Why is the FCC Doubling Down on Regulating the TV Industry and Set Top Boxes?

by on September 21, 2016 · 2 comments

The FCC appears to be dragging the TV industry, which is increasingly app- and Internet-based, into years of rulemakings, unnecessary standards development and oversight, and drawn-out lawsuits. The FCC hasn’t made a final decision but the general outline is pretty clear. The FCC wants to use a 20 year-old piece of corporate welfare, calculated to help a now-dead electronics retailer, as authority to regulate today’s TV apps and their licensing terms. Perhaps they’ll succeed in expanding their authority over set top boxes and TV apps. But as TV is being revolutionized by the Internet the legacy providers are trying to stay ahead of the new players (Netflix, Amazon, Layer 3), regulating TV apps and boxes will likely impede the competitive process and distract the FCC from more pressing matters, like spectrum and infrastructure.

In the 1996 Telecom Act, a provision was added about set top boxes sold by cable and satellite companies. In the FCC’s words, Section 629 charges the FCC “to assure the commercial availability of devices that consumers use to access multichannel video programming.” The law adds that such devices, boxes, and equipment must be from “manufacturers, retailers, and other vendors not affiliated with any multichannel video programming distributor.” In English: Congress wants to ensure that consumers can gain access to TV programming via devices sold by parties other than cable and satellite TV companies.

The FCC’s major effort to effect this this law did not end well. To create a market for “non-affiliated equipment,” the FCC created rules in 1998 that established the CableCARD technology, a module designed to the FCC’s specifications that could be inserted into “nonaffiliated” set top boxes.

CableCARD was developed and released to consumers, but after years of complex lawsuits and technology dead ends, cable technology had advanced and few consumers demanded CableCARD devices. The results reveal the limits of lawmaker-designed “competition.” In 2010, 14 years after passage of the law and all those years of agency resources, fewer than 1% of pay-TV customers had “unaffiliated” set top boxes.

It’s a strangely specific statute with no analogues for other technology devices. Why was this law created? Multichannel News reporting in 1998, representative of other reports at the time, has some clues.

[Rep.] Bliley, whose district includes the headquarters of electronics retailer Circuit City, sponsored the provision that requires the FCC to adopt rules to promote the retail sale of cable set-top boxes and navigation devices. 

So it it was a small addition to the Act, presumably added at the behest of Circuit City, so that electronics retailers and device companies could sell more consumer devices.TV regs chart small

The good news is that by the law’s straightforward terms and intent, mission: accomplished. Despite CableCARD’s failure, electronics retailers today are selling devices that give consumers access to TV programming. That’s because, increasingly, TV providers are letting their apps do much of the work that set top boxes do. Today, many consumers can watch TV programming by installing a provider’s streaming TV app on their device of their choice, manufactured and sold by dozens of companies, like Samsung, Apple, and Google, and retailers. Unfortunately, Circuit City shuttered its last stores in 2009 and wasn’t around to benefit.

But the new FCC proposal says, no, mission: not accomplished. There’s some interpretative gymnastics to reach this conclusion. The FCC says “devices” and “equipment” should be interpreted broadly in order to capture apps made by pay-TV providers. Yet, while “devices and equipment” is broad enough to capture software like apps, it is not broad enough to capture actual devices and equipment, like smartphones, smart TVs, tablets, computers, and Chromecasts that consumers use to access pay-TV programming.

This strained reading of statutory language will create a regulatory mess out of the evolving pay-TV industry, that already has labyrinthine regulations.

But if you look at the history of FCC regulation, and TV regulation in particular, it’s pretty unexceptional. Advocates for FCC regulation have long seen a competitive and vibrant TV marketplace as a threat to the agency’s authority.

As former FCC chairman Newton Minow warned in his 1995 book, Abandoned in the Wasteland, the FCC would lose its ability to regulate TV if it didn’t find new justifications:

A television system with hundreds or thousands of channels—especially channels that people pay to watch—not only destroys the notion of channel scarcity upon which the public-trustee theory rests but simultaneously breathes life and logic into the libertarian model.

Minow advocated, therefore, that the FCC needed to find alternative reasons to retain some control of the TV industry, including affordability, social inclusiveness, education of youth, and elimination of violence. Special interests have manufactured a crisis in TV–“monopoly control” [sic] of set top boxes by TV distributors. As Scott Wallsten and others have suggested, bundling a set top box with a TV subscription is likely not a competitive problem and the FCC’s remedies are unlikely to work. 

The FCC’s blinkered view of the TV industry is necessary because the US TV and media marketplace is blossoming. Consumers have never had more access to programming on more devices. More than 100 standalone streaming video-on-demand products launched in 2015 alone. The major TV providers are going where consumers are and launching their own streaming apps. The market won’t develop perfectly to the Commissioners’ liking and there will be hiccups, but competition is vigorous, output and quality are high, and consumers are benefiting.

The FCC decision to devote its highly-educated agency staff and resources (which will balloon when challenged in court or during the app specification proceedings) to an arcane consumer issue with such cynical origins is a lamentable waste of agency resources.

This an agency that for decades has done a hundred things poorly. In an increasingly competitive telecom and media marketplace, it should instead do a handful of things well. (Commissioner Pai has proposed useful infrastructure reforms and Commissioner Rosenworcel has an interesting proposal, that I’ve written about, to deploy federal spectrum into commercial markets). Let’s hope the agency leadership reassesses the necessity the this proceeding before dragging the TV industry into another wild goose chase.

Related research: This week Mercatus released a paper by MA Economics Fellow Joe Kane and me about the FCC’s reinvention as a social and cultural regulator: “The FCC and Quasi–Common Carriage A Case Study of Agency Survival.”

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