The FCC Targets Cable Set-Top Boxes—Why Now?

With great fanfare, FCC Chairman Thomas Wheeler is calling for sweeping changes to the way cable TV set-top boxes work.

In an essay published Jan. 27 by Re/Code, Wheeler began by citing the high prices consumers pay for set-top box rentals, and bemoans the fact that alternatives are not easily available. Yet for all the talk and tweets about pricing and consumer lock-in, Wheeler did not propose an inquiry into set-top box profit margins, nor whether the supply chain is unduly controlled by the cable companies. Neither did Wheeler propose an investigation into the complaints consumers have made about cable companies’ hassles around CableCards, which under FCC mandate cable companies must provide to customers who buy their own set-top boxes.

In fact, he dropped the pricing issue halfway through and began discussing access to streaming content:

To receive streaming Internet video, it is necessary to have a smart TV, or to watch it on a tablet or laptop computer that, similarly, do not have access to the channels and content that pay-TV subscribers pay for. The result is multiple devices and controllers, constrained program choice and higher costs.

This statement seems intentionally misleading. Roku, Apple TV and Amazon Fire sell boxes that connect to TVs and allow a huge amount of streaming content to play. True, the devices are still independent of the set-top cable box but there is no evidence that this lack of integration is a competitive barrier.

A new generation of devices, called media home gateways (MHGs), is poised to provide this integration, as well as manage other media-based cloud services on behalf of consumers. This is where Wheeler’s proposal should be worrisome. He writes:

The new rules would create a framework for providing device manufacturers, software developers and others the information they need to introduce innovative new technologies, while at the same time maintaining strong security, copyright and consumer protections.

This sounds much more like a plan to dictate operating systems, user interfaces and other hardware and software standards for equipment that until now has been unregulated. Wheeler gives no explanation as to how his proposal will lead to lower prices or development of a direct-to-consumer sales channel.

[M]y proposal will pave the way for a competitive marketplace for alternate navigation devices, and could even end the need for multiple remote controls, allowing you to use one for all of the video sources you use.

What Wheeler really wants is FCC management of the transition from today’s set-top boxes to the media home gateways (MHGs) just beginning to appear on the market—a foray into customer premises equipment regulation unseen since the 1960s.

For good reason, the words “media home gateway” never appear in Wheeler’s Re/Code article. By avoiding mention of MHGs, he can play his “lack of competition” card, as he did in Thursday’s press briefing on his proposal.

There’s more than a whiff of misdirection here. Set-top boxes are a maturing market. An October 2015 TechNavio report forecasts the shipment volume of the global set-top box market to decline at a compound annual rate of 1.34 % over the period 2014-2019. By revenue, the market is expected to decline at a compound annual rate 1.36% during the forecast period. When consumers “cut the cable cord,” as some 21 million have, it’s set-top boxes that get unplugged.

At the same time, TechNavio forecasts the global MHG market to grow at a compound annual rate of 7.82% over the same period. Elsewhere, SNL Kagan’s Multimedia Research Group forecasts MHG shipments will exceed 24 million in 2017, up from 7.7 million in 2012. The long list of MHG manufacturers includes ActionTec, Arris, Ceva, Huawei, Humax, Samsung and Technicolor.

MHGs are the “alternative navigation devices” Wheeler coyly refers to in his Re/Code essay. These devices will replace the set-top boxes in use today, but because of their ability to handle Internet streaming, they are likely to be available through more than one channel. That’s why they only way to view Wheeler’s call to “unlock the set-top box” is as a pre-emptive move to extend the FCC’s regulation into the delivery of streaming media.

To be sure, if the FCC mandates integration of streaming options into cable-provided MHGs, streaming companies would gain stronger foothold into consumers’ homes, which would then allow them to share their apps, gather data on users, and, perhaps most lucratively of all, control the interface on which channels are displayed, as noted by The Verge’s Ashley Carman.

Yet the streaming companies that would appear to benefit most from this proposal have thus far been quiet. Perhaps because Wheeler has made no secret that he believes Apple TV, Amazon Fire and Roku are multichannel video programming distributors (MVPDs), FCC-speak for “local cable companies.” Is his “unlock the box” plan precisely the opposite? Is it an effort to fold streaming aggregators into the existing cable TV regulatory platform, with all its myriad rules, regulations, legal obligations and—dare we say it—fees and surcharges? You might roll your eyes, but this is the only analysis in which the proposal, which focuses on “device manufacturers, software developers and others,” makes sense.

But does the FCC have the right to require cable companies to share customer data acquired through the infrastructure and software they built and own? It’s yet another iteration of the old unbundled network elements model that is consistently shot down by the courts yet one that the FCC can’t seem to get past.

Arcane details aside, the FCC should not be involved in directing evolution paths, operating software or other product features. It creates too much opportunity for lobbying and rent-seeking. History shows that when the government gets granularly involved in promoting technology direction, costs go up and innovation suffers as capital is diverted into politically-favored choices where it ends up wasted. The debacles with the Chevy Volt and Solera are just two recent examples of the dangers inherent when bureaucrats try to pick winners, or give a subset of companies in one industry an assist and the expense of others.

This post originally appeared Feb. 1, 2016 on the R Street Institute official blog.

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