Tuning In To Video Fees

Focus #22 • November 2020


While consumers may be bingeing video more than ever in a time of social distancing, new data show cable television revenues actually falling in Wisconsin in the run-up to COVID-19. Last year, the state Legislature cut local fees paid by cable and telephone video providers in Wisconsin and approved some offsetting state aid to local governments. Yet these traditional firms continue to pay some fees that are not borne by the streaming video competitors making inroads into their markets.

More Wisconsin households may be “cutting the cord” and dropping cable television in favor of internet video streaming services such as Disney Plus, Hulu, and Netflix, new figures suggest. The data have been reported to the state Department of Revenue for two years running as part of a state aid program meant to help compensate communities that are being required to cut local cable fees.

The 491 communities that applied for the assistance in each of its first two years reported that their cable and telephone video providers saw their gross receipts decline by about $11 million (1.1%), from $989 million in 2018 to $978 million in 2019, according to state Department of Revenue (DOR) data. As a result, those same communities also noted a $464,862 reduction in video service provider (VSP) fees collected as a percentage of those lower receipts, from roughly $46.1 million to $45.6 million.

The decline in gross receipts was notable in cities like La Crosse (a 7.2% drop) and Eau Claire (a 4.9% decrease), as well as in Milwaukee and Kenosha, where they fell 2.6% each in 2019. Other cities such as Madison had a smaller drop or in the case of Janesville and Fond du Lac a modest increase (see Figure 1). There were no particularly striking regional patterns among larger communities, though receipts appeared to drop somewhat more in western Wisconsin and fared somewhat better in some suburban communities though far from all.

The reason for the drop may well lie in the rise of online competitors who offer new alternatives to traditional broadcast television and cable. The shifting marketplace raises questions about possible ongoing impacts on local fees, which have been reduced but under state law continue to apply to some video providers and not to others.

Evolution of pay TV

Nationally, cable television franchise (or VSP) fees evolved as the industry matured. In the 1960s through 1980s, cable providers seeking to initiate new service typically negotiated with municipal leaders to pay a monthly fee in exchange for private commercial use of the public rights-of-way. Congress eventually capped this fee at 5% of the cable provider’s gross video and ad sales revenue per month. Traditionally there was almost always only one cable provider in a community.

However, in the period following the federal Telecommunications Act of 1996, cable companies began to see more competition. The competition initially came from direct broadcast satellite providers who were not subject to cable franchise fees, but it later also came from providers such as telephone companies who began offering video services and who were subject to the charge. At the same time, the cable industry began to offer voice and internet products – which avoid the VSP fee – to compete with what had been traditional phone company product lines.

lawmakers dial down VSP fees

To help address what Wisconsin cable companies viewed as a competitive disadvantage, state lawmakers cut local VSP fees in 2019. Although many communities were already below the 5% maximum allowed under federal law, the Legislature required them to reduce their rates by 0.5 percentage points across the board in 2020, and by another 0.5 points in 2021, for a total reduction of one percentage point over two years.

The provisions, included in the 2019-21 state budget (2019 Act 9), also sought to replace the local VSP revenues lost in 2020 by paying municipalities an amount equal to 0.5% of VSP gross receipts from 2018; the 2021 state payment will increase to 1.0% of VSP gross receipts from 2019 and communities would receive this amount annually into the future.

The measure also blocked any municipality that did not have a VSP fee in place on December 31, 2018 from receiving state aid in the future. The law also leaves these communities with some uncertainty about whether they could impose a fee at all as different sections of the statutes reference both the possibility of imposing a fee and the requirement that the fee be less than the amount imposed at the end of 2018 (which would be zero in these communities.)

The aid program, administered by DOR, reimbursed municipalities nearly the full $5 million allowed in 2020 and will pay up to $10 million in 2021 and every year thereafter. The state Legislature initially approved the aid program for 10 years, but the governor vetoed that restriction and made it permanent (although lawmakers and the governor can change the law at any time). DOR must notify municipalities by October 1 of the amount they will receive for the following year and make those payments by the fourth Monday in July of that year.

A National Trend

The drop in cable and telephone video business in Wisconsin is part of a national trend that has been going on for much longer than the state-level data allow us to confirm. The total number of U.S. households subscribing to cable and telephone company video services has declined from about 70.8 million households in 2010 to about 60.1 million in 2019, according to a January 2020 Congressional Research Service (CRS) report. Even in the midst of COVID-19, cable TV is projected to lose over 6 million households to a streaming video platform in 2020, according to a September 2020 survey by market research firm eMarketer.

Current cable consumers may benefit from a switch to streaming services through lower prices and more narrowly tailored options. However, they may also lose access to local television stations and other programming, including public access channels.

A continued decline in cable and telephone video consumers would also reduce the revenue that local governments receive from providers in exchange for the use of their right of way. The new state aid payments, which are frozen at a level based on higher past gross cable receipts, may provide a partial cushion for the loss of these local revenues, however.

In response to these shifts in the marketplace, some municipalities and states outside Wisconsin have attempted to impose fees on online video streaming services. The CRS reports that courts have yet to rule on the legality of such actions.

Stay Tuned

Some observers may ask why satellite and other providers that stream video over the internet directly to viewers are exempt from the VSP fee. The data packets from cable video and Netflix, for example, might travel over the same cable company fiber to the viewer, but only cable video customers must pay the franchise fees to their communities.

State policymakers who believe this is unfair might consider simply allowing municipalities to impose a fee on all providers that use public rights-of-way, including streaming and other entities. This change – if permitted under federal law and potential future court rulings – may be more competitively neutral and give communities more revenue certainty in the future. However, if home broadband through wireless 5G carriers becomes common, this approach could leave a new sort of uneven playing field, as such service may not involve public rights-of-way to the same degree or at least would not be subject necessarily to VSP fees.

Others might feel that the current approach fosters competition by not imposing the video fee burden on emerging companies. It may be hard to argue, however, that streaming video providers such as Disney and Apple are fledgling companies. On the other hand, allowing a new fee across a patchwork of municipalities in Wisconsin would impose a certain administrative cost for these national companies.

Another way to achieve fairness for legacy companies and upstarts alike would be to eliminate the fee for all video service providers, whether cable or phone companies. However, this approach would mean a hit to local government budgets or to the state if it offers aid to offset the loss for municipalities.

Consumers, companies, and local governments alike will be waiting to see if the courts, Congress, or the state Legislature broadcast a stronger signal and sharper regulatory picture moving forward.