face actual or potential sources of competitive entry—then one could talk of a "cable monopoly." But one can also talk of unicorns.
Before the lynch mob riles the entire cast of FCC villains out of their government shrines and on to the gallows, however, it may be interesting to probe the depths of the FCC's conscience. If the press releases are to be taken seriously, the FCC has decided to throw its chips down on competition but is getting some mighty fierce stare-downs from the champions of regulation. Item: When the FCC proposed to drop almost all STV regulation, "public interest groups," according to the Los Angeles Times, jumped in with the complaint that it "would make it much more difficult to monitor the performance of individual stations." Item: When CBS and NBC applied for DBS permits, ABC ran to Washington with a formal complaint. Item: When AT&T announced an experiment in offering an electronic version of its Yellow Pages, sports news, weather forecasts, a community bulletin board, and other services, a group of newspaper publishers geared up to block the test. Then there is the National League of Cities, whose spokesman in a New York Times interview derided Sen. Robert Packwood's telecommunications deregulation bill as "a meat ax for cutting local government out of any effective regulatory role in present or future cable franchises."
And why, indeed, not? For reasons of consumer choice, for reasons of depoliticizing the wunderkind of modern telecommunications, and—let us break the thunderous silence—for reasons of freedom of speech. Where, oh where, are the civil libertarian howls for the First Amendment? Where are the blue-blooded Constitution wavers on the most blatant and appalling freedom-of-the-press issue in the New World since Gutenberg? At the local level, they're all down at city hall, extorting "amendments" for "public interest broadcasting" in special clauses of the cable monopolists' contracts. Michael Gatzke, a San Diego attorney who deals in cable franchise litigation, says no more than the stark, raving apparent: the cable franchise is "no different than if you granted a franchise to the Los Angeles Times to be the sole distributor of newspapers in the city of Vista." But the American Civil Liberties Union has just gotten around to "reviewing its position" on cable TV—a position in favor of monopoly franchising, although on the telephone/common carrier model.
Meanwhile, in one of the many ironies of the cable revolution, it is a "conservative" group—the Mountain States Legal Foundation, famous for its defense of property rights and for once having been presided over by James Watt, now of Interior secretary fame—that has taken up the cudgels for the First Amendment. After the Supreme Court in January sent the case of Community Communications Company v. Boulder back to a lower court to determine whether the city regulators of Boulder had violated the antitrust statutes in denying CCC's request to expand its existing cable services in that city, the Mountain States Legal Foundation (MSLF) petitioned the court to intervene in the case on First Amendment grounds.
City officials, notes the MSLF, view cable TV as a natural monopoly that must be regulated by the award of exclusive franchises "pursuant to express conditions established by the City including program content review." And so it is arguing that such an award violates the First Amendment rights of Boulder residents by denying them the opportunity "to receive the widest possible spectrum of programming and communication from competing cable operations."
The First Amendment has also been raised by Robert Schloss of Omega Satellite Communications, challenger to the right of the city of Indianapolis to bar cable competition. While the court refused to grant a preliminary judgment in Omega's favor, the judge did set a September date for a full hearing on what he labeled "numerous constitutional issues and alleged statutory violations." Yet he did not personally appear impressed with the modern imperatives of the Bill of Rights. "When a television operator uses the public ways to deliver his message, disruption of the streets, alleys and other public ways necessarily occurs," he wrote. "Accordingly, some form of local government permission must precede such potentially disruptive use of the public way."
It may legitimately be asked how governments are allowed to assume such enormous power over the content of television programming with such pedestrian encroachments on public resources as Omega's underground cable—undetected for months and only discovered by city workers by accident. Should local commercial television stations be licensed by cities if their camera news crews drive on public streets? Should newspapers be licensed because they are delivered via the sidewalks?
The opportunities appear so vast and the constitutional imperatives seem so clear that one can very easily get caught up in the fantasy of our rich cable future, of Toffler's "cottage industry," of the Met on nightly, of unheard-of improvements in the "quality of life," of security systems that make crime problems just another nostalgia trip, of environmental goods and energy savings. But as the idea of cable entices, the wolves of politics growl.
Every current proprietor of monopoly privilege will fight to the bone to keep tomorrow's world from destroying today's special license. Should the FCC and the Supreme Court rule in favor of free and open communications competition next Tuesday, the stock value of great corporations would plummet; the stock-in-trade of powerful political empires would evaporate. Cable, as opposed to over-the-air or satellite technologies, may have one super monopolistic advantage: it requires construction crews to chip at our streets and staple our poles and to apply to local governments for permission to do same. Could so trivial a fact hold one enormous technology up for ransom?
If the past is any guide, we must be brave with the answer. "As viewers of American television flip across their dials in search of something they would like to see," observed economist Robert Crandall of the Brookings Institution a few years ago, "they are silently mocked by seventy-five or more channel demarcations where their sets do not respond. Instead of many choices of program, they must reconcile themselves to three, four, or perhaps, five." Is this a bitter scarcity imposed by the technical limitations of man's grasp of nature's forces? "The real reason," noted Crandall, "has little if anything to do with electronic phenomena—with either a shortage of channels or, as some would have it, the inherent inferiority of UHF. Rather, the limitation exists because of the FCC's desire to make sure that viewers are offered a big dollop of edification with each swallow of entertainment no matter how edifying the edification or how entertaining the entertainment." By artificially limiting the number of broadcast licensees, the FCC has intentionally "created substantial monopoly power—monopoly power which is by no means inevitable given the available spectrum and the technology that can be applied to use it." To what noble purpose, you ask? "To provide the FCC with considerable leverage for requiring licensees to cross-subsidize programs that the commissioners believe reflect the 'public interest.'"
The technology of cable television has given us one more opportunity to accelerate beyond the constraints of those who would trample the First Amendment and deny the desires of the great mass of consumers in favor of a regime of entirely civilized, socially acceptable "honest graft." The challenge of cable television, then, is whether we will once more allow the astonishingly advanced technology of tomorrow to be stifled by the ruthlessly predictable politics of the past.
Thomas Hazlett teaches economics at California State University, Fullerton. His articles have appeared in numerous publications, and he is a syndicated radio commentator. This article is a project of the Reason Foundation Investigative Journalism Fund.
Entertaining Politics in L.A.
If the battle for cable franchising is mostly a question of "honest graft"—over-the-table extortion sanctioned by the high-minded principles of "The Community"—the game can also be played beneath the table, or at some questionable latitude where the line and level appear very murky. Take the current competition for the South Central Los Angeles franchise, a predominantly black population center roughly the size of Pittsburgh, Pennsylvania.
When the franchise was first considered by the Los Angeles Department of Transportation (which regulates cable under a 1927 statute that, before television was invented, somehow applies to cable broadcasting), the actual franchise area was much larger than South Central Los Angeles. But in late 1979 and early 1980, the city government took action to slice the territory into thirds: Boyle Heights, Wilmington-San Pedro, and South Central. What happened from then on is a classic in the annals of New Technology and old-time politics.
Three firms were interested in the new, revised, South Central franchise. One was American Television and Communications (ATC), a division of Time, Inc. ATC did not offer a bid directly but instead set up Center City Cablevision, Inc., a company created to obtain this one franchise. To this end, the civic-minded capitalists at Time, Inc., thoughtfully gave away 20 percent of the stock of newly formed Center City to the following organizations: Special Service for Groups (4 percent), World Christian Training Center (3 percent), Westminster Neighborhood Association (3 percent), Los Angeles Links (3 percent), Sugar Ray Youth Foundation (4 percent), and the Gathering's Economic Development Committee (3 percent).
The Time, Inc., franchising department may simply have been clipping its program outline from old copies of Fortune magazine, for months before this L.A. consortium was concocted, the business journal wrote:
In contesting desirable markets, cable companies approach each franchise very much the way the politician approaches an election, mapping a strategy, outlining the key issues, and recruiting influential supporters. One of the most widely used tactics is what is known in the industry as the "rent a civic leader" approach—a large cable company will invite a group of local citizens to help it form a local cable company. Local interests usually control 20 percent of the new enterprise. The large cable company keeps the rest and agrees to build the system if the franchise is awarded.…
In Fort Wayne, Indiana, ATC's local partners included the organizers of an educational-TV station and a group of black ministers. Cox Cable, which is about to become a subsidiary of General Electric, allied itself with a local cable company that already had the franchise for the surrounding county. Cox Cable's partners apparently had more clout—it won. Henry Harris, the former president of Cox Cable and now head of Metrovision, a joint venture with Newhouse, thinks that "having the right local people is 80 percent of the game."
The next interested party was Community Telecommunications (CTI), a 1979 creation of some investment capital from a Washington-based MESBIC (Minority Enterprise Small Business Investment Company, a federally subsidized private corporation). A black-owned firm, it boasts of shareholders like Sidney Poitier (22.5 percent) and directors such as actor Brock Peters, religious notable Bishop H.H. Brookins, and former city council aide Channing Johnson, who also serves as the firm's corporate counsel.
Johnson, an articulate black attorney with far-reaching business and political contacts in the South Central area, is a most controversial figure. The storm centers on his previous employment: he once functioned as a key deputy to Los Angeles City Councilman Robert Farrell. Farrell was instrumental in dividing the South Central franchise into three districts, and he did so for an avowedly racist rationale. As he declared to the Los Angeles Times in August 1981, "It's important that a black-owned company get the award, not just another honky group that wants to get into L.A. and make a profit."
The move to divvy up the franchise was central to this race-conscious motivation, as both Johnson and Farrell freely admit. And Johnson further acknowledges that he personally spoke in favor of the regulatory change before public hearings at the city Transportation Department in November 1979. In the spring of 1980, just a few months later, Johnson had quit his city council staff position and was working full-time for CTI.
Is there a conflict of interest? Johnson replies with characteristic shyness, "Hell no—if I owned stock (which he does not admit to) it wouldn't be a conflict of interest." There is a one-year prohibition on former city employees appearing before a city agency representing a private firm on any matter they were involved with as a city official. But, as CTI director and corporate counsel, Johnson does not appear before city agencies, so he is clear of the statutes. "I am clearly not an agent of CTI with respect to their franchise effort," states Johnson. "The city attorney has confirmed that there is no conflict of interest."
Dr. Carl Galloway doesn't quite see it that way. Galloway is president of South Central CATV Associates (CATV). Formed by the merger of black-owned Universal Cable (60 percent) and the nationwide Six Star Nielsen Cablevision (40 percent), CATV is the third competitor for the franchise. CATV may have flunked its political science test altogether, for it is the competitor that has consistently had the most trouble with city hall.
Galloway's Universal Cable was originally known as Ebony Cablevision when it was formed by the late Edgar Charles in 1972. Its purpose was to produce greater television programming for blacks. In early 1980 the name was changed to "Universal" and its program redirected to appeal to a broader ethnic audience.
According to Galloway, who is also a practicing physician, Universal first went to Councilman Robert Farrell's office in mid-1979 in hopes of gaining the South Central cable franchise. Farrell turned them over to his then-deputy, Channing Johnson. Universal laid out its plans and discussed the prospects for the cable system. But Johnson, Galloway claims, stole their game plan, worked with Farrell to gain the necessary regulatory changes, and then quit the council staff in January 1980 to work for CTI-Universal's new competitor.
By the time the Transportation Department staff was ready to rank the three franchise applicants, Universal was in third place, with ATC-Center City first and CTI second. Dr. Galloway is anything but reluctant about telling you why: "It wasn't an issue of who could provide the best service—it was, 'Hey, can we get a piece of the pie.'" Further, he reveals that, as public relations gimmicks and as political payoffs, he was discreetly told to hand out shares of his firm to influential groups that weren't even in the cable business. "Our attitude from day one was that we were going to build this system, and if you want to get one-third of it, you put up one-third of the money and you take one-third of the risk," he recounts. "We didn't play ball because we were talking about a business deal. These other people had the idea that they had the right friends."
In what may well have been a breach of several antitrust statutes, fellow black city councilman and Farrell ally David Cunningham told a meeting of the two black-owned firms in May 1980 point blank: a merger between them would increase their franchise chances. In September 1980, an aide to Los Angeles Mayor Thomas Bradley, William Elkins, told a gathering of key black business leaders that a merger of the two companies was necessary for "community integrity."
At the same meeting, according to reports published in the Los Angeles Times, Elkins claimed that the white-owned ATC would get the highest staff recommendation and that both black firms might want to merge with it, in that such a conglomerate "might produce the strongest bid." As Farrell warned, "If I were ATC, I'd worry about my chances to get the final award without taking on more black participation." Mr. Plunkitt may rest assured that Tammany Hall is an equal opportunity employer.
The upshot for Galloway is that, when push came to shove, he mistakenly shoved back. "Think if someone came up and said they wanted half of your car and you said, 'Are you going to pay for it?' and they said, 'No, but we've got some friends…' That's just what we're up against. Maybe we've been missing the point of all those gangster movies."
One point that Channing Johnson seems to have missed is the conflict-of-interest code. John Haggerty of the Los Angeles City Attorney's office flatly rejects Johnson's claim that he has been cleared of any potential wrongdoing. "I was asked very general questions," says Haggerty of his contact with Councilman Farrell and Channing Johnson. "It is not true that Channing Johnson has been cleared in a conflict-of-interest investigation." Is Johnson currently under investigation? The City Attorney's office is not able to confirm or deny inquiries of this kind, says Haggerty.
But when asked for an interpretation of the city's conflict-of-interest statute, Haggerty reveals that, where a former council staffer was "personally and substantially involved" in a particular policy formulation, there is a blanket prohibition against that person ever acting as an agent or lobbyist on behalf of a firm affected by such policy. Contrary to Johnson's assertion, this prohibition is not limited to formal appearances before city agencies. The only disputed point would seem to be: Did Channing Johnson, after he became general counsel at CTI, talk to anyone at city hall, his previous place of employment, about the franchise application that would either make CTI very rich or leave them bankrupt?
In the meantime, the white-owned ATC has dropped out of the running, and the two black firms are in the stretch run of a very bitter race. It has taken on somewhat classic political overtones, in that many of the partisans on the city council and in the mayor's office got involved in the franchise battle, they said, only to assure the involvement of minority businessmen. When the field was narrowed to two black-owned competitors, however, none of the political interests took their leave. A decision on the franchise winner is expected any day.
This article originally appeared in print under the headline "The Viewer Is the Loser!".