Wednesday, September 21, 2011

FCC Should Let the Sun Set on Its Set-Top Box Regulations

On September 7, the FCC's Media Bureau released an order granting TiVo a waiver from its set-top box rules requiring "digital cable ready" devices be capable of accessing analog cable channels and receiving over-the-air broadcast service. The Commission concluded that waiving its rules should reduce "by $80 to $100" the cost of TiVo's Premier Elite all-digital, CableCARD-enabled DVR.

The TiVo waiver order follows close behind the FCC Media Bureau's release of two other waiver orders on August 25. Those orders extended waivers of the FCC's set-top box integration ban for two small cable operators. The integration ban prohibits set-top boxes provided by cable operators from being self-sufficient in order to create and manage a niche market for independently manufactured set-top boxes. The ban forcibly separates conditional access (or video content navigation) from security functionalities, prohibiting both from being performed by a single device.

In one integration ban waiver order, the FCC concluded that James Cable, LLC, demonstrated financial hardship justifying a partial extension of its waiver. And in the other order the FCC concluded that a waiver extension should be granted to Choice Cable T.V. Rico since the record demonstrated that "the integration ban would make HD service prohibitively expensive for rural Puerto Rico residents and could potentially eliminate the availability of HD/DVR service for the few residents who can afford it."

The FCC has granted waivers from its set-top box rules before. And these orders are welcome as far as they go. One can appreciate the Commission's willingness to provide the requesting parties at least some relief from the agency's self-imposed device design requirements. But limited waivers from set-top box regulations aren't enough.

Given the costs of its set-top box regulations – recognized in part through its granting the waiver orders – and the dynamic growth of the video marketplace since late last century, the agency should – even if belatedly – consider a course change for this century. The FCC should exercise its powers under the sunset provision of Section 629 and waive all set-top box regulations. Permanently.

The FCC's integration ban rests on a conceptually counterintuitive and counterproductive regulatory policy. By disintegrating those set-top box functionalities, the FCC seeks to make independently manufactured set-top boxes and set-top boxes leased to subscribers by cable operators both rely on the same security solution. This is meant to make it more attractive for cable customers to purchase independently manufactured set-top boxes at electronics retail outlets.

However, the FCC's integration ban has never created the niche market that the agency first imagined back in the 1990s. In a FSF Perspectives paper from last year titled "The FCC's Continuing, Costly Video Navigation Device Regulation," I wrote that:

The costs of the integration ban — ultimately leading to more expensive devices for consumers — should have lead the Commission to jettison its ban. But the Commission instead tries to cabin its concession by insisting that the exemption can still work 'without undermining the effectiveness of the integration ban.' This despite the Commission's own admission that since the ban went into effect: 'most manufacturers have abandoned the [CableCARD] technology. Indeed, since July 1, 2007, cable operators have deployed more than 22.75 million leased devices pre-equipped with CableCARDs, compared to only 531,000 CableCARDs installed in retail devices connected to their networks.'
Those numbers suggest that consumers usually prefer to lease set-top boxes from cable operators (and trade them in for more advanced devices) over making trips to the store and fronting the cash to purchase devices that will become outdated after a few years.

Nevertheless, the FCC stubbornly persists in enforcing its set-top box regulations, including its CableCARD rules. The FCC amended those rules in part in 2010, and further tweaked them in early 2011, with the most recent set of changes not going into effect until year's end. The end game of FCC's propping up of the CableCARD regime is to eventually install an expansive set of video device navigation regulations called "AllVid."

In a blog post this spring titled "Video Competition Should Lead FCC to End Old Regulation," I pointed out how the landscape of the video marketplace has dramatically altered since the 1990s. For instance, where so-called cable bottlenecks once existed, consumers now enjoy competition from two national DBS providers, and in some places telco entrants into the video services market. Consumers are also experiencing broadband-delivered video content through a variety of devices, including PCs, video game consoles, Internet-connected HD TVs, and even wirelessly-connected tablets and smartphones.

These dynamic video market developments suggest that government regulation of set-top boxes or other video navigation devices is wrong-headed. If anything, video device regulation should be the exception rather than the rule. In other words, in today's competitive video market, aggrieved competitors or consumers should first demonstrate an abusive exercise of market power or anticompetitive conduct before regulatory restrictions on video devices should be imposed. But the system we have still takes the opposite approach: set-top box regulation is the rule unless special waivers can be obtained from the regulators. Unfortunately, that approach relies on 1990s assumptions about the marketplace.

Through its waiver orders and its recent amendments carving out new exceptions from its CableCARD rules, the FCC's recognizes at least some of the costs imposed by its set top box regulations. But a broader view of the history of its set-top box regulations shows that the promised benefits of the FCC's integration ban and CableCARD regulatory regime have never materialized.

It's undesirable and an overreach to have government controlling video device designs in a competitive market. And developments in the video market that have led to new services and platforms for video delivery suggest a market that is effectively competitive, making existing or any future set-top box or video navigation device regulation unnecessary and outdated.

Fortuitously, Congress gave the FCC a unique "sunset" power under Section 629 to eliminate such regulation when it determines the market is effectively competitive.

The FCC should let the sun set on its set-top box regulation.