The average consumer has benefited from the incredible pace of innovation over the last decade. In the consumer electronics space, the past ten years have given us the smartphone, the smartwatch, and even the smarthome. Heck, for a little over $1000, you can purchase your own portable pilotless drone that can film you doing all those things that get you “stoked.” Oh, and that drone is compatible with a $400 off-the-shelf camera that weighs a little more than one pound that takes professional quality 4K video. Business models are evolving too, as reflected by how viewers now consume content. Not only have the amount of over-the-top (OTT) video offerings available exploded, but companies like Netflix and Amazon are producing their own original programming; and winning awards for it too.
Unfortunately for consumers, one market that has been relatively immune to the innovation bug is the set-top box (STB) space. Why is it that in the age of self-driving cars and 3D printers that consumers still have basically the same video navigational device they had in their homes a decade ago? If preteens can print their own prosthetic limbs with hardware purchased at the local computer store, why can’t we easily purchase and activate a device that seamlessly integrates our cable and OTT video content in a user-friendly interface?
The New York Times editorial page recently noticed the same thing. In an op-ed this Monday, the NYT noted:
People should be able to buy cable boxes from any manufacturer and connect them to their cable line or satellite dish as long as they meet basic technical standards. That could save Americans hundreds of dollars; it’s a one-time outlay, and the cost of the technology in set-top boxes, as with other electronics, is falling. Some companies sell them for less than $200….
In addition to saving people money, reducing cable companies’ control over set-top boxes could improve TV watching. Some television makers might build set-top boxes into their machine so consumers would not have to buy two devices. Tech companies like Apple and Google could create set-top boxes with easier-to-use menus. Device makers might also offer consumers the ability to simultaneously search for entertainment on cable and Internet-based services like Netflix and Hulu.
There are few differences between that little box you rent from your cable company that allows you to navigate your cable programming channels and the unencumbered, fully functional, Internet connected computer that sits in your home office. The only principal difference being, for 99% of Americans, your cable company completely controls that set-top box. Sure, they might offer a few apps or limited Internet connectivity, but your friendly neighborhood cable company has little incentive to build features or enable functionality that takes you beyond their tightly walled gardens, let alone seamlessly integrates with the Internet and video content they do not control. The lack of competition in the linear TV and broadband markets, which also helped spell the death of the Comcast-Time Warner Cable merger, means that consumers often have little choice when it comes to picking who provides them a cable-Internet bundle. If a positive consumer experience really affected their competitive viability, cable companies would probably have a slightly higher favorability rating from their customers.
It’s also not surprising that the cable industry has fought innovation in this space, as they enjoy a pretty cozy position in the marketplace. Brian Roberts, the CEO of Comcast, warned fellow cable executives of the existential threat posed by digital video recorders (DVRs) in 2002, before partnering with TiVo several years later. This isn’t to say that it is entirely cable’s fault, but their partners in the video marketplace — cable networks — often insist that cable providers fight innovative new technologies that threaten content’s traditional revenue streams. And with the rise of vertical integration among cable companies and television networks, the vested interests of the two continue to blur.
Either way, the cable industry has a long history of tepidly embracing the open Internet, which is usually linked with attempts to rein in or control technology. Cable providers want to use their control of the network to fight disruption from Internet video and other Internet delivered content, while providers of content are reluctant to cede any control over their content — even to their paying customers — that might limit their ability to dictate when and how their content is consumed.
This is where the third-party device manufacturers, such as set-top box makers, come in. If the STB market is truly opened up to third parties, companies not beholden to legacy business models will build innovative new devices that consumers can use to integrate and discover all the content they pay for, including content within their cable service offerings. This would enable innovation on the periphery of the market, much like favorable policy and legal decisions in the telecommunications space eventually limited the control Ma Bell had over devices on the periphery of their networks (more on this later) and paved the way for many of the products we now take for granted. Besides enabling consumer choice and innovation, enabling a competitive third-party STB market could save consumers money. Lots and lots of money it turns out.
Recently, Senator Markey (D-Mass.) and Senator Blumenthal (D-Conn.) released a report showing that consumers are paying exorbitantly high rates for set-top boxes provided by cable companies. The study behind the report found that roughly 99 percent of customers are renting their set-top box directly from their cable provider, and spending more than $231 per year on the rental equipment. These high rental prices have helped create a set-top box market worth nearly $20 billion per year — a lucrative business not looking to decrease prices anytime soon. Indeed, rental prices continue to increase even for the same STB you’ve had in your home for years. A combination of the cable companies’ sole access to the market, and refusal to work with the technology sector to allow for new innovations into the current set-box structure, is not only closing off markets but is ultimately hurting consumers.
A Decades-Long Issue
Although Congress has taken recent steps towards addressing the monopolistic set-top box issue, the battle is far from new. In 1996 Congress passed the Telecommunications Act and with it ordered the FCC to establish rules that created a competitive marketplace in which customers could obtain “navigation devices” – or third party set-top boxes – from providers other than cable service providers.
In 2003 the industry agreed to a new standard, known as CableCARD, an external decoder that allowed for access to linear cable programming channels without the use of a cable company’s set-top box. The FCC made a push for this standard in 2007 with a mandate known as the “integration ban,” which required all new set-top boxes to use CableCARD as their decryption mechanism. The FCC hoped to spur innovation in the technology sector and allow other devices to enter the marketplace via the CableCARD standard.
The fundamental flaw with the FCC working with cable service providers to enable outside devices was that the cable providers had no incentive to make sure third-party devices prospered. Furthermore, the FCC did not require cable operators to make available interactive channels (such as video-on-demand) to retail devices so retail devices were never put on an equal footing with operator-leased devices, much less equally supported. Unsurprisingly, without access to all cable content, a dependency on operators for supply and activation, and no incentive for operators to provide support, the use of CableCARD in retail devices proved to be too burdensome and non-user friendly to succeed in the mainstream marketplace.
Fast forward to December 2014, when Congress passed the STELA Reauthorization Act. The law repealed the set-top box integration ban, no longer requiring cable operators to use CableCARDs in the STBs they lease to subscribers, and thereby threatening equipment compatibility. Many legislators opposed the action including Senator Markey who noted:
When Congress last year regrettably removed the requirement that cable company services be compatible with set-top boxes purchased in the marketplace rather than rented directly from the provider, we doomed consumers to being captive to cable company rental fees forever. We also endangered a competitive set-top box marketplace, replacing consumer choice with cable company control.
While past standards aimed at opening the market to third parties did not see great success, completely shutting down avenues for third parties to access cable services is not a step in the right direction. Instead, third party companies should be allowed to build a dynamic, next generation standard that promotes innovation in the industry. Besides, history has shown that by allowing innovation in the communications arena, consumers have gained significantly, often even bolstering the network provider’s fortunes despite their initial heavy resistance. Just look at the introduction of the iPhone into the cellular telephone network. Once third parties were able to introduce innovation and new user interfaces, the “phone” was transformed virtually beyond recognition to the benefit of consumers and network providers alike.
The FCC’s Downloadable Security Technology Advisory Committee (DSTAC) working group report recently pointed out just how important third-party innovation has been to the industry. Here are just a few examples:
- DVR & Whole Home Media with DVR: The DVR launched in the late 90s by TiVo, ReplayTV and others with no assistance from cable companies. This widely popular technology “became fundamental to every MVPD’s [essentially cable provider’s] conception of its ‘service’.” In 2003, Whole Home Media with DVR “was the first product that afforded user access to all household media content, including DVR recordings from any TV.” This product, which was again not supported at inception by cable companies, is now supported in some shape by most cable operators. This third-party innovation is a parent of technologies like VidiPath that are “integral” to (cable) services.
- Remote Viewing: Popularized by Slingbox in 2005, this technology allowed “users to view live TV and DVR content from anywhere they choose.” This meant consumers no longer had to be at home to view their content. The FCC in its report again reported this technology as one that became “integral to an MVPD’s service.”
- Remote DVR Management: Introduced by TiVo in 2003, this innovation allowed users to schedule recordings anywhere and anytime through a web browser. The FCC noted in its report that “again this was built on top of a 3rd party system that integrated on top of the essential MVPD video services with no assistance from MVPDs. This innovation is now a standard feature in many of the MVPD ‘apps.’”
The moral of the story here is that third-party players have not only helped drive innovation, but ultimately when cable operators came around to realizing the potential of the new technology, the services became integral to the cable operator’s own technology.
Disruptive technology that fuels competition in the marketplace has spurred the manifest innovation in the consumer electronics sector. Unfortunately, one need only look at the Ubers or Airbnbs of the world to see that in a highly regulated atmosphere, disruption can be met with high resistance. (Ironically, the cable industry knows this well as it started off as a disruptive innovation, and the original cable companies had their own struggles with incumbents trying to keep them out of the market.)
Decades ago the telecom industry faced a similar issue to the set-top box problem. In the 1968 Carterfone decision, the FCC was forced to decide whether telephone users had the right to choose what receiver they used. Before Carterfone, telephone users had purchased or rented their devices from the AT&T monopoly, much like cable subscribers today rent their set top boxes. The FCC ultimately issued an order allowing users to attach a two-way radio transmitter/receiver to their telephone, much to the dismay of the telecom industry. This precedent extended beyond the telephone receiver and was applied to the set-top box debate. In 1998 when the Commission issued the decision to allow consumers to chose their own set-top boxes they noted that their decision stemmed from the principles adopted in Carterfone.
The Carterfone decision not only set a precedent for allowing consumer choice and modifications to existing systems where the integrity of the system was not compromised, but it also spurred innovation. Several models later of receiver adapters eventually paved the way for modem receivers, which brought the Internet to the masses.
Not only does good policy and agency precedent support the need for a next generation standard, but the economy loses when competition is stifled and the markets are closed. While a few large companies with questionable track records steer the set-top box debate, consumers are losing out and the consequences are dire. As other groups and members of Congress have pointed out:
“As the world becomes increasingly connected and technology advances, new innovations must be able to break into the cable marketplace and provide the vigorous competition that drives down prices for consumers.”
– Senator Blumenthal (D-Conn.)
“When entrepreneurs large and small were allowed to innovate at the edges of the phone networks, consumers benefited with cheaper phones and new third-party devices . . . enabling peripheral innovation at the edges of today’s networks holds the same promise. The next great wave of innovation will only happen when consumers get to choose the devices they want.”
– Consumer Video Choice Coalition
The consequences of chilling innovation in this space and suppressing competition are substantial. Pay-TV providers argue that because they have embraced the mobile marketplace this makes up for the lack of access to innovation and user interface differentiation by third-party device providers. Yet, this hardly gets to the point that it is not about what the cable companies dictate should be the means of streaming, but rather, the consumer’s choice of how and what services they want to access.
Just this week representatives of the cable industry and interested third parties finished their preliminary work in the DSTAC, which was charged with recommending a next generation interoperability solution for navigational devices. In fact, they just submitted their report to the FCC, which is now inviting public comment. Not surprisingly, representatives of the cable industry and those in favor of a more open market for STBs could not agree, so the report is divided into two parts. (For a more detailed description of the two proposals, see John Bergmayer’s excellent blog post on the report.)
The fate of future innovation in this space rests largely in the FCC’s hands now. Will the next interoperability solution truly enable peripheral innovation and modern ways to navigate and discover video content from third parties, or will it merely be an expansion of cable apps, thus perpetuating the status quo by extending the cable industry’s exclusive control of content presentation and navigation to mobile devices? Only time will tell, but consumers should definitely be paying more attention.
Chelsea Reckell is a Law Clerk at CCIA and a 2L at American University Washington College of Law. Follow @creckell