The FCC's Previous Failures Regulating Video Devices Show Folly of New Rules

The FCC is planning vast new regulatory controls regarding how video devices are designed and function. To date, the agency has not identified any market power problem justifying new controls. As recently as the Fifteenth Video Competition Report (2013), the Commission even admitted the video device market "is more dynamic than it has ever been." Yet FCC Chairman Tom Wheeler is working on a regulatory proposal that he seems confident will develop new ways to access video content.

Overconfident is more like it, considering past FCC efforts. When it comes regulating video devices, the Commission has a track record of failure. Tremendous advances in video devices have resulted from entrepreneurial investment and innovation. But prior Commission attempts to redesign video devices through regulation have been thwarted by technological and economic realities. These realities have made video devices more costly to manufacture and therefore more costly for consumers to use.

Three pronounced FCC policy failures in regulating video devices demonstrate the empty promises and pitfalls of regulation in this fast-changing, technologically dynamic area. Taken together, they offer concrete evidence for why the Commission should avoid any new foray into regulating the design and operation of video devices.

The FCC's Failed FireWire Mandate. In 2003, the FCC adopted regulations to require all cable operators include a FireWire data port in all HD set-top boxes they distributed to customers. Also known as an IEEE-1394 interface, FireWire is an external data connection for audio and video transfers. But the Commission's video device design preferences were rejected by the marketplace. HDMI ports were far more widely adopted in HD TVs than FCC-mandated FireWire ports. The Commission finally relented and removed its FireWire requirement in 2010. Industry estimated $400 million in costs to comply with the Commission's failed FireWire mandate.

The FCC's Failed Integration Ban. Beginning in 1998, the Commission prohibited cable operators from offering subscribers video devices that performed both program content access and security functions. The Commission even conceded in a 2010 order that "[t]he integration ban raises the cost of set-top boxes for cable operators, which discourages operators from transitioning their systems to all-digital." The Commission’s ban on integrating access and security in a single video device even prohibited access-enabling devices from downloading security functions from the Internet. Despite the obvious problematic nature of the integration ban, the FCC clung to it stubbornly. The Commission took a permission-by-waiver approach, requiring video device providers to file for exemptions from the integration ban. Congress finally stepped in. The STELA Reauthorization Act of 2014 repealed the integration ban entirely.

The FCC's Failed CableCARD Mandate. A manifestation of the integration ban was the Commission's CableCARD regulations. CableCARDs are small PC cards that are inserted into cable set-top boxes or independently manufactured devices. They perform decryption to allow subscribers access to video programming. In 2003, the Commission imposed regulations that made CableCARD compatibility the official means for cable operators to comply with the integration ban. Cable operators were required to make their cable systems compatible with CableCARD-enabled devices made by independent manufacturers. What's more, cable operators were also required to rely on CableCARDs to provide security functions for the set-top boxes they lease to their subscribers. This "common reliance" mandate resulted in unnecessarily complex and costly cable set-top box devices. Indeed, the cable industry has estimated that CableCARD-related costs to consumers have exceeded $1 billion. By another reported estimate CableCARD adds $56 to the cost of each set-top box.

However, the FCC order imposing CableCARD mandates contained serious legal defects. The D.C. Circuit threw that order out in Echostar v FCC (2013). Legal problems aside, consumers were largely uninterested in purchasing independently manufactured set-top boxes. As the Commission conceded in its Fourteenth Video Competition Report (2012), "[c]onsumer adoption of retail CableCARD-compatible devices has not matched the Commission’s expectations." According to a January 2016 industry report, the nine largest cable operators have deployed 55 million set-top boxes with CableCARDs. Only 621,000 CableCARDs have been deployed for retail devices. Overwhelmingly, consumers have preferred to lease video devices from cable providers. This allows consumers to avoid extra trips to the store. It also allows them to avoid owning a video device that technological advances render outdated, such as standard definition digital video recorders (DVRs).

Those three recent failures in FCC video device policy are concrete reminders of the limits of bureaucratic regulation. It's easy enough to write rules and make promises that they will bring about imagined improvements in sophisticated technological devices. But when government mandates run into real-world technical difficulties, manufacturers are subjected to hundreds of millions of dollars in extra costs and consumers end up footing the bills. Real innovation requires investment-backed risk-taking by market participants who must actually create and sell products and services. This is especially the case in dynamic markets, such as the market for video devices.

At all times it should be remembered that today's video market advancements have taken place outside the scope of FCC regulation. Hi-definition video – and increasingly ultra HD – has replaced one-way analog cable video technology. Cable, direct broadcast satellite (DBS), and telco video consumers now use Internet-enabled HD DVRs with video-on-demand, whole homing options, and a variety of other video applications. Video content, including through TV Everywhere, is widely available to subscribers on gaming consoles, PCs, or tablet devices. CableCARD-compatible video devices manufactured by third parties are also still available, although consumers overwhelmingly prefer to lease devices from providers.

Meanwhile, online video distributor (OVD) subscriptions using streaming media devices offer consumers another alternative platform for video viewing. OVDs like Netflix and Amazon Prime have more than 100 million subscriptions. That number equals or exceeds total cable, DBS, and telco video subscriptions. Market research indicates almost 20% of U.S. broadband households have a streaming media device – such as the Roku 3 or Amazon Fire TV. And 8% of households have streaming stick device for TVs or PCs, like the Amazon Fire TV Stick. Ownership of streaming media devices is projected to rise significantly in the immediate future.

All this to say that marketplace freedom has a superior track record advancing innovation and consumer choice for video devices. The Commission’s real-life track record of failed video device regulations adds weight to the case against new mandates. 

The FCC has made big promises about the benefits of video device regulations before. It did so with FireWire, the integration ban, and CableCARD. In the end, the Commission's promises led to aggravating technical difficulties and consumer bafflement. And, of course, to higher costs that were passed on to consumers.