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PK Successfully Predicts the Future: FCC Evolution Waiver Destroys Competition

December 9, 2009 , , , ,

This summer, PK flagged a decision by the FCC that was a big step towards undermining any remaining competition in the cable set-top box world. In fact, it was such a big step in the wrong direction that we filed a petition asking the FCC to reconsider its decision.

There is great background for this “Evolution waiver” (named after the company that originally requested it – Evolution, Inc. – not because anything is evolving) here, so I won’t rehash all of the details.

The short version is that the FCC thought it needed to waive its existing rules designed to create competition in cable set-top boxes in order to make sure that low-cost set-top boxes were available. The rules created competition by separating the security function (I paid for my cable) from the video function (turn what comes through the coax cable into TV).

The theory is that as long as the cable company has control of the security part of set-top boxes (currently in the form of CableCARD), anyone should be able to build the video part of the boxes. Any number of companies could comply with the rules and build boxes that would compete in the marketplace. A good way to undermine this independent competition would be to allow cable operators to offer cheap boxes that combine security and video. This would make independent devices that follow the rules appear more expensive and more complicated (because they use CableCARD instead of combining everything in a single device). In fact, the waiver is designed to allow just these types of integrated boxes.

In telling the FCC that their decision was a bad idea, we pointed out two major problems. First, boxes that complied with the rules could be built without the waiver. As a result, the waivers are completely unnecessary. Not only are waivers unnecessary but, second, waivers destroy the market for compliant set-top boxes. It actively punishes companies that have tried to respect FCC rules and develop hardware that complied.

A few months later we saw a filing from a company called IPCO, LLC. Yesterday we added it to our petition (here is the IPCO filing and the declaration) and told the FCC that the entire basis for their decision to waive existing rules is unsound.

It turns out that we were exactly right. IPCO has successfully developed low-cost set-top boxes that manage to comply with the FCC’s rules, so there is no need for a waiver to make boxes available (see first point). Not only that, but the FCC’s waivers completely screwed IPCO (see second point). As soon as it was clear that the FCC was not going to actually enforce its rules, funding dried up and customers walked away.

Besides being relevant for this specific proceeding, this entire episode is an example of larger problems that has been festering at the FCC. First, too often the FCC makes policy by waiver. Instead of carefully evaluating a situation and developing rules that can apply to everyone, the FCC waives existing rules as individual companies request. Policy by waiver makes it impossible for an innovative company to try and play by the rules, because there is a constant threat that the rules will change at any time.

Second, and there will be much more on this later now that the FCC has decided to look into it, the cable set-top box market is dysfunctional. The current state of the market makes it incredibly difficult for an innovative company to even begin considering offering something new. I love TiVo as much as the next guy, and I am glad that they are making a go of it, but there is a reason that Steve Jobs and Apple steers clear of such a “loopy” market.