Proposed FCC Rules: Are Small Set-Top Box Providers In For Tough Times?

Back in February this year, the Federal Communications Commission (FCC), in a proposed rule-making document, provided some insight into new rules governing set-top-boxes that it was going to enact later this year.

The proposals were aimed at helping these device users reduce the burden of huge costs they are paying to lease boxes from small players in the cable industry. (FFC document)

The three pillars of the proposed legislation included:

· Driving prices down
· Fostering innovation in the industry
· Enabling broader competition between incumbents and new players

At first blush, it seemed that this was good news for cable consumers, because it put more choice in their hands. But of course, not everything that lawmakers propose is always as it seems at “first blush”. There’s always a “However…” just around the corner!

What’s the buzz about?

Truth be told, the ability for TV viewers to view content on whatever device they want – without having to pay exorbitantly - could simplistically be seen as a “non issue”. Why? Because Congress already has laws on the book that afford the same freedom of choice to TV viewers as phone users – viewers can choose their viewing equipment, like phone users, without constraints from the content providers.

That law has been on the books for over 20 years!

Technological advancements have also meant that almost every segment of society has seen its fair share of benefits, specifically in terms of cost reduction. Whether it’s about smart home systems, accessing the internet, or using solar power to run your home. However, there’s one aspect of our everyday lives that has seen the inverse impact – rising costs despite improving technology!

According to federal cable and TV watchdogs, while the cost for common household entertainment and communications devices, such as cell phones, computers and television sets has declined by an average of 90% over the last two decades; the cost of cable set-top boxes has seen a dramatic spike over that period – by a whopping 185 percent!

Regulators may not have been overly concerned if this was a one-off problem, or if it were restricted to a very small segment of the TV viewing population. Statistics show that nearly 99% of American pay-TV consumers lease their set-top boxes from their telco, satellite or cable TV providers.

The size of that leasing market is staggering – bringing these providers an astronomical sum of over $20 billion annually. This translates roughly to around $231 spent annually by each of America’s families that lease those devices. Clearly, federal regulators saw this as a systemic issue, one that needed more than just industry self-regulation to address.

As a result, the FCC decided it was time to step in to do something to curb the ever increasing costs for the average American to watch cable TV. However, the devil’s always in the detail, and the FCC’s proposal to unlock set-top-boxes isn’t being accepted as the watchdog has hoped it would.

Unlocking the Box – But How?

Commenting on the spirit of the FCCs proposals, Chairman Tom Wheeler suggested that the idea of the new rules would be to force set-top-box providers to “unlock the box” so that their content could be made readily available to alternate box providers, such as Apple and Google.

The focus of the FCCs proposal was to “…tear down anti-competitive barriers and pave the way for software, devices and other innovative solutions to compete with the set-top boxes that a majority of consumers must lease today.”

The perceived impact:

In unlocking the boxes, it was expected that consumers would have greater choice in choosing which devices they wanted to own/lease in order to get their content. So what would be the net result of such legislation? Potentially, it could spark price wars between established players (like Comcast) and alternate sources, resulting in cheaper rates for all consumers.

According to the FCC, in order for the proposed “Unlock the box” rules to make a notable impact on cable TV rates, and the competitive environment, three conditions must be met:

· Consumers must be made aware about programming choices available to them, including information such as video-on-demand, channel lineups, and details about the content available to them from various sources – both established and alternate
· Details about what each of the devices being used, either from established players or alternate sources, can do with the content available. E.g.: Can it be downloaded, recorded or saved
· And finally, the actual content itself should be made available for each of the proposed devices

So how did the FCC envision its proposals could help unlocking the box?

Well, instead of mandating specific actions on the set-top-box industry, the FCC recommended that content, device and technology players get together and come up with some standards that would achieve the FCC’s vision of “unlocked boxes”. However, the regulator did set out certain parameters under which a body to develop these standards should be formed:

· Openness for all to provide input
· Membership balance to ensure representing everyone’s interest
· Well documented due process
· Ability to appeal certain decisions
· Agreement through consensus

The government believed that, given this approach, the industry would be able to come up with recommendations and standards that would ultimately lead to the successful unlocking of set-top boxes.

An Unnecessary “Killer” Proposal?

While all of this may seem a great way to unlock content to be broadcast on any device, not everyone in the industry is happy. The American Cable Association (ACA), which represents nearly 750 small players, have voiced their concern that these proposals, should they become law, would end up decimating the small players – which would give larger behemoths like Comcast even greater stranglehold over pay-TV customers.

The essence of the ACAs argument is that its membership isn’t comprised of companies that have millions of pay-TV customers. In fact, many of the ACA members have less than a thousand customers, leaving them with razor thin margins as it is. Additionally, because of their small footprint, the ACA members don’t have much leverage with the networks when it comes to negotiating fees for content.

Another knock to the FCC proposal, according to the ACA, is that many of the smaller companies have hybrid systems in place, and are not fully digitized as yet. This will take them longer to comply with some of the FCC’s recommendations around some of the more costly technological innovations requested. This too could spell doom for many smaller players in the industry, further strengthening the hand of the giants.

The ACA also highlights that the FCC proposal is ignoring key technological advances that the small players are already spearheading. Many ACA members are already offering apps to their consumers, which they can download onto any of their preferred devices, enabling them to then watch TV at their leisure.

It would also seem that, if “consumer choice” and “innovation” were at the heart of the FCC proposal, the new rules might already be unnecessary. Comcast recently announced that, as a result of its partnership with Roku, its customers will soon be able to access its content using other devices later this year.

And if “competition” was a pillar to be strengthened, many content providers say that, by forcing content to be “handed over” to other devices, the FCC’s proposals will in fact encourage piracy of their content.

Although the FCC has revised its proposal after hearing from various industry participants, one wonders whether the final law could in fact sound the death knell for small set-top-box players.

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