Sunday, April 11, 2010

National Broadband Plan: A Setback On Set-Top Box Regulation

Although the FCC dubs its recently unveiled National Broadband Plan a "21st century roadmap," the Plan prescribes a very 20th century approach to the set-top box market. In fact, the Plan calls for more set-top box regulation than ever before. To kick off its implementation of the Plan the FCC will be considering the release of two notices involving set-top box regulation at its public meeting to be held later this week. Instead of piling on additional set-top box regulations under the National Broadband Plan, we need a Plan B that takes stock of both the growth of competition in the video marketplace and Congress's intent that such regulation eventually sunset.

The Telecommunications Act of 1996 directed the FCC to adopt regulations to assure the commercial availability of electronic equipment such as set-top boxes to ensure consumer access to multichannel video programming from independent manufacturers and retailers. FSF President Randolph May recounted the history behind the FCC's implementation of Section 629 in his FSF Perspectives paper from 2006, "Don't Inflict Analog Era Equipment Rules On The Digital Age." In 1998, "the FCC directed the cable industry to develop a physical device—now called a CableCARD—containing security functions that could be inserted in the equipment of independent manufacturers so that their boxes could be used with cable systems around the country." Moreover, "although not required by Congress to do so, the agency went further and imposed the integration ban" whereby since July 1, 2007, MVPDs were required to stop selling or leasing new devices that integrate both security and non-security functions, such as program menus and other channel navigation features. Direct broadcast satellite (DBS) providers were exempted from the integration ban.

Importantly, Section 629 included a sunset provision, under which regulations shall cease to apply when the FCC determines: (1) "the market for multichannel video distributors is fully competitive; (2) "the market for converter boxes, and interactive communications equipment, used in conjunction with that service is fully competitive"; and (3) "elimination of the regulations would promote the public interest."

Given that a law passed back in 1996 contemplated its own sunset, and that video competition has significantly increased since that time on account of DBS providers and telephone competitors, one might expect that the proper agency response would be deregulation, or at least stasis. Just last fall in Comcast v. FCC, the U.S. Court of Appeals for the District of Columbia Circuit concluded that, due to DBS and telephone competitors in video, the purported cable "bottleneck" justifying various regulations under the Cable Act of 1992 no longer exists. But the National Broadband Plan takes a different course, instead calling for even more regulation of set-top boxes.

The National Broadband Plan's section on devices maintains that "despite Congressional and FCC intentions, CableCARDs have failed to stimulate a competitive retail market for set-top boxes." The Plan states that Motorola and Cisco combine for a huge share of the market. By contrast, CableCARD-enabled retail devices comprise 1% of all set-top boxes deployed in cable homes. Finding all this unacceptable, the Plan's "Recommendation 4.12" calls for the FCC to "initiate a proceeding to ensure that all multichannel video programming distributors (MVPDs) install a gateway device or equivalent functionality in all new subscriber homes and in all homes requiring replacement set-top boxes, starting on or before Dec. 31, 2012." The Plan insists that this gateway device requirement "should apply to all MVPDs," not just cable providers. A development and deployment deadline set for the end of 2012 is urged in the Plan, with regulatory milestones called for track MVPD progress in meeting the mandate.

All of these pronouncements might have more heft if it were 1996 and not 2010. But today's dynamic video market context matters – or, in the interest of responsible regulation, ought to. It now makes far less sense for regulators to zero in on the set-top box market when considering the state of market competition for MVPD equipment. Since consumers increasingly enjoy the ability to choose between cable, DBS and telco MVPDs, equipment for using each respective service are ready substitutes for one another. Other emerging alternatives include downloadable video through online services such as iTunes or Hulu, or delivery to video game consoles such as the Xbox360. Consequently, the case for cable set-top box regulation has diminished, thanks to the growth in video competition.

New regulation also risks freezing into place a future retail set-top box market that will be of little benefit or interest to consumers. Consumers may already find it more convenient to obtain their set-top boxes directly through their cable provider than to undertake separate trips to retail outlets to search for boxes. Moreover, thanks to technological and market developments cable consumers may be able to obtain set-top box services without needing set-top boxes.

Cablevision, for instance, has plans for remote-storage digital video recorder (DVR) service to be made available to customers. Network intelligence and remote delivery from cable head ends might therefore become the most convenient and cost-effective way for cable companies to provide video programming and related services to consumers. Additional FCC regulation hardly seems appropriate in the face of market innovations of this kind. At worst, might new regulation of retail cable set-top boxes serve to artificially prop up a market segment trending toward obsolescence?

Whether or not Section 629's government-managed, forced-competition provision for set-top boxes was ever a sensible policy remains a valid question. To be sure, no agency has the rightful authority to rewrite a federal statute. And so the FCC has to make do with the law, whatever its own policy preferences. But the task is made more manageable through Section 629's sunset provision – a pretty uncommon occurrence in regulatory statues -- which allows the FCC flexibility to take into account of rapidly changed and still-changing technologies and markets.

Rather than redoubling set-top box regulation under the National Broadband Plan, here is a Plan B worthy of adoption: Reduce regulation by eliminating the "integration ban." Citing its own Video Competition Report and the D.C. Circuit's holding in Comcast v. FCC, the FCC should declare the MVPD market fully competitive. The FCC can hang on (at least for now) to its requirements that cable providers make CableCARDs available for use with independents' equipment to use with cable systems. The FCC can then acknowledge that its prior judgment --that an "integration ban" was the only way to guarantee competition -- was not an infallible policy pronouncement, but a judgment call that is now irrelevant to today's dynamic video market. Instead, the FCC can affirm the public interest is best served by: (1) intermodal competition between cable, DBS and telco MVPDs; (2) efficiencies created by equipment containing advanced proprietary features or by similar advanced services delivered without equipment; and (3) avoidance of costs to consumers imposed by government-mandated technical standards.

In the end, the National Broadband Plan's gateway device recommendations seek a reinvigorated government-managed competition regime pointing back to the end of the last century. A forward-looking approach that better respects the dynamic nature of the video marketplace would not expand the "integration ban" but eliminate it. Such an approach would emphasize intermodal competition and the benefits of continuing technological innovation free of government mandates.