If the current Federal Communications Commission set-top box proposal actually does take effect, what might those “unlocked” boxes look like? Somewhat unsurprisingly, they appear likely to resemble products currently available from vendors such as Roku, Google, Amazon.com, ARRIS, and Technicolor.
At the same time, the opportunity for consumer electronics manufacturers to move the needle in the U.S. market faces limitations. Appetites for boxes at retail have historically been low, as evidenced by TiVo’s travails. Moreover, the new entrants would likely face a slow start as a new segment trying to unseat the incumbents that have already deployed more than a quarter of a billion units into U.S. homes.
Before the industry ever reaches the point of actually deploying an “unlocked” set-top box, we can expect to hear a great deal more about the technical, regulatory, and even the political issues that have made this proposal into so contentious.
Current status of the proposal
The basic idea behind the FCC’s proposal is to open up the pay-TV industry’s mostly proprietary set-top box ecosystem to third-party manufacturers, with the goal of “injecting” more competition into the market. The FCC voted to approve the proposal in late February, which started a 60-day commentary period that ends in late April.
Potential “unlocked” boxes
If the industry does get to the point of deploying an unlocked STB, a process which many industry sources believe could take up to two years to implement, there are some key guidelines in the proposal that will influence future STB products. These include:
- Unlocked STBs would be available at retail.
- Unlocked STBs would be able access the pay-TV programming packages from all MVPDs.
- MVPDs would still be allowed to lease STB products to their subscribers.
Based on recent comments from the FCC, we can make some assumptions about the characteristics of potential unlocked boxes. The first assumption is that by purchasing an unlocked box, consumers could save money. This means that unlocked boxes would be low-priced, or at worst, moderately-priced.
The next assumption is that some already-available consumer electronic products that support IP video would be excellent candidates for an unlocked box. These products could include some models of streaming media players, such as the Apple TV and the Amazon Fire TV product, as well as streaming media stick products like Google’s Chromecast.
In addition, the unlocked boxes would ostensibly:
- Be easy to install, doing away with the need for an MVPD “truck roll.”
- Maintain the security of pay-TV programming, which means stealing or pirating pay-TV content would be extremely difficult.
Using the guidelines spelled out in the FCC’s proposal, while also incorporating assumptions about the capabilities of an unlocked STB, SNL Kagan developed the following table, which provides an overview of existing and potential STB products based on price range.
Table 1: Potential set-top box products by price range
So based on what we know about the FCC’s STB proposal, the most likely products that could serve as “unlocked” boxes are basic products, such as:
- Low-end streaming media player products like Roku products or the Amazon Fire TV box.
- Streaming media stick products such as Google’s Chromecast of Amazon’s Fire TV Stick.
- IP client devices, which are already available from several MVPDs.
- Digital transport adapters (DTAs), which are also available from traditional STB vendors like ARRIS and Technicolor.
All of these products would, of course, need to integrate the yet-to-be determined security standards of the final proposal. However, they all meet the requirements of being both low-cost and available (or in the case of the IP clients and the DTAs, potentially available) at retail.
It’s also useful to point out that other products, to include stand-alone DVRs, video game consoles, and even smart TV sets, could also potentially serve as “unlocked” STBs. However, based on the higher price points of these products, we believe the majority of demand for any potential unlocked box will be driven by low prices.Demand for unlocked boxes: Market sizing
Assuming that the FCC’s unlocked STB proposal survives the challenges it is expected to face over the next year or two, consumer electronics manufacturers would gain access to a market that accounts for 96.7 million multichannel households supporting more than 260 million set-top boxes and receivers, according to SNL Kagan estimates for the U.S. market.
Table 2 provides our current U.S. installed base forecast for pay-TV STBs, which was formulated prior to the emergence of the proposed regulations. Total installed STBs are projected to top out in 2017 at 274 million, and then decrease slightly over the next few years, settling at 263 million in 2019.
Table 2: U.S. set-top box installed base forecast, 2015 - 2019
Based on our interpretation of which types of products will be able to serve as unlocked boxes, we developed a sensitivity analysis to examine the potential opportunity for unlocked boxes in the U.S. STB market.
Table 3 examines the number of unlocked boxes in the U.S. installed base of STBs by estimating three different penetration rates of unlocked boxes. It is important to note that SNL Kagan is projecting the first unlocked boxes will not ship until 2018. This delay is due to two issues:
- An expectation of numerous legal and regulatory challenges to the proposal
- The extended period of time that will be needed to resolve the security requirements of an unlocked box
Table 3: Sensitivity analysis: "Unlocked" boxes in the U.S. installed base of STBs (millions of units), 2015 – 2019
It’s also important to note that while the base of unlocked boxes could be greater than 5%, especially in 2019, it seems highly unlikely that the percentage will be significantly higher. Table 3 instead provides some context regarding the potential size of the unlocked box market and its expected impact on the installed base of STBs.
More specifically, at year-end 2018, if unlocked boxes are able to capture 1% of the US installed base, then the total would be 2.7 million. If the market segment reaches 5% of the installed base, it would reach 13.5 million boxes.
The White House weighs in
Setting aside the potential impact of unlocked boxes on either the STB market or the pay-TV industry, it is also important to note that the noise level surrounding this proposal has actually increased over the past few weeks.
For example, in a somewhat unusual move, the White House recently weighed in on the debate surrounding STBs and the FCC’s proposal. On April 14th, in an online interview President Barack Obama pointed to the FCC STB proposal as an example of the kind of action government agencies should take “to promote competition and better protect consumers.”
The President received some industry and media criticism for commenting on a pending FCC proposal, mostly because the FCC is an independent agency. However, a number of sources also pointed out that nothing prohibits a president from commenting on an FCC proposal.
The next day, Jason Furman, chairman of the Council of Economic Advisers, and Jeffrey Zients, Director of the National Economic Council and Assistant to the President for Economic Policy, followed up with more detail in a blog post. They stated “the President announced that his Administration is calling on the FCC to open up set-top boxes to competition. This will allow for companies to create new, innovative, higher-quality, lower-cost products."
As might be expected, the National Cable & Telecommunications Association (NCTA) was quick to return fire. “We are disappointed that White House political advisers are choosing to inject politics and inflammatory rhetoric into a regulatory proceeding by what is supposed to be an independent agency,” said its president Michael Powell.
Other opponents to both the proposal and the White House’s recent comments, such as the Future of TV Coalition and the Motion Picture Association of America, continue to emphasize their belief that market-based solutions remain preferable to new FCC regulations.