summary of recent phoenix center research george ford chief economist phoenix center

Summary of Recent Phoenix Summary of Recent Phoenix Center ResearchCenter Research

George FordGeorge FordChief EconomistChief EconomistPhoenix CenterPhoenix Center

Organization of Organization of PresentationPresentation

Organization of Presentation:Organization of Presentation: Why is Franchise Reform Important?Why is Franchise Reform Important?

Realistic Expectations of Industry StructureRealistic Expectations of Industry Structure Terrestrial versus Wireless/Satellite Terrestrial versus Wireless/Satellite CompetitionCompetition

The Economics of EntryThe Economics of Entry How Build-Out Requirements Deter EntryHow Build-Out Requirements Deter Entry How Build-Out Requirements Exacerbate the How Build-Out Requirements Exacerbate the Digital DivideDigital Divide

How Franchise Reform will Actually Produce How Franchise Reform will Actually Produce MORE Revenue (the “Competition Dividend”)MORE Revenue (the “Competition Dividend”)

The Consumer Welfare Cost of Franchise The Consumer Welfare Cost of Franchise Reform DelayReform Delay

A la Carte ResearchA la Carte Research

““Equilibrium Industry Equilibrium Industry Structure”Structure”

Firms enter only if they make a Firms enter only if they make a profitprofit

Entry stops when “the next firm” Entry stops when “the next firm” expects a negative profitexpects a negative profit

When entry stops, the existing When entry stops, the existing number of firms is the number of firms is the equilibrium number of firms (equilibrium number of firms (NN*)*) No incentive to enterNo incentive to enter No incentive to exitNo incentive to exit

Phoenix Center Policy Paper No. 21

Equilibrium Industry Equilibrium Industry Structure:Structure:

Where We are Today:Where We are Today: Given high fixed and sunk costs, there Given high fixed and sunk costs, there will be FEW local networkswill be FEW local networks TelephoneTelephone CableCable Some Fringe Players (wireless, satellite, Some Fringe Players (wireless, satellite, WiMax, etc.)WiMax, etc.)

So, rig the game in favor of entry by So, rig the game in favor of entry by new firms and expansion by existing new firms and expansion by existing firms into related marketsfirms into related markets Eliminate regulatory entry barriersEliminate regulatory entry barriers Impede strategic entry barriersImpede strategic entry barriers Expand marketsExpand markets


How many firms can we get?How many firms can we get?(formally stated)(formally stated)

ES

Nφ

=*

N* = Equilibrium Number of Firms (symmetric) = Weakness of CompetitionS = Market Size in Expenditure (isoelastic demand)E = Sunk Entry Costs

Sources: Sutton (Sunk Cost and Market Structure), Duvall and Ford (PCPP10)


When will a firm enter?When will a firm enter?

Do gross profits (Do gross profits (dd) exceed ) exceed entry costs (entry costs (ee)?)?

Gross profits (Gross profits (dd) are revenues ) are revenues less variable costs.less variable costs.

Entry costs (Entry costs (ee) are fixed/sunk) are fixed/sunk

d – e 0


Do you want Facilities-Do you want Facilities-based Entry?based Entry?

Increase Gross ProfitsIncrease Gross Profits

Reduce Entry CostsReduce Entry Costs

But not in ways harmful to consumers!


Factors Driving Profits Factors Driving Profits ((dd))

Market Size (+)Market Size (+) Intensity of Price Competition Intensity of Price Competition (-)(-)

Product Differentiation (+)Product Differentiation (+) Network Overlap (-)Network Overlap (-)


Per-Firm Profits are also a function of the number of firms in a market!

Numerical Example 1Numerical Example 1(Table 1, PCPP 21)(Table 1, PCPP 21)

Equilibrium Number of Firms, Equilibrium Number of Firms, NN* = 3* = 3

NN dd ee dd - - ee

11 100100 1515 8585

22 4040 1515 2525

33 2020 1515 55

44 1212 1515 -3-3

55 88 1515 -7-7

66 55 1515 -10-10

77 44 1515 -11-11Phoenix Center Policy Paper No. 21

Numerical Example 2Numerical Example 2(Higher Gross Profits)(Higher Gross Profits)


NN dd ee dd - - ee

11 200200 1515 185185

22 8080 1515 6565

33 4040 1515 2525

44 2424 1515 99

55 1616 1515 11

66 1010 1515 -5-5


Numerical Example 3Numerical Example 3(Intensity of Price Competition)(Intensity of Price Competition)

NN ee Intense Intense Price Price

CompetitionCompetition

Moderate Moderate Price Price


PerfectPerfect

CollusionCollusion

dd d - ed - e dd d - ed - e dd d - ed - e

11 1515 100100 8585 100100 8585 100100 8585

22 1515 2828 1313 4040 2525 5050 3535

33 1515 1212 -3-3 2020 55 3333 1818

44 1515 66 -9-9 1212 -3-3 2525 1010

55 1515 44 -11-11 88 -7-7 2020 55

66 1515 33 -12-12 55 -10-10 1717 22

77 1515 22 -13-13 44 -11-11 1414 -1-1


Headcount and Headcount and CompetitionCompetition

With large fixed/sunk costs, With large fixed/sunk costs, headcounts can be deceivingheadcounts can be deceiving A large number of firms may A large number of firms may indicate collusionindicate collusion

A small number of firms may A small number of firms may indicate intense price competitionindicate intense price competition


Numerical Example 3Numerical Example 3(Intensity of Price Competition)(Intensity of Price Competition)

NN ee Intense Intense Price Price


Moderate Moderate Price Price


PerfectPerfect

CollusionCollusion

dd d - ed - e dd d - ed - e dd d - ed - e

11 1515 100100 8585 100100 8585 100100 8585

22 1515 2828 1313 4040 2525 5050 3535

33 1515 1212 -3-3 2020 55 3333 1818

44 1515 66 -9-9 1212 -3-3 2525 1010

55 1515 44 -11-11 88 -7-7 2020 55

66 1515 33 -12-12 55 -10-10 1717 22

77 1515 22 -13-13 44 -11-11 1414 -1-1


Product Differentiation Product Differentiation and Overlapand Overlap

Price

Homes/Overlap50% 100%

P1

P2

P3

More Differentiation

Less Differentiation

Differentiation weakens price competition.

Overlap increases price competition.

Phoenix Center Policy Paper No. 21, Figure 1.


The other way to promote The other way to promote entry: Reduce Entry Costsentry: Reduce Entry Costs

Four Types of Entry Costs (e)Four Types of Entry Costs (e) Technological Entry Costs (+)Technological Entry Costs (+) Strategic Entry Costs (+)Strategic Entry Costs (+) Regulatory Entry Costs (+)Regulatory Entry Costs (+) Spillovers (-)Spillovers (-)


Types of Entry Costs Types of Entry Costs ((ee))

Technological Entry Costs (+)Technological Entry Costs (+) Entry costs that are unavoidable Entry costs that are unavoidable to provide serviceto provide service

NetworkNetwork Operating CapitalOperating Capital AdvertisingAdvertising Building LeasesBuilding Leases Etc…Etc…



Strategic Entry Costs (+)Strategic Entry Costs (+) Entry costs that arise solely Entry costs that arise solely because of incumbent firm actions because of incumbent firm actions intended to raise entry costsintended to raise entry costs

Excessive AdvertisingExcessive Advertising Lock-in/Penalty ContractsLock-in/Penalty Contracts Discriminatory Access to Inputs (e.g. Discriminatory Access to Inputs (e.g. programming)programming)



Regulatory Entry Costs (+)Regulatory Entry Costs (+) Rules that raise entry costs above Rules that raise entry costs above technological entry coststechnological entry costs

Build-out RequirementsBuild-out Requirements Gold-plating NetworksGold-plating Networks Entry FeesEntry Fees E911 and other social programsE911 and other social programs

Often mingled with Strategic Entry CostsOften mingled with Strategic Entry Costs If socially-desirable, there may be a If socially-desirable, there may be a trade-off between entry and the trade-off between entry and the provision of the service (e.g., E911); provision of the service (e.g., E911); Cost-benefit analysis should be Cost-benefit analysis should be conductedconducted



Spillovers (-)Spillovers (-) Spillovers exist when a firm can use Spillovers exist when a firm can use existing assets to enter related existing assets to enter related markets.markets.

This firm has lower entry costs than a This firm has lower entry costs than a firm without existing assets that can firm without existing assets that can be leveraged into a related marketbe leveraged into a related market

Network (DSL over Copper; Cable Broadband Network (DSL over Copper; Cable Broadband over Coax; Fiber over existing rights-of-over Coax; Fiber over existing rights-of-way; customer relationships)way; customer relationships)


Numerical Example 1Numerical Example 1(Table 1, PCPP 21)(Table 1, PCPP 21)


NN dd ee dd - - ee

11 100100 1515 8585

22 4040 1515 2525

33 2020 1515 55

44 1212 1515 -3-3

55 88 1515 -7-7

66 55 1515 -10-10


Numerical Example 4Numerical Example 4(Reduced Entry Costs)(Reduced Entry Costs)


NN dd ee dd - - ee

11 100100 55 9595

22 4040 55 3535

33 2020 55 1515

44 1212 55 77

55 88 55 33

66 55 55 00


““Convergence” Reduces Convergence” Reduces Entry CostsEntry Costs

Convergence is relevant only when it reduces Convergence is relevant only when it reduces entry costsentry costs

Effects of convergence are generally limited Effects of convergence are generally limited to firms with existing assets that can be to firms with existing assets that can be “spilled over” into related markets“spilled over” into related markets

For policymakers, “convergence” is only a For policymakers, “convergence” is only a useful concept when applied useful concept when applied to particular to particular firms firms – – it is not a panacea “that lets anybody it is not a panacea “that lets anybody enter”enter”

Examples of Spillovers:Examples of Spillovers: Cable VoIPCable VoIP Bell IPTV/Fiber DeploymentBell IPTV/Fiber Deployment Electric Utilities/BPLElectric Utilities/BPL

Highly unlikely that somebody can successfully Highly unlikely that somebody can successfully build a new network from scratch…build a new network from scratch…


Equilibrium Industry Equilibrium Industry Structure:Structure:

SummarySummary There will be few local networksThere will be few local networks So, rig the game in favor of entry So, rig the game in favor of entry by new firms and expansion by by new firms and expansion by existing firms into related marketexisting firms into related market Eliminate regulatory entry barriersEliminate regulatory entry barriers Impede strategic entry barriersImpede strategic entry barriers Expand marketsExpand markets


Cable Build-Out RulesCable Build-Out Rules An example of an area where public An example of an area where public policy is raising the cost of entry—and policy is raising the cost of entry—and a place where policymakers can act to a place where policymakers can act to reduce entry costsreduce entry costs

Phoenix Center Policy Paper No. 22Phoenix Center Policy Paper No. 22 Build-out requirements deter entry by Build-out requirements deter entry by raising entry costs and reducing profitsraising entry costs and reducing profits

““build-out requirements are of central build-out requirements are of central importance to competitive entry because importance to competitive entry because these requirements impact the threshold these requirements impact the threshold question of whether a potential competitor question of whether a potential competitor will enter the local exchange market at will enter the local exchange market at all.” FCC No. 97-346 (1997)all.” FCC No. 97-346 (1997)


Build-Out RulesBuild-Out Rules

Unambiguously Bad for EntrantsUnambiguously Bad for Entrants May be good for ConsumersMay be good for Consumers May be good for IncumbentsMay be good for Incumbents But can’t be good for both But can’t be good for both Consumers and Incumbents at the Consumers and Incumbents at the same timesame time

(So why do both policymakers and incumbents (So why do both policymakers and incumbents advocate for build-out rulesadvocate for build-out rules?)?)


Build-Out Rule:Build-Out Rule:Graphical ExplanationGraphical Explanation

Price

Homes/OverlapH

homes ordered by capital cost

r(h)

e(h)

e(h): Entry Cost for home ir(h): Expected Revenue for home i

Phoenix Center Policy Paper No. 22, Figure 1.

Free Entry EquilibriumFree Entry Equilibrium

Price

Homes/Overlaph* H


t

v

w

r(h)

e(h)

Profits from Entry

With Build-Out RuleWith Build-Out Rule

Price

Homes/OverlapH


u

v

x

y

z

r(h)

e(h)

Profits from Entry

Losses from Entry

With Build-Out Rule:With Build-Out Rule:The Monopoly’s DecisionThe Monopoly’s Decision

Price

Homes/OverlapH


r(h)

e(h)The monopolists decision to build-out is entirely different than an entrants.

Profits from Entry

Losses from Entry

Entrant’s r(h)

Build-out Rule:Build-out Rule:Matrix of Preferred OutcomesMatrix of Preferred Outcomes

ParticipanParticipantt

Free EntryFree Entry Build-out RuleBuild-out Rule

EntryEntry No EntryNo Entry

ConsumersConsumers 22 11 33

IncumbentIncumbent 22 33 11Phoenix Center Policy Paper No. 22, Table 1.

Build-Out RulesBuild-Out Rules Simulations indicate that build-out Simulations indicate that build-out rules deter entry in the vast majority rules deter entry in the vast majority of markets (80-90%), even under of markets (80-90%), even under conservative assumptions conservative assumptions Policy Paper No. 22 and 25 (the latter Policy Paper No. 22 and 25 (the latter forthcoming); Faulhaber & Hogendorn, 2000.forthcoming); Faulhaber & Hogendorn, 2000.

Empirical evidence indicates that level-Empirical evidence indicates that level-playing field mandates deter entry playing field mandates deter entry Hazlett & Ford, 2001Hazlett & Ford, 2001 16 states have “level-playing-field” laws 16 states have “level-playing-field” laws that increase the cost of video entrythat increase the cost of video entry


Build-Out RulesBuild-Out Rules Forthcoming Phoenix Center Policy Paper No. Forthcoming Phoenix Center Policy Paper No. 25 presents cost-benefit analysis of build-25 presents cost-benefit analysis of build-out requirements imposed on entrantsout requirements imposed on entrants

Cost/Benefits are measured in terms of Social Cost/Benefits are measured in terms of Social WelfareWelfare

Sufficient Condition is IntuitiveSufficient Condition is Intuitive Build-out is welfare improving if the benefits to Build-out is welfare improving if the benefits to consumers not served without the rule exceed the consumers not served without the rule exceed the costs of serving themcosts of serving them

Under nearly any set of plausible assumptions Under nearly any set of plausible assumptions about market conditions in video, voice, and about market conditions in video, voice, and data, build-out requirements always flunk the data, build-out requirements always flunk the cost-benefit test and by a large amountcost-benefit test and by a large amount


Some Welfare Consequences Some Welfare Consequences of Build-outof Build-out

$

Quantity

Demand Curve

P1

P2

Consumer Surplus from 1st Firm

Consumer Surplus from 2nd Firm

The consumer gains from the second firm are much lower than from the first. Thus, the social welfare consequences (consumer gains plus lost profits from serving high-cost area) of build-out mandates on entrants are likely to be negative. But, that does not mean they were not socially desirable when placed on incumbents.

The Asymmetry of The Asymmetry of SymmetrySymmetry

Monopolist profit is $100. Duopoly profit Monopolist profit is $100. Duopoly profit is $40. Entry cost is $30. is $40. Entry cost is $30. With monopoly, profit is $70 (= 100 - 30).With monopoly, profit is $70 (= 100 - 30). With duopoly, profit is $10 (=40 - 30) for With duopoly, profit is $10 (=40 - 30) for each firm.each firm.

What if law makes entrants match What if law makes entrants match incumbents entry costs?incumbents entry costs? Monopolist spends an additional $11 on entry Monopolist spends an additional $11 on entry cost.cost.

Entrant’s profits are -$1 (=40 – 41). Entrant’s profits are -$1 (=40 – 41). Monopolist’s profits are $59 (=100 – 30 – 11).Monopolist’s profits are $59 (=100 – 30 – 11).

Symmetric regulation reinforces monopolySymmetric regulation reinforces monopoly

Hazlett & Ford, The Fallacy of Regulatory Symmetry (Business & Politics, 2001).

Convergence: The link Convergence: The link between video and between video and

broadband deploymentbroadband deployment Phoenix Center Policy Paper No. 23Phoenix Center Policy Paper No. 23

Networks being constructed today support voice, video and Networks being constructed today support voice, video and data services—increasing the cost of providing one service data services—increasing the cost of providing one service (video) increases the cost of providing another service (video) increases the cost of providing another service (broadband)(broadband)

We have a Federal policy goal of promoting open-entry for We have a Federal policy goal of promoting open-entry for broadband services (Section 706 of the Act, FCC precedent)broadband services (Section 706 of the Act, FCC precedent)

The increased cost is important because video is a large The increased cost is important because video is a large portion of consumer spending on communications servicesportion of consumer spending on communications services

The impact is felt particularly hard in lower income The impact is felt particularly hard in lower income neighborhoods, because in these areas, video revenues are neighborhoods, because in these areas, video revenues are particularly important to the business case for deploymentparticularly important to the business case for deployment


Pew SurveyPew Survey

Monthly Communications SpendingMonthly Communications Spending

ServiceService MonthlyMonthly PercentPercent Percent Percent WirelinWirelin

ee

TelephoneTelephone $54$54 38%38% 50%50%

MobileMobile $35$35 24%24%

InternetInternet $14$14 10%10% 13%13%

Cable Cable TelevisionTelevision

$40$40 28%28% 37%37%

Source: Pew Internet & American Life Project survey October 2002 of 1,677 Americans.Source: Pew Internet & American Life Project survey October 2002 of 1,677 Americans.Phoenix Center Policy Paper No. 23

Census 2003, Census 2003, Subscription RatesSubscription Rates

IncomeIncome TelephoneTelephone InternetInternet Dial-upDial-up Cable/DSLCable/DSL

5000 To 74995000 To 7499 94.2 20.3 14.0 5.9

7500 To 99997500 To 9999 96.5 19.6 14.2 5.0

10000 To 1249910000 To 12499 97.1 22.8 16.5 6.2

12500 To 1499912500 To 14999 97.2 24.6 18.2 5.8

15000 To 1999915000 To 19999 96.8 29.5 21.5 7.8

20000 To 2499920000 To 24999 97.8 36.9 26.7 9.9

25000 To 2999925000 To 29999 98.3 42.6 29.6 12.0

30000 To 3499930000 To 34999 98.4 49.0 35.1 13.2

35000 To 3999935000 To 39999 98.7 57.7 41.9 15.0

40000 To 4999940000 To 49999 99.2 66.3 45.2 20.2

50000 To 5999950000 To 59999 99.2 71.9 47.0 24.0

60000 To 7499960000 To 74999 99.4 79.9 49.8 29.1

75000 To 9999975000 To 99999 99.3 84.2 48.0 35.2

100000 To 100000 To 149999149999

99.7 90.4 42.3 46.4

150000 and Over150000 and Over 99.7 92.4 36.4 54.2


2005 GAO Study2005 GAO Study


Cable Subscription and Cable Subscription and IncomeIncome

Mediamark Research, Inc. Mediamark Research, Inc. Income < $25,000; 54%Income < $25,000; 54% $25,000 < Income < $49,999; 62%$25,000 < Income < $49,999; 62% $50,000 < Income < $74,999; 70%$50,000 < Income < $74,999; 70% Income > $75,000; 75%Income > $75,000; 75%

The business case for deploying an integrated voice, The business case for deploying an integrated voice, video and broadband network to low-income households video and broadband network to low-income households depends depends upon the ability to sell video serviceupon the ability to sell video service

Regulatory requirements that Regulatory requirements that increase increase the cost of video the cost of video deployment deployment effectively can create a type of broadband effectively can create a type of broadband “red-lining” effect“red-lining” effect

Open video entry policies are the Open video entry policies are the solution solution to a to a “Digital Divide”“Digital Divide”


Phoenix Center Policy Paper No. 23, Table 2Phoenix Center Policy Paper No. 23, Table 2

Homes Passed by Income Group (%)Homes Passed by Income Group (%)

Block Groups by Block Groups by

Median IncomeMedian Income

Range Range

(y = income)(y = income)

(a)(a)

Homes Homes PassedPassed

(%):(%):

BroadbandBroadband

Only Only

(b)(b)


(%):(%):

Broadband Broadband ++

Telephone Telephone

(c)(c)


(%):(%):

Broadband Broadband ++

Video Video

(d)(d)


(%):(%):

Broadband +Broadband +

Telephone +Telephone +

Video Video

y < 20,000y < 20,000 -- -- 8484 8888

20,000 < y <30,00020,000 < y <30,000 -- -- 8888 9090

30,000 < y <40,00030,000 < y <40,000 -- -- 9393 9595

40,000 < y <50,00040,000 < y <50,000 -- 44 9898 9999

50,000 < y <60,00050,000 < y <60,000 11 99 100100 100100

60,000 < y <70,00060,000 < y <70,000 22 22 100100 100100

70,000 < y <80,00070,000 < y <80,000 99 5454 100100 100100

80,000 < y <90,00080,000 < y <90,000 1414 7676 100100 100100

90,000 < y <100,00090,000 < y <100,000 3434 9292 100100 100100

100,000 < y 100,000 < y <125,000<125,000

8383 100100 100100 100100

125,000 < y 125,000 < y <150,000<150,000

9797 9797 100100 100100

y > 150,000y > 150,000 100100 100100 100100 100100Phoenix Center Policy Paper No. 23

Broadband Broadband Telephony

Broadband Video

Broadband Telephony

Video

0.1% 0.2% 1% 1%

87% 88% 90% 91%

Figure 4. Percent of Below-Poverty and Minority Homes Passed

Poverty Homes

Minority Homes


Other Phoenix Center Other Phoenix Center Research:Research:

Franchise Fee Revenues After Video Franchise Fee Revenues After Video CompetitionCompetitionPolicy Bulletin No. 12Policy Bulletin No. 12

Consumer Welfare Cost of Franchise Consumer Welfare Cost of Franchise Reform DelayReform DelayPolicy Bulletin No. 13Policy Bulletin No. 13

A La Carte and “Family Tiers” A La Carte and “Family Tiers” Policy Bulletin No. 14Policy Bulletin No. 14

Video Franchise FeesVideo Franchise Fees $2.4 billion in 2004 $2.4 billion in 2004 –– $37 from each $37 from each household that subscribes to cablehousehold that subscribes to cable

Assessed as percentage of “cable Assessed as percentage of “cable service” revenues, and often service” revenues, and often included advertising revenues of the included advertising revenues of the cable operatorcable operator

Impact on network deployment Impact on network deployment recognized early – in 1972, FCC recognized early – in 1972, FCC preempted franchise fees above 3% preempted franchise fees above 3% unless FCC approved higher rateunless FCC approved higher rate

Federal Cap: Section Federal Cap: Section 622622

Franchise Fee may be no higher Franchise Fee may be no higher than 5% “gross revenues derived than 5% “gross revenues derived . . . from the operation of a . . . from the operation of a cable system to provide cable cable system to provide cable services”services”

DBS services exempt by statuteDBS services exempt by statute47 U.S.C. § 152 nt47 U.S.C. § 152 nt

Video Entry will Lower Video Entry will Lower PricesPrices

2005 GAO Report2005 GAO Report Estimates significant price reductions (about 16%) in areas Estimates significant price reductions (about 16%) in areas

where there is wireline video entrywhere there is wireline video entry Analysis based on 113 wireline “overbuilds”Analysis based on 113 wireline “overbuilds” Cable industry given draft of study by GAO and did not Cable industry given draft of study by GAO and did not

provide any response or rebuttalprovide any response or rebuttal Results consistent with several previous published studies Results consistent with several previous published studies

on cable overbuilding over the last two decades, including on cable overbuilding over the last two decades, including papers (co)authored by Ford (1994, 2005)papers (co)authored by Ford (1994, 2005)

http://www.gao.gov/new.items/d05257.pdfhttp://www.gao.gov/new.items/d05257.pdf

Cable industry’s own survey shows lower prices where Cable industry’s own survey shows lower prices where wireline competition – “there were anomalous wireline competition – “there were anomalous circumstances in virtually all of the overbuild circumstances in virtually all of the overbuild communities that made their rates artificially low”communities that made their rates artificially low”

http://www.ncta.com/pdf_files/101105_05-255_replies.pdfhttp://www.ncta.com/pdf_files/101105_05-255_replies.pdf

Lower Prices Will Lower Prices Will Change the Franchise Change the Franchise

Fee Tax BaseFee Tax Base Policy Bulletin No. 13 describes Policy Bulletin No. 13 describes under what conditions lower prices under what conditions lower prices will raise or lower the tax basewill raise or lower the tax base

As long as the market demand As long as the market demand elasticity is elastic (larger than 1 elasticity is elastic (larger than 1 in absolute value), revenues will in absolute value), revenues will rise as price fallsrise as price falls

Revenues are the tax base, so the Revenues are the tax base, so the same rule applies to franchise fee same rule applies to franchise fee taxestaxes

Demand Elasticity Demand Elasticity Estimates for Multichannel Estimates for Multichannel

VideoVideoDemand Elasticity Estimates for Demand Elasticity Estimates for

Multichannel Video ServiceMultichannel Video Service

AuthorAuthor Year Year PublishePublishe

dd

EE

GAOGAO 20052005 -2.7-2.7

GAOGAO 20032003 -1.5-1.5

GAOGAO 20022002 -2.1-2.1

GAOGAO 20002000 -3.2-3.2

Beard, Beard, et alet al.. 20052005 -2.7-2.7

ChiptyChipty 20012001 -5.9-5.9

Ford, Ford, et al.et al. 19971997 -2.4-2.4

RubinovitsRubinovits 19931993 -1.5-1.5

Demand Response from Demand Response from Successful Video EntrySuccessful Video Entry

D

Q

$

P1

P2

Q1 Q2

D1

D2

O

Elastic Demand for Multichannel

Video

OP2D2Q2 > OP1D1Q1 by about 30%

Competition will Competition will Increase Franchise Fee Increase Franchise Fee

CollectionsCollections Competition in Video will increase Competition in Video will increase the tax base for franchise feesthe tax base for franchise fees Market demand is elasticMarket demand is elastic Customers shift from Satellite (no Customers shift from Satellite (no franchise fee) to terrestrial providersfranchise fee) to terrestrial providers

We estimate a 30% increase in We estimate a 30% increase in franchise fee tax basefranchise fee tax base Could hold cities harmless by reducing Could hold cities harmless by reducing maximum franchise fee from 5% to 3.7%.maximum franchise fee from 5% to 3.7%.

Phoenix Center Policy Bulletin No. 12

The Cost of Delaying The Cost of Delaying ReformReform

Delay alters payoffs of Delay alters payoffs of alternative investments, possibly alternative investments, possibly shifting capital to less socially shifting capital to less socially desirable investments (i.e., away desirable investments (i.e., away from fiber and broadband)from fiber and broadband)

Any loss of consumer gains today Any loss of consumer gains today cannot be captured tomorrow. It cannot be captured tomorrow. It is gone forever.is gone forever.

The Cost of Delaying The Cost of Delaying ReformReform

Cost of Cost of CapitalCapital

10%10%

InvestmentInvestment $1 $1 MillionMillion

Annual Annual PaymentPayment

ReturnReturn

Project 1Project 1 $163,000$163,000 10%10%

Project 2Project 2 $187,000$187,000 15%15%

Project 2 Project 2 with 5 Year with 5 Year DelayDelay

187,000187,000 9.3%9.3%

““In Delay There is No In Delay There is No Plenty”Plenty”

How much do consumers lose from How much do consumers lose from a delay in franchise reform?a delay in franchise reform? Under plausible assumptions, one Under plausible assumptions, one year of delay costs consumers $8.2 year of delay costs consumers $8.2 billion.billion.

A five year delay costs consumers A five year delay costs consumers $36 billion.$36 billion.

A La CarteA La Carte

Policy Bulletin No. 14Policy Bulletin No. 14 Market structure in the Market structure in the programming distribution may be programming distribution may be irrelevant to the bundling of irrelevant to the bundling of undesirable programmingundesirable programming

Programmers/Advertisers introduce Programmers/Advertisers introduce a market defect the bundling a market defect the bundling decisiondecision

SummarySummary

We are now faced with a facilities-We are now faced with a facilities-based only entry method into local based only entry method into local markets (video, voice, and data)markets (video, voice, and data)

We must remove any unnecessary We must remove any unnecessary barriers to facilities-based entry barriers to facilities-based entry if we are to have competitionif we are to have competition End market and service limitationsEnd market and service limitations Eliminate Build-out RulesEliminate Build-out Rules Reduce taxes on entryReduce taxes on entry

summary of recent phoenix center research george ford chief economist phoenix center

Documents

entry stops

economics of entry

favor of entry

fixedsunk entry costs

regulatory entry barriers

strategic entry barriers

sunk entry costs sources

negative profit entry