The Economics of Build-out Rules in Cable Television

Firms that wish to offer wireline, multichannel video programming services in direct competition with cable incumbents are being faced with calls by those incumbents and policymakers to "build-out" to entire communities as a pre-condition to receiving a franchise. This article argues that build-out mandates are actually counter-productive and serve primarily to deter new entry, increase the profits of incumbents, and harm consumers. Using both a theoretical model and an empirical simulation, the article demonstrates that build-out rules cause new video entrants to bypass certain communities entirely and to sharply lower the number of communities in which new network construction would be profitable.