Impact of Proposed FCC Ruling on Smaller Cable Operators

In January 2016, the Federal Communications Commission raised eyebrows around the cable industry as chairman Tom Wheeler announced a proposal to “unlock” set-top boxes by creating a software-based replacement for CableCARD. Without the CableCARD requirement, consumers would essentially be able to get cable TV programming on any device (smartphones, tablets and PCs, in addition to TVs) by purchasing an STB from a third-party vendor. They would not have to rent a box directly from their cable operators anymore.

The FCC’s plan was at odds with the preferences of many cable providers, who liked an alternative approach (also supported by the FCC’s own technical advisory committee) involving the development of special applications for these third-party devices. One FCC official explained the body’s controversial stance by comparing the situation to mobile phones. That is, consumers can purchase any handset they want and still access the same wireless networks, similar to how the unlocked STBs would be able to tap into a common set of cable systems.

However, this comparison between the mobile telephony and cable industries is imperfect, as it overlooks how the FCC’s new rules would impact Tier 2 and Tier 3 operators in particular. With the FCC having voted 3-2 along party lines to approve a Notice of Proposed Rulemaking in February 2016, smaller cable providers should be aware of how the changes could affect their business models if the FCC does not ultimately reverse course.

The current state and possible future of STBs

Under the CableCARD system, almost all cable subscribers rent STBs from cable providers. A U.S. government survey led by Senators Ed Markey of Massachusetts and Richard Blumenthal of Connecticut found that 99 percent of households used rented STBs and paid about $232 a year in fees for 2.6 boxes. Rentals are an important and growing revenue stream for cable operators. The Senate report pegged it at about $19.5 billion per year.

But even in the face of rising rental fees caused by a tightly controlled equipment market, the centrality of STBs in the home is gradually being reduced by viewership trends. The rise of streaming devices and viewing of over-the-top (OTT) services like Amazon and Netflix, the increasing importance of Video on Demand platforms and the spread of broadband Internet access have put the IP suite front and center for consumers, as well as operators. Widespread transition to IP distribution is already underway.

And for this reason, parts of the FCC and the cable industry have promoted a less hardware-centric approach to reforming the video services market. Comcast vice president David Cohen summarized this view in an official blog post, in which he signaled his company’s preference for “the market-driven ‘apps’ based approach suggested by the [FCC] technical committee.” The idea is to ultimately have fewer, not more, STBs in the home.

Why the FCC proposal could lead to more boxes and higher costs for everyone

On the surface, the proposed FCC rules would seem to lessen the importance of customer premises equipment. In reality, it could have the opposite effect, especially for smaller cable operators.

Huge companies such as Comcast have publicly pushed back on the FCC’s new direction, but in all likelihood they have the least to lose in the event of actual enactment of this STB overhaul. This is because they already have IP-based systems in place, in the form of widely utilized platforms such as Comcast’s X1 “Entertainment Operating System.” Accordingly, they could easily comply with future regulations related to the STB proposal by simulcasting their linear pay-TV content over IP, creating a common interface for third-party devices.

Smaller operators are not nearly as well-positioned:

• Many of them are in the midst of a slow but steady transition to IP. If the STB market were “opened up,” the timetable for shifting would be dramatically shortened. Many providers would not be able to simulcast their content.
• The fallback compliance plan is not much more appealing. Operators would likely need to introduce an additional piece of CPE, a device that could convert proprietary QAM video streams into IP equivalents that could be accessed by third-party interfaces.

Either way, the reality of an open STB market would likely mean rising costs for cable operators, which would be passed on to customers in the form of higher monthly fees. Whereas Tier 1 players would have the capital and existing infrastructure investments to comply (even if reluctantly) with fresh STB rules, Tier 2 and Tier 3 counterparts would not have the same luxury.

In other words, the FCC could end up encouraging the exact thing it is trying to end: higher prices driven in part by equipment-related costs. It wouldn’t be the first time that something like this has happened.

“The FCC imposed a CableCard technology mandate on cable operators years ago purportedly to drive greater retail availability of set-top boxes, but after more than $1 billion of costs to consumers, that approach has proven to be ineffective,” explained Cohen in his post. “Just five years ago, the FCC considered, and wisely abandoned, a similar proposal, known as ‘AllVid.’ Since that time, we’ve seen an explosion in innovation and competition in the video marketplace.”

Hopefully, the FCC will carefully consider its next moves here. Tier 2 and 3 operators should have the opportunity to gracefully transition to IP distribution with solutions such as Evolution Digital’s IP Hybrid STBs, and not be forced to deploy additional CPE to immediately comply with a flawed ruling.