The FCC’s Push to Unlock Set-Top Boxes May Backfire

A recent proposal from the Federal Communications Commission isn’t getting as much attention as it deserves, and its critics argue that it won’t be anything like the slam-dunk for competition and innovation that the FCC describes, even though many consumers will probably find themselves reflexively sympathetic to the proposals.

In a nutshell, the FCC wants to unlock the “set-top box” that brings cable television into your home, so you won’t have to rent those boxes from the cable companies anymore.

It’s a sign of how far regulation lags behind technology that everyone still calls these things “set-top boxes,” even though it is physically impossible to perch them on top of modern TV sets.  The device in question is the gadget you rent from your cable or satellite provider to decode the incoming signals so you can watch TV.  For the primary television set in a household, the set-top box is often incorporated into a DVR system.

Assessing the FCC proposal in January, the New York Times estimated the average consumer pays $231 per year to lease boxes from cable or satellite providers, providing $20 billion in annual revenue to the companies.

The price of the boxes is said to have risen 185 percent over the past 20 years, even as virtually all other consumer electronics became considerably less expensive.  Set-top boxes were also denounced as “clunky technology” that lagged far behind the performance standards consumers expect from other computerized systems.

The primary reason for these deficiencies, in the FCC’s view, is that set-top boxes are sold to a captive market: users must rent them from their cable or satellite provider, because they contain custom technology to decode each provider’s transmissions.

Tech companies like Google, Apple, and Amazon are eager to open the market to competition, which the FCC would facilitate by “unlocking” the boxes.  Consumers would be able to buy set-top boxes from competing vendors, who would be given the programming necessary to adapt to each cable or satellite system by the providers.

This would, in theory, bring the cost of set-top boxes down, while improving their performance and blending all sorts of additional applications into a single device experience.  Owners of current-generation videogame systems like the Xbox One can get a taste of what this could work like.  The Xbox One really wants to be your set-top box, as well as a game machine – it has a whole onscreen channel guide and TV viewing environment built into the operating system.

Cable and satellite providers oppose the FCC rule, for both the obvious reason that they don’t wish to surrender the revenue from set-top box leases… and the potentially even greater problem that competitive box vendors might begin interfering in the arrangements between entertainment content providers and cable companies.  The box provider could compete directly with cable or satellite TV services to provide content, with absolutely no inconvenience to the user, or the boxes could even change the cable/satellite viewing experience – such as by inserting their own advertisements into the content they display.

This might all sound good to consumers, especially given the occasionally testy relationship between cable/satellite companies and their customers, who see themselves as ill-served members of a captive audience, at the mercy of near-monopolies.  However, some spirited arguments against the new set-top box rules have been made.

Phoneix Center economist George S. Ford slammed the FCC action as a “cynical play” at The Hill in February, calling the argument for cheaper set-top boxes through competition a “ruse,” because the supposedly excessive price of existing box technology is due to FCC mandates.

More disturbingly, Ford argued the new rules amounted to allowing third-party manufacturers to “confiscate another company’s product – and the viewers it works hard to acquire – by doing little more than repackaging it to create their own video service without having to negotiate and pay for content.”

Also, as you gaze into the third-party set-top box, it gazes also into you.  The devices would harvest enormous amounts of information about television viewers.

“Quite plainly, Wheeler’s proposal is a naked play to provide customers’ viewing habits to edge providers so these companies can monetize that information without having to go to the trouble of actually putting together a video product,” Ford charged, noting that broadband providers themselves are actually limited in their ability to use such information under the “Net Neutrality” rules.

Surprisingly, one of the most potent arguments against the new FCC rules was published Thursday at the Wall Street Journal, written by Anthony Wood… who is the CEO of Roku, one of the very third-party device providers that would seem poised to benefit from unlocking the boxes.  In fact, there are already some test markets where cable companies allow Roku devices to handle set-top box functions.

Wood warned the new FCC rules could well have unintended consequences that increased bottom-line prices to consumers, by disrupting the existing business models for production and delivery of media content:

The proposed regulation would—as we say in the industry—“decouple the user interface” from the video and data itself. This would allow a company like Google to do to the TV what it did on the Web—build an interface without the “inconvenience” of licensing content or entering into business agreements with content companies such as ABC, FOX, HBO, or video distributors like pay TV operators. The unintended consequences of circumventing these kinds of arrangements are likely to include increased costs for consumers, reduced choices and less innovation.

One potential pitfall is that the current business model allows video content providers to offer inexpensive entry-level packages at a loss.  As Wood explained, the companies accept this loss because they can sell content upgrades, including premium channels and pay-per-view content.  If set-top boxes are unlocked and third parties can muscle in on that premium content action, the business model that makes basic cable relatively cheap would be wiped out.

Wood, like Ford before him at The Hill, argued that new regulations were unnecessary to unleash competition, because it’s already happening:

Today, anyone with an Internet connection can buy a streaming device for less than $50 and access thousands of movies and TV shows, including from networks traditionally only available through your cable company’s box, such as ESPN, CBS,Disney, Showtime and others. Soon every piece of video produced for TV will be available to consumers on demand through a variety of competing platforms. Your cable company will be one option, but certainly not a required way to get your TV content.

This competition is causing cable companies to raise their game. Comcast, for instance, developed the X1 platform, which provides an improved user experience with features like content recommendations, shortcuts and voice search that are common with streaming platforms. Time Warner Cable and Charter Communications offer pay TV packages through apps that run on streaming players and smart TVs, rather than cable set-top boxes.

Both Wood and Ford also made the interesting point that by focusing on television content, the FCC is fighting yesterday’s battle over a fading technology, when they should be focused on broadband Internet – the wave of the future that could soon become the universal content delivery system.

The divergence between their criticisms on that point are intriguing: Wood thinks the FCC should be working harder to impose regulations that would prevent broadband providers from imposing competitive disadvantages on Internet-based streaming video, while Ford thought the FCC was artificially prolonging the life of the set-top box by tinkering with its regulatory environment, arguing that “the next evolution of the set-top box is not a competitive market; it’s the elimination of the box outright.”

“If broadband Internet services are accessible and affordable to consumers and there is a level playing field for content providers and devices makers, then consumers will benefit from a revolutionized television experience,” Wood concludes.  “Let’s not bog down the revolution with an unnecessary government intervention in a dynamic marketplace.”

In the fast-moving world of the Internet, one man’s regulation is another man’s de-regulation.  Most supporters of the new FCC rules portray them as encouraging competition by opening a sheltered market, while detractors view the new rule as handicapping cable and satellite providers to serve the interests of politically-savvy tech giants like Google (Ford explicitly denounces the FCC proposal in those terms.)

Consumers are probably enchanted at the thought of having a single, reliable device that handles all of their media content with a friendly user environment.  One way or another, no matter what the FCC does next, it’s coming.