Federal Communications Commission (FCC) chairman Tom Wheeler is taking aim at the pay-TV industry by targeting one of its least glamorous components: the set-top box.
In a surprise move, on January 26th the FCC chairman announced a proposal that would permit U.S. cable and satellite TV subscribers to select the devices they use to access and watch programming. According to Wheeler, this proposal would effectively “unlock” the closed set-top box (STB) market, with long-term goals of making cable TV bills more affordable, increasing access to IP-based video content, and speeding up the pace of innovation in both video hardware products and software platforms.
Wheeler emphasized the potential cost savings for consumers if the proposal passes, highlighting that most consumers subscribing to cable or satellite TV services will have the option to stop paying a monthly fee to lease an STB from their service provider. Instead, the proposal outlines a vision that would allow consumers to either purchase their boxes at retail or continue leasing them through their current service provider.
Specifically, the proposal mandates that pay-TV service providers must:
- Furnish consumer electronics brands and other alternative STB vendors with “service discovery” capability, which means providing access to the data and guides that show what content is available to consumers.
- Share their “entitlement” information. Entitlement information dictates what the device is allowed to do with the content, such as recording a program on a DVR.
- Furnish “content delivery,” which means passing through the video programming through the alternative device.
On February 18th, the FCC voted to approve the proposal.
As expected, service providers, as well as industry groups such as the National Cable & Telecommunications Association, have condemned the proposal as unnecessary.
In direct response to the proposal, an industry group called the Future of TV was rapidly formed. The group consists of service providers such as AT&T/DirecTV, Comcast, DISH Network, Cablevision Systems, and Time Warner Cable, STB vendors such as ARRIS Group Inc. and EchoStar Technologies, and programmers like NBC Universal, TV One, and Revolt.
The Future of TV coalition states it believes strongly that innovation and competition should drive the creative marketplace, not government mandates that have the potential to undermine and impede the U.S. pay-TV market. Nomi Bergman, president of Bright House Networks and co-chair of the Future TV coalition, stated that chairman Wheeler’s proposal was “the ultimate example of the government trying to fix something that isn't broken.”
Other pay-TV service providers emphasized how the industry is already moving in a more “open” direction without needing a push from the FCC. Examples offered included:
- Time Warner Cable is conducting a trial that uses Roku boxes to deliver its programming, while Charter Communications already offers its subscribers the ability to stream video through a Roku App.
- Several cable TV operators, including Cox Communications, Suddenlink, and Mediacom, allow their subscribers to view programming through TiVo STB products.
Key Technical Details Lacking
Beyond the general objections to the FCC’s proposal, several service providers have pointed out that they don’t understand how the proposal would actually work. While it lists the capabilities service providers must supply to third-party STB vendors, the proposal does not specify how these capabilities will be supported.
According to FCC sources, chairman Wheeler purposefully omitted a specific technical solution for supporting third-party boxes. Instead, he pointed to the need to form an “open industry standards group” to address the technical issues needed to provide content security, copyright settings, and access to the actual programming content.
Pay-TV industry sources were quick to emphasize that this process sounds eerily similar to the FCC mandate in 2000 that resulted in the CableCARD.
Potential Impact of the Proposal
While the debate over the FCC’s STB proposal continues, SNL Kagan has examined the potential impact of the proposal on the broader pay-TV and the consumer electronics industries. If adopted, the proposal could have a significant impact on the pay-TV industry, effectively creating groups of winners and losers.
We acknowledge that the following “levels of impact” are quite subjective, and we also recognize that many of the technical details surrounding the FCC proposal remain undecided.
Multichannel video programming distributors (MVPDs): Negative impact.
The pay-TV service providers dislike this proposal for numerous reasons, the most important being the potential loss of control of how their subscribers experience and watch television. Starting from the time the subscriber presses the power button on their remote, today’s MVPD controls virtually all of the viewing experience, to include:
- the information the viewer receives about programming
- opportunities to view or purchase on-demand programming
- information about adding premium channels
Under the FCC proposal, “unlocking” the STB would permit someone other than the MVPD to control various aspects of the viewing experience. For example, a third-party STB could potentially run on Android, and opportunities to purchase on-demand programming could be driven through the Google Play Store. Any movement in this direction could have a negative impact on the financial performance of an MVPD, although we tend to view the long-term threat to their business model as being manageable and confined to the lower-end of the market.
Other negative consequences of the proposal for MVPDs include:
- The potential loss of STB rental fees for those subscribers electing to purchase a third-party box.
- Viewer analytics and data collection. While difficult to quantify in dollar terms, the ability to track subscriber viewing choices and habits is important and valuable to both MVPDs and programmers. If the subscriber is using a third-party STB (for example, a TiVo product), that data collection capability could be lost.
While the MVPDs could certainly survive the implementation of this proposal, the “spirit” behind the proposal seems to offend them as much as the actual proposal itself. A common complaint among MVPDs is that the FCC has been captured by forces who view regulation as preferable to working with the MVPDs to solve a problem or develop an opportunity. This latest proposal appears to be expanding the rift between the FCC and the pay-TV industry.
Set-top box vendors: Moderately negative impact.
Based on the current business model that relies on MVPDs to purchase STB products directly from the STB vendors (ARRIS, Technicolor, EchoStar, etc.), if the proposal is adopted we could see those vendors take a moderate hit on sales, especially at the low-end of the market where a retail-based sales model could reduce demand for their products.
Since the current version of the proposal seems to envision allowing the MVPDs and subscribers to continue using a lease model, it's also almost certain that MVPDs will continue to purchase and deploy what could be considered to be traditional cable and satellite STB products. These include hybrid IP gateways (HIPGs), which are higher-priced, full-featured STB products, such as Comcast’s X1, DISH Network’s Hopper, and DirecTV’s Genie. A key question will be how much demand for these higher-end products might leak away if some pay-TV subscribers opt for basic, retail-based products in an effort to reduce their monthly bills.
Technology companies. Positive impact.
For companies like Google, Amazon.com, Apple, and Microsoft, the FCC proposal could open a business opportunity that has largely been closed.
For several years, tech companies have been advocating a vision that would make the television user interface look more like a smartphone interface. A common example is that in place of the traditional, grid-like TV interface, pay-TV subscribers would be able to select and use apps that could be ported onto just about any electronic device or set-top box. In this vision, the underlying software platform would become the centerpiece of the pay-TV experience. For consumers using a third-party set-top box, the platform would ostensibly be “independent” from the actual MVPD.
A number of technology companies have products that could replace the STB. Examples include streaming media players (i.e. AppleTV, Amazon Fire TV, Roku), video game consoles (PlayStation, Xbox), and stand-alone DVR products from TiVo. In addition to selling the actual product, other potential benefits include:
- Gaining access to viewer data.
- The potential to promote their own services or device ecosystem.
Still, since key technical and security details still need to be worked out, these technology companies would probably need to wait a year or more before they actually had the opportunity to deploy new products to pay-TV subscribers.
Content developers. Slightly negative impact.
The content development community has also harshly criticized the FCC’s STB proposal. Programmers like NBC Universal, which usually takes its cue from parent company Comcast, and industry groups such as the Motion Picture Association of America (MPAA) quickly joined the Future of TV Coalition.
Much of the concern among the content development community is that the FCC proposal could be the first step in the “unbundling” or disaggregation of the current pay-TV ecosystem. This unbundling effect could potentially change, redirect, or even reduce revenue flows within the existing ecosystem, something that would most likely negatively impact the programmers. Examples of revenue flows that could be changed include are basic carriage fees, retransmission fees, and advertising revenues.
Although many of the content developer concerns seem to be potential long-range challenges rather than immediate problems, most of the content community is leery of any regulation that could undermine their current business model.
Pay-TV subscribers. Slightly positive impact.
Chairman Wheeler has emphasized that consumers would be the big winner if his proposal is adopted. We tend to agree that there would be an upside for pay-TV subscribers, although that upside could end up being quite modest.
The primary driver behind the proposal is to increase competition in the pay-TV market, which would ultimately reduce service costs. If the proposal does lead to third-party STB vendors selling their products directly to pay-TV subscribers, then it seems probable that some fees associated with pay-TV service would decrease, or at a minimum, stop increasing.
Another part of the FCC proposal that has raised questions is how to deal with STB service issues. For example, if a subscriber is using a third-party STB and a problem develops, who does he call? The MVPD? Apple, Roku, or whoever sold them the third-party box? If the MVPDs adopt a policy where they only service leased boxes, subscribers with third-party boxes could be left in a DIY situation.
Overall, we tend to believe that only a small percentage of pay-TV subscribers would trade in their leased STBs and purchase third-party boxes. The cost savings associated with such a move seems like it would only amount to a few dollars per month, which may not be enough incentive to induce large numbers of pay-TV subscribers to change the way they consume TV.