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Policy

Cable Awaits Set-Top Ruling

12/05/2004 7:00 PM Eastern

Washington— After recently skirting one a la carte issue, the cable industry finds itself coping with another: the unbundling of set-tops to promote their sale at retail outlets around the country.

The Federal Communications Commission has promised to issue new guidance by the end of the year, which would mark another episode in a long-running technodrama that pits cable operators against the consumer electronics industry, giant CE retailers like Best Buy Co. Inc. and Circuit City Stores Inc., and technology players like TiVo Inc. and Intel Corp.

Set-Top Chronology
1996: New telecom law requires Federal Communications Commission to promote retail sale of cable set-tops.
1998: FCC adopts POD (now called CableCard) rule, effective July 2000, and integrated set-top ban, effective July 2005. Chairman Michael Powell dissents from ban.
1999: FCC exempts analog-only boxes from integration ban.
2000: D.C. Circuit affirms July 2005 integration ban.
2003: FCC moves ban to July 2006, promising new review by January 2005.
Source:MCN research

BAN IS COMING

At issue is an FCC rule that would ban cable operators from deploying any new set-top box with integrated circuitry after July 2006. Analog-only boxes are exempt.

Cable operators have a huge financial stake in the security of conditional-access systems in set-tops. In 1999, the last year for which the National Cable & Telecommunications Association has data, the industry lost $6.6 billion from theft of service.

Thus, boxes with leaky scrambling codes represent a large financial risk.

The cable industry — which needs an answer from the FCC soon, to establish any necessary production timetables — wants the ban eliminated, claiming market forces are working to produce a competitive set-top market that Congress intended. Last week, Comcast Corp. asked the FCC to defer the ban to at least January 2008 if lifting the ban was unacceptable.

Cable’s arguments against the ban are many. With thousand of consumers now buying DTV sets that work without a set-top, the NCTA says the ban is now unnecessary.

And with the integration ban adding an estimated $93 to the cost of each box, cable-equipment rates would also be driven higher — frustrating the effort to produce a low-cost, digital-only box that will help cable convert to all-digital transmission.

“Implementation of the ban on integrated set-top boxes would impose hundreds of millions of dollars in unnecessary additional equipment costs on consumers. And these costs would be borne by consumers with no corresponding public-interest benefit,” the NCTA said in a Nov. 19 FCC filing.

Cable’s opponents, not surprisingly, tell a different story. They insist that if cable is allowed to deploy integrated boxes, the industry could use its muscle to prevent the development of a vibrant set-top box market, contrary to the aims of federal legislation.

CE firms and others claim that cable must support the technology behind nonintegrated boxes in order for fair competition to emerge — competition that will drive down set-top costs, despite the NCTA’s rhetoric to the contrary.

“It is clear that any genuine benefits for consumers in terms of navigation-device cost, choice and function will only result from open markets and level playing fields that allow for multiple manufacturers to place their products on store shelves,” Intel said in Nov. 17 filing at the FCC.

TELECOM ACT TIE-IN

The box debate has been raging for more than eight years, beginning with passage of the Telecommunications Act of 1996, a law that required the FCC to break open the set-top market long dominated by the cable industry’s chief suppliers, Motorola Inc. and Scientific-Atlanta Inc.

In 1998, the FCC ruled that the optimal approach was the separation of signal security from channel surfing functionality. This meant anyone could build the box, but cable would keep the encryption codes housed in a point-of-deployment module (now called a CableCARD) that slides into a credit card-sized set-top slot.

The FCC ordered cable operators to make CableCARDs available by July 2000 (which they did, with a few notable exceptions) and to stop furnishing new integrated boxes after July 2005.

FCC chairman Michael Powell was a commissioner in the GOP minority when the ban was adopted. While he supported the separation requirement, he opposed the ban, saying the agency was denying consumer access to integrated boxes that might be more affordable than boxes with unbundled signal-theft elements.

'CONSUMER PREFERENCES’

“It is quite plausible,” Powell wrote in his partial dissent, “that the 'impediment’ to switching to retail may in fact be a consumer preference for distributor-supplied integrated boxes! I see no reason to attempt to control consumer preferences.”

In 1999, the FCC narrowed the scope of the ban. At cable’s request, the agency exempted analog-only boxes from the integration ban, leaving covered just hybrid analog-digital and digital-only boxes .

The unbundling of analog boxes, the FCC reasoned, would waste money on a technology that was growing obsolete.

Having failed at the FCC to get the ban lifted, cable went to court.

In a case brought by General Instrument Corp., the industry argued that the FCC lacked legal authority to ban integrated boxes in pursuit of a retail set-top market. In June 2000, the U.S. Court of Appeals for the D.C. Circuit handed the FCC an across-the-board victory.

The court ruling did not stop the issue from continuing to serve as a political football.

The cable industry kept the pressure on for elimination of the ban, while CE rivals fought for an earlier deadline than 2005.

In April 2003, the FCC decided to accommodate cable by moving the ban to July 2006. The agency noted that the cable industry had signed the previous December an agreement to support plug-and-play DTV sets, a CableCARD-enabled device that does not require a set-top box to receive one-way cable programming services. The FCC endorsed the plug-and-play agreement in September 2003.

At the same it set a new deadline, the agency also promised to review that decision by January 2005. With that deadline fast approaching, all parties involved in the debate have been making their case in private meetings with FCC officials.

An FCC source indicated that the agency intended to issue a ruling by the end of the year.

“We are working on it. Outcome unsure,” the source said.

September