Wiring Washington.

How to make a killing in cable

Back in 1985, the bidding for the cable TV franchise in the nation's capital brought out 100 brave entrepreneurs who invested $1.4 million in a company called District Cablevision. In November 1999, those selfless risk-takers finally cashed out. When the register stopped cha-chinging, they had ended up with $41 million--a whopping 29-to-1 markup. To understand just how fat a return that is, consider that over the same time the S&P 500 has grown a relatively lean 7-to-1.

To get into a deal as superb as the District Cablevision scam, you had to know someone. To be precise, you had to know Mayor Marion Barry--and know him well. The District Cablevision "investment team" included Barry's advisers, friends in government, pals in business, and associates in politics--including a city department head, a Democratic National Committee member, and a big contributor to the mayor's campaigns. These important folks were given 25 percent of the District Cablevision franchise, a $130-million investment, in exchange for about 1 percent of the actual capital cost.

This sort of deal--typical of the arrangements that helped wire America for cable--sanctioned a form of graft in the name of "the public interest." In the late 1970s, when the feds finally allowed cities to issue cable franchises, it took only an instant for local bigwigs and cable operators to realize that they could combine forces and end up really rich.

The key was monopoly--not the Microsoft variety, hashed out in a competitive marketplace, but the real thing, the government-granted-and-enforced type. Cities had the legal authority to control access to municipal rights of way. They seized the opportunity to block multiple cable companies from entering town and gaining market share through open and fair competition. Instead, municipal franchising authorities were commissioned to select a sole licensee who would best serve the public. (Technically, these firms were issued "nonexclusive" franchises, meaning that other companies could theoretically get licenses of their own and compete. I personally know individuals who have spent more than a decade trying to get a second "nonexclusive" franchise. And who have won a Supreme Court case. And still haven't gotten City Hall to issue that franchise.)

To be sure, monopoly franchises were a tough sell. There had to be a cover story, a "public interest" reason why rivals should be blocked from risking private capital in pursuit of customers. The favored rationale: Cable was a "natural monopoly," and hence competition could not be sustained. Only local government was in perfect position to extract promises from franchisees--low prices, excellent service, state-of-the-art technology, "free" infrastructure for schools and libraries.

To get the franchise, cable companies would set up a dummy corporation and issue 20 percent of the stock to "rent-a-citizens," local investors selected for their influence with the mayor and city council. (In D.C., the local distribution was 25 percent, perhaps owing to the area's greater sophistication in such matters.)

The companies did in fact make promises to get the franchises. Big, fat, juicy promises. District Cablevision, for instance, pledged to provide 78 channels of programming, an "Information-net" for local government, quick implementation, and low prices. And, of course, it promised to keep control local, running the system with minority investors who were active in the community.

So what happened once District Cablevision won the franchise? Within two months the company came back to the city council to renegotiate its terms. The system was quickly sold to TCI, the world's largest cable firm, and the photo ops with local African-American "owners" quickly faded into the misty watercolors of the parent corporation's annual report. The system took forever to construct; nearly half the city still could not get cable service into the 1990s. The I-net has never been built, and the bargain prices never materialized--rates began at nearly double the promised level. Even today, some 15 years and generations of telecommunications technology later, the system boasts less capacity than originally promised.

That's the sizzling performance that led to the 29-to-1 return. With the sale of TCI to AT&T in 1999, the Courageous 100 lined up to cash in. As per the terms of the deal, they needed the city council's permission to sell. According to all reports, the city council was outraged--at the decade-plus of broken promises, the years of abysmal service, the shoddy technology, the rising prices, and the arrogant attitude that have made "District Cablevision" a swear word throughout the city.

So how did the council vent its righteous anger? In a way that seems a fitting end to an affair conducted not merely in the name of but at the expense of the public. The council approved the franchise transfer in a unanimous vote.

Thomas W. Hazlett is a resident scholar at the American Enterprise Institute and an economist at the University of California at Davis.