Nearly a month into the New Year, the FCC is now pursuing several more action items on its agenda for implementing the National Broadband Plan. Unfortunately, if the FCC's recent order imposing set-top box conditions on the Comcast-NBCU merger is any hint, one of those action items will be a broader set of regulatory controls on the design of video navigation devices. But leaving Comcast-NBCU's merger aside, the FCC should call off its "AllVid" plans for future regulation of video navigation devices. Continuing developments in the dynamic video market show that adherence to free market principles remains the surest way to promote continuing investment and innovation in video navigation devices for the benefit of consumers.
Media reports from this year's Consumer Electronics Show reveal the launch of a variety of new Internet-capable video devices. An increasing number of "smart TVs" being brought to market, for instance, are capable of downloading video content from the Internet. Cable companies and other multi-video programming distributors (MVPDs) are also pursuing new business arrangements with manufacturers of other innovative devices for delivering video content. Meanwhile, new broadband-enabled and video-capable tablet devices and smartphones are being brought to market — thereby giving video consumers mobility options.
What's more, remote control innovations are also changing how consumers can operate their video navigation devices. Apps are now created to allow smartphones to be used as remote control devices, and manufacturers are also experimenting with creating remote controls with one-push button options for streaming or downloading content from the Internet — such as a "Netflix button." Of course, future TVs and video navigation devices could also make remote controls less significant by incorporating voice activation and motion sensor capabilities like the new Xbox Kinect.
All of these innovations involve complex engineering design decisions that balance new technological capabilities — such as processing speeds, video resolution, search capability, storage capacity, and sound quality — with corresponding technological constraints — such as size, weight, and cost. Device designers must also balance features such as interoperability and openness with concerns over security and protection of third-party copyrights. In a free market, competing manufacturers make their own judgments about how to approach these types of device engineering trade-offs and what functions or features should be optimized to best meet divergent consumer demands.
Strangely enough, it's in the midst of this sea-change in video delivery technologies and device functionalities that the FCC has proposed to impose new regulatory requirements on certain MVPDs regarding video navigation devices. By invoking a provision from the Telecommunications Act of 1996, the FCC issued its "AllVid" proposal in 2010. Under the FCC's proposed technological standards mandate, MVPDs must install a "gateway device or equivalent functionality" in homes using video navigation devices. In particular, the FCC proposes to require placement of:
the network-specific functions such as conditional access, provisioning, reception, and decoding of the signal in one small, inexpensive operator-provided adapter, which could be either (i) a set-back device – which today could be as small as deck of cards – that attaches to the back of a consumer's television set or set-top box, or (ii) a home gateway device that routes MVPD content throughout a subscriber's home network. The adapter would act as a conduit to connect proprietary MVPD networks with navigation devices, TV sets, and a broad range of other equipment in the home. The AllVid adapter would communicate over open standards widely used in home communications protocols … enabling consumers to select and access content through navigation devices of their choosing purchased in a competitive retail market.
The FCC contends "AllVid" regulation will help realize the agency's view that "there is true promise in the basic concept of separating operator-specific communications functions into a device that can then communicate with individual retail devices or a network of retail devices throughout a subscriber's home." "AllVid" therefore implies that the FCC can make engineering and other technological design decisions better than the free market. Or at least it implies that the FCC can pull levers that will spur competitors to create a more innovative and competitive video device market than the one we now have today.
But when it comes advanced technologies in dynamic markets, the reality is FCC regulation is much more prone to restrict innovation than to unleash it. Revealingly, "AllVid" would prohibit MVPDs from including some of the so-called "adapter" functions in the video navigation devices they make available to their own subscribers. This means that consumers would be unable to lease a DVR or other type of advanced device with all functions integrated into that one device. Subscribers would instead need to get an "AllVid" adapter containing some of the functionalities to go with the leased DVR or other device in order to obtain full functionality. This proposed restriction on what MVPDs can make available to consumers mirrors the FCC's current "integration ban" for set-top box regulations.
As I pointed out in an earlier FSF Perspectives piece, "The FCC's Continuing, Costly Video Navigation Device Regulation," most consumers prefer to lease set-top boxes from their cable or other MVPD provider in order to avoid fronting extra money for the equipment, making separate trips to the store to purchase equipment, and being stuck with outdated equipment (such as non-HD DVRs). That is a major reason why the FCC's existing set-top box regulation — including its ban on set-top boxes integrating content and security functionalities — has created significant regulatory compliance costs and brought no discernable benefit to consumers.
More importantly, the FCC's regulatory approach attempts to artificially prop up the agency's idiosyncratic and narrow view of one particular market segment. The regulatory foundation for "AllVid" is an outdated picture of the video marketplace. For "All-Vid" is the latest iteration of a set-top box regulatory regime that was envisioned back in the mid-1990s when cable companies did not face the degree of competition they now face from direct broadcast satellite and telco video entrants.
Nor was online video distribution through broadband Internet a factor in 1996. Via broadband connections, consumers today can obtain video programming through services such as Amazon's Video on Demand, iTunes, and Netflix's subscription service. Hulu and a number of individual broadcast and cable TV programmer websites offer streaming content to consumers for free by using ad-supported models. Roku, Boxee, and Apple TV also offer content delivery services through their respective new devices. In addition, broadband-connected video game consoles such as Sony PlayStation 3 and Xbox 360 are becoming increasingly popular devices for obtaining TV and movie programming.
By trying to insert itself further into today's dynamic video market through technological device design mandates, the FCC risks freezing into place rules geared more toward a monopolistic, static market. But as several video programmers reiterated to the Commission late last year:
[V]ideo distribution services are not static - programmers and content creators consistently invest in the creation of new services, features, and enhancements, such as 3D networks and program interactivity, made possible by advances in technology pioneered by program networks and their partners. Standardizing the output from MVPD networks would essentially freeze the status quo, thereby reducing the incentive to innovate and stifling the development of new features and services that consumers demand.
Imposing a single government-mandated standard for video navigation devices can also create stronger incentive for wrongdoers to attempt to compromise security. As the video programmers contend: "[c]ontent security issues are best left to multiple, private, and voluntary solutions which are inherently more flexible and able to deal with advances in technology more adroitly than government regulation."
Given the innovation and choice in the video market we see today, if there is any provision in the 1996 Telecom Act relating to set-top boxes that the FCC should be invoking it is the sunset provision. Congress placed into Section 629 a unique provision that calls upon the FCC to sunset regulation of set-top boxes when the market becomes effectively competitive. The FCC should now invoke the sunset provision, or at a minimum keep from expanding its regulation of video navigation devices.
Market innovations of the type demonstrated at CES and described here overwhelmingly show that consumers are offered abundant choices for video device delivery options in an effectively competitive market, not a static monopolistic market. And the fact that video market developments have taken forms that no regulator in 1996 possibly could have predicted is no reason for regulators in 2011 to look past them now. The FCC should respond to staggering innovation and vibrant competition with deregulation, not more regulation.