Government Shouldn't Design Devices in Dynamic Markets

Last week the National Association of Broadcasters (NAB) continued its push to have government require that FM receiver chips be embedded in wireless devices. Apparently, NAB seeks a forced-access technology mandate by which Congress would require one media delivery platform – FM broadcasting receivers – be fused into the physical devices of a competing media delivery platform – wireless devices. And this despite the fact that MP3 players, including iPods, typically carry FM receivers and that wireless innovation has led to the availability of smartphone applications that allow access to FM broadcasting. In other words: "There's an app for that."

NAB released a poll suggesting that consumers would be willing to pay a small amount in order to have FM receiving capability in their wireless devices. NAB's poll comes in the wake of summer lobbying efforts surrounding the Performance Rights Act (H.R. 848 and S.379). Reports indicate that NAB seeks an amendment to the pending legislation that would include an FM chipset mandate being imposed on wireless manufacturers.

Wireless devices designed with FM receiving capabilities may, in fact, have strong appeal with consumers. But that should be something for the market to decide. Designing commercial media technologies should not be the business of Congress or bureaucrats. This is especially so in dynamic markets where rapid innovation is a constant and government technical mandates can be quickly rendered obsolete by new market developments. Not to mention the fact that the politically driven design decisions made by government can easily thwart the market-driven design decisions made by private enterprise. Wireless manufacturers design devices with all kinds of functionality trade-offs in mind. Balancing complex technological and financial constraints requires freedom to experiment and innovate. Unfortunately, the idea of a wireless FM chipset mandate fits a too-familiar pattern of government technical mandates that artificially prop up a technology market segment to the exclusion of genuine, dynamic market supply and demand.

Consider another example of intrusive government technical mandates currently being imposed on the video marketplace. The FCC's ongoing efforts to expand regulation of video navigation devices fit this mold of government-imposed mandates for technological devices premised on a static view of the market rather than a dynamic view. As I point out in an April blog post "National Broadband Plan: A Setback On Set-Top Box Regulation," the FCC first set out its government reengineering and managed competition ambitions for video navigation devices in the National Broadband Plan. And over the course of the spring and summer, the FCC has begun its implementation.

First, the FCC issued a notice for public comment on a proposed new set of CableCARD regulations concerning cable set-top boxes. CableCARDs are small physical devices created as a result of prior rounds of FCC regulation-induced negotiations with the cable industry. Provided to consumers by cable operators, CableCARDs contain security functions that can be inserted into the video navigation devices of independent set-top box manufacturers so that those devices can be used to access cable programming. (Cable operators are also subject to an FCC-imposed "integration ban" that prohibits them from combining video navigation and security functions in their set-top boxes. They are instead required to make use of CableCARDs to provide security functions for the set-top boxes they lease to their customers.) Based on its notice, the FCC will eventually issue new interim rules that will govern CableCARDS until a promised new regulatory regime is put in place.

Second, the FCC issued a Notice of Inquiry seeking comment on specific requirements for an expanded video navigation device regulatory regime that will apply to all multichannel video programming distributors (MVPDs). The FCC intends to require that all MVDPs install a "gateway device or equivalent functionality" in all homes using video navigation devices by the end of 2012. By year's end the FCC will follow up with a Notice of Proposed Rulemaking that will distill the new technical mandates for video navigation devices with which all MVPDs must eventually comply.

The FCC has premised these new regulations largely on the argument that a competitive set-top box market has not emerged as was originally contemplated by the Telecommunications Act of 1996. But a serious problem with the FCC's policy is that it insists on giving consumers something that they may not want. Consumers often find it convenient, for instance, to lease cable set-top boxes from their cable operator as part of their overall cable package. This saves consumers a trip to the store to purchase a set-top box from an independent manufacturer. It also saves consumers the effort of buying a new set-top box should they decide to upgrade to a better product that includes high-definition picture or digital video recorder service.

In addition, set-top boxes may become much less prevalent or even largely irrelevant in the years ahead. Some cable operators, such as Cablevision, are looking to offer video programming services without set-top boxes by transferring functions to cable head ends. Overly aggressive regulation could potentially thwart those kinds of technological advancements.

Another problem with the FCC's policy is that it looks for competition in the wrong place. Late 2010's video marketplace is nothing like 1996's video marketplace. In addition to cable service, consumers now enjoy competition from two national direct broadcast satellite (DBS) providers. Telcom MVPD entrants also offer competitive service packages in many places. And some consumers are using video gaming devices or direct broadband connections through their PCs – or even through their wireless devices – to obtain video services and programming. The fact that the FCC now intends to expand regulation to DBS and telco MVPDs implies that it now sees a variety of device substitutes available to consumers.

However, the FCC seems to be making a liability out of an asset with its plans to apply video navigation device regulation to all MVPDs. As a general matter, the FCC mistakenly treats MVPD competition as grounds for new regulation for all video navigation devices rather than as the competitive basis for deregulation of cable set-top boxes. And, in particular, the FCC wrongly insists on expanded regulation to sustain a government-managed niche market for video navigation devices for cable, DBS and telco video services when the viability of that niche market has arguably been undermined by dynamic market changes.

Undoubtedly, those dynamic changes that have taken place in the video market since 1996 require a new and different policy approach to cable set-top boxes. But that policy approach should be deregulation as a means to further video innovation and competition between cable, DBS, telco MVPDs, and any other potential emerging competitors. Importantly, Section 629 of the 1996 Act, fairly uniquely, gives the Commission the power to sunset set-top box regulation when the MVPD and set-top box markets are fully competitive and when elimination of regulations would promote the public interest. Federal law puts it within the FCC's power to bring about device deregulation. The Commission should exercise this power that Congress has conferred.

Dynamic market developments and existing law support deregulation for cable set-top boxes and cable providers rather than the imposition of government-mandated and designed navigation devices. In the same vein, Congress should not adopt FM chipset mandates for wireless devices.

The lesson here is that Congress and the Commission should say no to mandating designs for advanced communications and information services devices in dynamic markets.