Time to Revisit FCC Set-Top Box Rules

Published December 1, 2006

A decade ago, Congress decided cable companies and their competitors should allow consumer electronics manufacturers to make “plug and play” set-top equipment that would work with any cable or direct broadcast satellite (DBS) service. Rather than leasing it, consumers could buy such equipment from multichannel video program distributors as well as retailers unaffiliated with cable or DBS service operators.

Congress’ goal may have made sense in the staid, monopolistic world that characterized analog communications. However, rapid changes in technology and the marketplace, spurred by the digital revolution, require that the Federal Communications Commission (FCC) revise its equipment regulations, or their cost to consumers will far exceed their benefits.

First, Some History

In 1998, the FCC directed the cable industry to develop a physical device–now called a CableCard–containing the security functions that could be inserted into the equipment of independent manufacturers. That made sure their boxes could be used with cable systems around the country.

The FCC thought this separate security device would allow multichannel video program distributors to retain control over the security function while enabling third-party manufacturers to market set-top boxes and navigation devices. The cable industry has so far supplied about 200,000 CableCards for use in more than 140 models of digital cable-ready devices. But rather than purchase set-top equipment from third parties, the vast majority of cable subscribers continue to use equipment leased from their cable companies.

The FCC, nonetheless, went further. It required that all multichannel video program distributors stop selling or leasing new devices that integrate both security and non-security functions by 2005. This ban on security/non-security integration meant that all equipment used to access cable services would rely on common technology–like the CableCard.

However, the agency exempted multichannel video program distributors that support the use of equipment available in unaffiliated retail outlets and that operate throughout the United States. DBS providers were the only multichannel video program distributors that qualified for the exemption. Unlike cable subscribers, DBS subscribers could buy a device and use it anywhere in the country. Thus, cable operators were covered by the ban on integrating devices, while their principal competitors were not.

The pace of technological change has accelerated rapidly since 1998. In March 2005, the FCC extended until July 2007 the implementation date of the integration ban.

Now the FCC again is considering requests by cable operators to extend the date. But since the last extension, the landscape has changed even more dramatically.

Here Come the Telcos

Verizon and other telephone companies are rushing into the video business. The two DBS service operators–DircecTV and Dish Network–have done an about-face and are now supporting equipment containing mainly proprietary features. And Congress finally has set a firm February 2009 date for the transition away from analog to all-digital broadcast television transmission.

With the changed landscape, this is a case crying out for regulatory relief. Downloadable security should be deliverable within the next few years, but not by July 2007. Implementing the integration ban in the meantime would be very costly to consumers but would bring no real benefits.

Both the cable industry and Verizon estimate the re-engineering required to enable their leased equipment to work with separate security devices will increase the cost for each box by $72 to $95, adding another $2 to $3 to monthly lease charges. With a firm digital TV transition date, it is counterproductive to deter consumers from switching by raising the price.

Congress has authorized a fund to subsidize the purchase of non-multichannel video program converter boxes in anticipation of the analog broadcasting cut-off. But much less funding will be needed if more consumers already have the capability to receive digital transmissions using digital set-tops supplied by multichannel video program distributors.

Moreover, requiring cable companies and Verizon to implement physical separation in the coming months would divert technical resources away from the task of implementing a downloadable security solution as quickly as possible.

Competitors should not be treated in a disparate fashion. Even though DBS service operators have moved almost completely to proprietary set-top boxes, they remain exempt from the ban. Fortunately, Congress recognized in 1996 that developments might well outrun any FCC mandates. It said the agency must waive any regulation if “necessary to assist the development or introduction of a new or improved multichannel video programming or other service offered over multichannel video programming systems, technology, or products.”

While agencies have considerable inherent authority to waive regulations, Congress usually doesn’t include such express waiver authority in particular statutory provisions, unless to make a point. In the interest of consumers, the FCC should act quickly to extend the integration ban’s implementation date for all multichannel video program distributors, while at the same time closely monitoring the technological developments in a dynamic marketplace.

Randolph May ([email protected]) is president of the Free State Foundation. This article originally was published on CNET.