The Paradox of Thinking Outside the (Set-Top) Box

The FCC issued its keenly anticipated National Broadband Plan this week, which calls for new rules to bolster competition among broadband providers, spur investment in broadband capacity and reallocate publicly owned spectrum to support next-generation wireless broadband services. For the average consumer, however, the biggest immediate impact of the plan could come from its proposal to replace traditional cable set-top boxes within two years with simple “gateway” devices that handle conditional access and tuning but leave all other functionality to other devices or services.
The commission’s goal with the proposal is to give teeth to Section 629 of the Telecommunications Act of 1996, which was meant to spur development of new types of set-top boxes, with new functionality, that could be sold through Best Buy and the like and that would be compatible with any cable system. The goal was to break cable operators’ monopoly on the functionality of set-top boxes.
The FCC’s first effort to implement the plan resulted in development of the CableCard, which was supposed to allow any compatible device to connect to a cable system through a simple interface. The CableCard, however, never really caught on with consumers or device makers and largely failed to break cable operators’ grip on set-top boxes and their functionality.
With the new proposal, the agency hopes  to create more breathing room for device makers by forcing cable operators to  segregate essential functions like access and tuning from other features like DVR capability and Internet connectivity.
As with CableCards, however, more boxes won’t necessarily translate into meaningful competition for the incumbent service providers–the commission’s ultimate goal. Cable operators, in fact, already face powerful incentives to look beyond the set-top box for delivering new services and functionality to subscribers. Ironically, the commission’s new rules could end up bolstering cable operators’ competitive position by accelerating the shift from local, set top–based services to network-based services.
One of the commission’s goals with the new rules is to encourage development of integrated set-top boxes that combine traditional video service with Internet connectivity. As others have pointed out, however, nothing would prevent cable operators themselves from developing and marketing integrated devices. Given the industry’s recent TV Everywhere push, in fact, it’s quite likely they would.
Internet connectivity, in fact, will actually make it easier for cable and satellite providers to deploy scalable new services and functionality without incurring the capital costs involved in upgraded equipment already in subscribers’ homes.
Two recent court cases also give cable operators strong incentive to favor network-based services over set-tops.
In 2007, a federal district court in New York ruled that a plan by Cablevision to offer subscribers a remote-DVR service would violate programmers’ copyrights and barred the service’s deployment. In 2008, however, the Second Circuit Court of Appeals overruled the district court, declaring that since the remote recordings were still under the control of the individual subscriber, they fell within the same fair-use exemption that applies to TiVo or other set-top DVR.
The networks appealed to the Supreme Court, but last year the justices declined to hear the case, letting the Second Circuit ruling stand and essentially opening the door for cable operators to offer cloud-based storage and retrieval service to subscribers.
If that weren’t enough incentive,  TiVo’s recent court victory over DISH Network ought to be. As smartphone designers know, and DISH found out the hard way, the digital device world right now is awash in patent litigation. Adding functionality to a box — especially me-too functionality — simply invites patent infringement claims, while network-based functionality (so far, at least) has not.
The next important battleground for video services is going to be in the cloud or on the network level, not the on the set-top. By focusing on set-top competition, the FCC may once again miss its quarry.

Question of the week

Could anything break cable operators’ monopoly on set-top-boxes?