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FCC and STBs: Breaking down the set-top box

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FCC and STBs: Breaking down the set-top box

This is the firstinstallment of a two-part series on the FCC's proposal to open up the set-topbox market. The second installment can be found .

The FCC's recent move to "unlock the box" has sparkeda heated debate.

Driven by a desire to protect consumers and driveinnovation, the commission's set-top box proposal would allow U.S. cable and satellite TVsubscribers to select the devices they use to access and watch programming.

No one wants to be cast as anti-consumer or anti-innovationin the industry. Thus, it would appear that if the FCC is right, pay TVproviders objecting to the proposal must be wrong. Right?

Not so, according to SNL Kagan analyst Mike Paxton.

"The FCC has a valid position in trying to, if notdirectly open up the set-top box market, then at least light a fire under theindustry to move faster than they have been in coming up with alternativedevices or apps," Paxton said in an interview. "So they are right onthat point. The industry on the other hand — the cable and satellite and allthe pay TV service providers — are right that they are moving in the directionof offering alternatives to set-top boxes."

Indeed, this is the argument that the National Cable &Telecommunications Association made in a 394-page commenting on the FCC's proposal.The association noted programmers and operators are embracing new devices andnew technologies, most of them centered on an app-based marketplace.

"Consumers can receive cable, satellite, and telco TVprogramming on the most popular retail devices — including smartphones,tablets, smart TVs, streaming set-top boxes like Roku, game consoles, and other connected devices,"the association wrote in its April 22 filing, adding that consumers can alsobuild their own video packages with streaming media services like and

All in all, the NCTA said, "Consumers have never hadmore choices of different providers, different packages, and different devicesfor video services."

Given this, the association believes the FCC's proposal isnot only unnecessary, but is also potentially harmful.

"Both sides have a point. The industry is moving thatway," Paxton said, noting that the FCC, however, "would like to seethem move faster."

He does think there is a risk the FCC's proposal could domore harm than good, though.

"I think the stronger point, speaking as an analyst, ison the industry side and that comes from historically looking at regulatoryinitiatives that have tried to do something similar to this," he said.

Those efforts, namely the CableCARD and tru2way initiatives, largely failed.CableCARDs, which could plug into any set-top box and unlock cable and telco TVchannels for the viewer, enabled consumers to buy set-top boxes at retail,while tru2way was used in conjunction with CableCARDS and focused on allowinginteractive services to be deployed. Neither initiative, however, caught onwith consumers, and both were eventually abandoned.

The question of what consumers truly want, of course,underpins the entire debate, as both sides say they are looking out forconsumers' interests.

Specifically, the FCC cited data from Sens. Edward Markeyand Richard Blumenthal illustrating that consumers on average pay $231 inset-top box rental fees annually per household, and that altogether, U.S.consumers spend $20 billion a year to lease these devices. These numbers makeset-top boxes out to be a cash cow for pay TV providers, a never-ending sourceof high-margin revenue that pay TV providers would fight tooth and nail to keep.

American Cable Association President and CEO Matthew Polka,however, said this was a misrepresentation of set-top box rental fees.

"All you hear is the bad cable and satellite companiesare charging hand-over-fist for these boxes," he said in an interview."But no one is talking about how within the cost of a set-top-rental, youhave the price paid for the guide … which we have to buy from . You're not adding in thecost of service whenever someone has a problem."

In fact, most operators are generally ambivalent aboutset-top boxes, according to Marc Tayer, president of MediaTech Insights andauthor of Televisionaries, a bookthat documents the history of digital TV.

"It's a love-hate thing," he said in an interview."They're ambivalent because the boxes are what gives them control with theconsumer and they're control freaks." The downside is that these boxes arealso incredibly expensive to roll out and service.

SNL Image

X1 set-top box
Source: Comcast

There is no company that better knows this than At the company's cablebusiness, spending on customer premise equipment — industry jargon for set-topboxes and other installed devices — accounted for nearly half of ComcastCable's total capital expenditures. The company total cap ex of $7.03 billion,with CPE making up $3.37 billion of it. The company has been rolling out its X1platform, putting out "40,000 boxes a day," according to Comcast Cable Presidentand CEO Neil Smit.

The expense helps explain why cable companies have for yearstalked about the prospect of one day moving beyond the set-top box. FormerTime Warner CableInc. CEO Glenn Britt used to speak fairly ardently on this issue,and in early 2011 his company was among the first major cable operators todemonstrate its ability to deliver video programming directly tointernet-connected TVs.

"For years, our video user interfaces have beenconstrained by the limited capabilities of set-top boxes," Brittsaid during aconference call in January 2011. "By taking advantage of more powerfulconsumer electronics devices, we can offer a much more compelling navigationexperience, one that offers more functionality and is more aestheticallypleasing than anything we've done in the past."

CablevisionSystems Corp. made similar arguments when it fought to roll out itsremote-storage DVRs. In essence, the company was trying to become lessdependent on the physical box in each customer's home.

"By putting intelligence back into the network, whichis our core strategy — DVR is a manifestation of that, but there are otherapplications like it — it allows simpler and simpler [consumer electronic]devices to attach to the network," Tom Rutledge, who at the time was COOof Cablevision but is now CEO of Charter Communications Inc., said during a May 2010 conference call. "So, we seea day where everybody has lots of simple devices that can attach to our networkthrough the Wi-Fi network, through the cable network, through the internetinfrastructure and voice infrastructure. And we see consumers bringing thosedevices, not us."

Of course, that is not to say that cable operators see novalue in set-top boxes and are ready to chuck them all out the window.Comcast's investment in its X1 platform proves that is not the case.

"I don't think it's correct that operators see set-topsas a hassle, but it's also incorrect to view them as a cash cow," SNLKagan analyst Ian Olgeirson said in an interview. "The truth liessomewhere in between. Operators have a huge interest in controlling the customerexperience, which is the foremost motivation for set-tops. However, set-topsshould not be viewed as a loss leader, and operators have priced lease fees toallow them to make money after the initial capital expense is covered."

Tayer agreed that pay TV operators can keep reaping rentalfees long after they have recouped their original outlay for a new box.

"For the first few years, because they are prettyexpensive boxes, it's actually a pretty good deal for the consumer not to haveto pay the full price. But after that, a lot consumers have those boxes formore than a few years, and then it's kind of ridiculous," he said."Why are you still paying $10 or $15 a month after having that box forseven or eight years? Then it's all gravy to the cable company at that point."

Even so, Tayer does not see consumers clamoring for changeor asking the FCC to tackle this issue. In fact, recent data shows that mostconsumers generally like their current set-top boxes. Bruce Leichtman,president and principal analyst for Leichtman Research Group Inc., recentlysurveyed 1,206 TV households throughout the U.S. and found that only 20% ofrespondents with a pay TV HD set-top box agreed set-top boxes from TV companieswere a waste of money. A much higher percentage, 44%, disagreed. Moreover, 42%of respondents with a pay TV HD set-top box said those boxes provided featuresthat added value to their TV service.

"I hear talk about consumers not liking their set-topboxes, but I do a lot of research and I've never had that come up in myresearch," Leichtman told SNL Kagan, adding that he tried to make hisquestions as free from bias as possible. "Bottom line is they arenonplussed. It's just not an issue for the vast majority of consumers."

Asked about the expense of set-top boxes — the FCC's totalof $231 per year that each household spends — Leichtman noted that consumers donot seem to mind the expense so long as they like their overall pay TV service.He noted that among those respondents with three or more set-top boxes in thehome, 68% are very satisfied with their pay TV provider. Among those with onlyone or two boxes, 54% are very satisfied.

"I think the reason people like more boxes is becausethere is more continuity in the home," he said. "I think there is abit of a fallacy out there that lower pay means higher satisfaction and morestickiness, and that's not necessarily true."

He noted that those consumers with three or more boxes werespending more than 20% more per month on average but were also more satisfied.

"So the idea that consumers are up in arms or riledabout set top boxes — the data doesn't reveal that," he said. "Myconcern is that my numbers will sound biased, but they're not. I truly believeit's a solution in search of a problem."