Peter Fader and Marc Tayer on the FCC and Unlocking Set-top Boxes

Increased competition, consumer choice and lower prices are the main talking points in the latest clash between the Federal Communications Commission (FCC) and cable and satellite TV service providers. While the FCC as regulator wants to break the providers’ control over the set-top box that brings their programming into households, the providers reject the idea. In an unusual act, U.S. President Barack Obama recently threw his weight behind the three-month-old FCC proposal.

The “huge question” is whether the FCC proposal would actually benefit consumers, even if it were successful, said Marc Tayer, president of MediaTech Insights, a consulting firm, and author of Televisionaries, a book that documents the history of digital TV. Google, Amazon and other technology companies would benefit “tremendously” if the set-top box market were to open up, he noted.

“The battleground is widening,” said Wharton marketing professor Peter Fader, who is also co-director of the Wharton Customer Analytics Initiative. He noted that many of the existing cable-satellite-telco companies are branching out beyond TV to the Internet, phone services, home security and the Internet of Things. “The win is going to be the hub that the household has.”

Tayer and Fader discussed the broader market dynamics that form the backdrop for the FCC proposal on set-top boxes on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

The Case for Choice

“Ninety-nine percent of pay-TV subscribers are chained to their set-top boxes because cable and satellite operators have locked up the market,” FCC chairman Tom Wheeler said in late January in a proposal to “unlock the set-top box.” He noted that U.S. households have few choices and pay “high prices” averaging $231 annually to lease set-top boxes, which works out to $20 billion a year. Citing recent analysis, he added that since 1994, the cost of set-top boxes has increased 185%, while the cost of computers, TVs and mobile phones have dropped 90%.

“The battleground is widening. The win is going to be the hub that the household has.” –Peter Fader

The FCC wants consumers to decide how they receive their programming – through set-top boxes or through devices like tablets or smart TVs using an app or other software. In order to make this possible, it wants cable, satellite and telco companies to share some critical information with the creators of competitive devices, including the programming available to consumers and the device functions such as the ability to record.

The same day Wheeler unveiled his proposal, service providers formed a coalition called “The Future of TV” to resist the changes the FCC wants, launching a signature campaign among consumers. “The proposal, like prior federal government technology mandates, would impose costs on consumers, adversely impact the creation of high-quality content, and chill innovation,” Comcast wrote.

The National Cable & Telecommunications Association (NCTA) wrote on its website: “By forcing new government mandates on network providers and content creators, the FCC may intend to reward Google handsomely, but in the process it will ignore contractual freedoms, weaken content diversity and security, undermine important consumer protections like privacy, and stall the creative and technical innovation that is driving positive changes in today’s TV marketplace.” Google, in a recent FCC filing, said the agency “should commence a rule making quickly to unleash competition in the retail navigation-device market,” according to a Wall Street Journal report.

Try, Try, Try Again

Tayer noted that the latest FCC proposal is its third attempt over the past decade to free the set-top box, and that two previous attempts failed. The first was in 2007, called CableCard, which he described as an “outright disaster [that] wasted R&D budgets and worse, raised the cost to the consumer.” That plan also wanted to provide third parties seamless access to consumers on existing set-top boxes. “That endeavor failed because the cable companies controlled the platform and made it extremely difficult to use and it was eventually scrapped,” said a report in The Verge.

The second attempt was in 2010, called AllVid, which sought to replace the existing set-top boxes with something like a universal adapter that allowed users to access pay-TV content and Internet TV. Here again, Google and firms like it were seen as the ultimate beneficiaries. “If you open up the set-top box market and make it available at a retail store, it should reduce the price for the consumer, but the opposite happened,” said Tayer.

“A real concern here is the law of unintended consequences. In this case it plays right into Google’s hands.” –Marc Tayer

“A real concern here is the law of unintended consequences,” Tayer cautioned, referring to the latest FCC proposal. “In this case, it plays right into Google’s hands. Look out if that opens up some serious privacy issues. We don’t have that issue with cable companies because they are much more highly regulated by the FCC in things like privacy, whereas Google is much less regulated by the Federal Trade Commission.”

Not surprisingly, that is one of the major criticisms the Future of TV coalition has against the FCC move. “It’s about companies profiting from content they haven’t paid for,” it wrote on its site. Further, it said the proposal endangers the survival of independent and minority programmers.

Time to Open the Garden Gate?

Tayer said a big part of the FCC move is “to bring together … two worlds that are sitting side by side today.” One has the cable-satellite-telco service providers with their set-top box, and the other has providers of Internet content such as Google, Roku, and Apple TV. As he put it, the cable-satellite-telco TV companies operate behind a “walled garden” in the U.S. with roughly 100 million TV households paying monthly subscription fees. Clearly, they have a lot to protect.

Fader said the term “walled garden” is perfect. “It refers to an entrenched player trying to protect its own interests — and unfortunately, hurting and hampering its own ability to innovate,” he added. “They don’t want to disturb their tried and true business model, even though there [are] lots of interesting technologies knocking at the garden gate. Opening that gate might [mean] a short-run hit for the entrenched providers, but in the long run could be good for the entrenched players if they learn how to coexist with them.”

That said, there are no clear angels or villains. Tayer pointed out that the FCC move is not aimed at breaking up any monopoly. In fact, the cable-satellite-telco TV service providers do not operate a monopoly and are in a competitive market where most U.S. households can choose from three or more service providers, he said. Innovation in set-top boxes has also been occurring, although some of the set-top boxes sitting in people’s homes would be old equipment, he added.

“At the center of all this is broadband Internet,” said Tayer. Netflix, Amazon and others may now have a small market share, but that business is growing, he added. “TV is slowly moving towards the Internet, and there is concern over who controls those broadband pipes.” He also pointed out that there is much less competition in broadband pipes than there is with the multichannel pay-TV business. “Consumers in the U.S. typically have one or two choices for high-speed Internet,” he said. “That is getting better over time, but there is no law to mandate high-speed Internet for all.”

“The millennials are cord averse and never sign for a subscription.” –Marc Tayer

The cable-satellite-telco industry is also responding to those changes with some innovation in business models, but that process is slow, said Tayer. He noted that major program creators like Disney and Time Warner now negotiate with distributors like Comcast or AT&T to bundle several channels.

The phenomenon of “cord-cutting,” where subscribers cancel their existing cable or other service and switch to Internet for content, is also forcing some change. These days, channels like HBO, Showtime, Star and others offer a la carte content, and Verizon and others offer bundles to consumers in anticipation of cord cutting, said Tayer. “The millennials are cord averse and never sign for a subscription.” Also, Comcast is rolling out its X1 set-top box app and high-speed Internet nationally, he added.

Presidential Motivations

Aside from those underlying issues, the immediate speculation is about why Obama would want to get involved in this fracas. “We wouldn’t be talking about this issue if the FCC had [merely] issued a declaration,” said Fader. “But when the President chimes in, it adds just a bit of seriousness to it that you wouldn’t see otherwise.” Tayer saw Obama’s intervention as consistent “with his general vision of an open Internet, [of being] pro-consumer and also in limiting the power of major corporations.”