Creating Consumer Choice in Set-Top Boxes

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Imagine what the smartphone industry would look like if 99% of people used phones designed and sold by their carriers, instead of by companies like Samsung, Apple, and Motorola. You don't need to imagine too hard, though, since we have a pretty good idea already: they'd be as hard to use, ugly, expensive and outdated as cable set-top boxes, a market where 99% of users rent devices provided by their cable operators.

Congress tried to prevent this result when, in the 1996 Telecommunications Act, it directed the FCC to take steps to make it so that the cable box market was just as open and competitive as other areas of consumer electronics. The standard it came up with--CableCARD--found a niche, but failed to achieve its purpose. As a result, not only are the devices people use not as good as they would be in a competitive market, but consumers are paying upwards of $20 billion dollars a year to rent them. While in most consumer electronics markets, new products with new features are offered at the same price or cheaper, in cable land, when new features like DVR recording, multi-room, and HD come around, the cable industry charges a premium for them--and continues to do so thereafter. Just a few month’s cable box rental fees can add up to what it would cost to buy a tablet computer outright.

The technology behind CableCARD involves putting a cable-provider physical card into a third-party device, like a TiVO. That card provides the security component that ensures people only can access the channels they pay for. A simple enough idea, but the technology has been beset by technical and logistical problems. The technical problems include how a CableCARD cannot send signals upstream to the cable provider by itself, making things like video-on-demand impossible. The logistical problems include inventory management--not all CableCARDs are the same, CableCARDs can be put into an unusable state--not to mention the fact that, being physical items, they provide a pretext for the cable company to charge a rental fee.

(One side note--despite the attention that online video and streaming devices like the Chromecast and Roku get, traditional pay TV is still larger than online video, and the install base of pay TV set-top boxes is larger than that of streaming devices. Traditional pay TV providers still have enormous influence in the market, control over much top content, and are not going away anytime soon. Even new entrants like Google Fiber have found they need to offer a traditional TV service to be appealing to most customers.)

Back in December, Congress directed the FCC to loosen some of its CableCARD rules--a decision PK disagreed with, but which carried with it a silver lining of sorts: Congress also directed the FCC to set up something called the Downloadable Security Technical Advisory Committee (DSTAC). This committee of engineers from trade groups, consumer groups, pay TV providers, and the consumer electronics sector was tasked with briefing the FCC on the state of technology with respect to "downloadable" security. Public Knowledge is a member of this committee.

Now, "downloadable" security has long been used in FCC circles to refer to a replacement for CableCARD, which is physical security. Early on, many critics of the proposals Public Knowledge and others have put forward argued that our ideas went beyond the downloadable security mandate. As we viewed the statute, the DSTAC was charged with recommending a successor to CableCARD that was at least as capable as the technology it would replace. The very words of the statute support this reading: the purpose of the DSTAC was to “promote the competitive availability of navigation devices in furtherance of section 629.” (Section 629 is the provision of law that directs the FCC to promote a competitive market for these devices.) Nevertheless, others, mostly from the cable industry, said that the DSTAC should just focus on narrow "conditional access" or cryptography standards.

As it happened, the DSTAC was too divided to come up with a single recommendation. On Friday, it adopted a two-part report. Public Knowledge and others have endorsed a protocol-based proposal that would modernize the basic CableCARD concept. Third-party devices would have access to the video content that users pay for, and would be able to offer their own user interfaces and sets of features (e.g., recording, ad-skipping) and present pay TV content (not just "cable," but telco provided services like U-Verse, fiber TV services like Google Fiber, and satellite TV) alongside online content.

But the other camp, instead of recommending a narrow security standard, ended up rallying behind a proposal that might be best described as a web app proposal. Under this approach, third-party devices would not have access to actual video content, but just display various apps (that might include video) that are deployed by the cable provider.

Both of these approaches are inspired by technologies that have been used elsewhere. The relevant question at this point isn't which of these proposals will work technically, but which of them will achieve the desired outcome: a market for devices that can access pay TV content. PK thinks that allowing device makers to sell devices that offer unique interfaces and compelling features will get us there, and that a standard that relegates third-party devices to the role of dumb terminals for cable apps just doesn't lay the groundwork necessary for a successful market. Under the cable industry proposal, third-party devices won’t be able to be significantly better than the cable-provider ones.

What's at stake here is control. It's well documented that the cable industry rakes in billions on device rentals. But the real money may still be yet to come--if your cable company has the same level of control and power over your TV screen that, for example, Apple does over the iPhone, its opportunity to "monetize" that control may be irresistible. Imagine if Comcast got 30% of your Netflix or Hulu subscriptions, or if Charter could target ads to your TV screen based on what it knows about you based on your Internet usage and billing information. It's the potential for control like this that underlies efforts like Comcast's X1 set-top box platform.

The best way to fight this is to introduce competition. People shouldn't need to rent a box from their operator to watch TV, and the devices they buy should have as much flexibility as possible in how they display and interact with the content that users are already paying for. Not every third-party device will be good, but the best way to improve the market is through the discipline of competition.

Giving up control might be in the best long-term interest of the cable and programming industries, as well. Cable should compete with online video by getting better. The wireless industry ended up growing, not shrinking, after it gave up micromanaging what features could be on mobile phones. Part of what the cable industry needs to do to keep customers is offer better and more flexible packages. But devices are a part of this. In a recent study, 51% of potential cord-cutters said they would hold on to their cable subscriptions if they had devices that unified traditional pay TV content with online content. Lots of companies are out there ready to make devices that do just that.

The FCC now has the DSTAC's report with its two proposals. Ultimately, it will have to act to replace the aging CableCARD standard with something better, something that can finally achieve the 1996 Telecommunications Act's goal of a competitive marketplace. PK believes that the protocol-based proposal that it supports provides a much surer path to competition than the cable industry's web app approach, and we look forward to continuing to make that case to the FCC. The FCC is now seeking public comment on the two-part DSTAC report. Ultimately, it needs to move forward to a rulemaking to implement a solution that will finally achieve the goal of competitive video devices.

Photo Credit Flickr User: Dan Budiac

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