DSTAC, CableCard, pay-TV apps and the future of the cable industry's $20B set-top business

By Daniel Frankel


TiVo's Premiere Q set-top box

Federal regulators have worked for decades to come up with ways to remove the cable industry's lock on the set-top box. The goal, they argue, is to give customers the option to purchase whatever set-top they want, rather than leasing the one from their cable operator.

And, according to a Congressional estimate, those actions could eliminate $20 billion per year in profits from cable operators' bottom lines. That figure is the amount of money that the nation's cable operators make from subscribers who pay to rent a set-top box from their cable operator, according to a study recently commissioned by lawmakers.

The set-top issue flared anew in July, when Sens. Edward J. Markey (D-Mass.) and Richard Blumenthal (D-Conn.) released a statement saying that American households are spending more than $231 per year on set-top box rental fees and that 99 percent of these consumers are renting their boxes from their pay-TV provider.

"Consumers should have the same range of choices for their video set-top boxes as they have for their mobile phones," Markey argued.

"Decades ago we ended the practice of forcing customers to lease a black rotary dial phone from Ma Bell," said Chip Pickering, CEO of Comptel, a trade group representing Amazon (NASDAQ: AMZN), Netflix (NASDAQ: NFLX) and others. "The archaic practice of forced leasing a set-top box from the cable company is a holdover from a bygone era."

Pickering counts powerful allies, such as Milo Medin, Google's (NASDAQ: GOOG) VP for access services, who recently called on the FCC to "take action" on what he feels is a closed, proprietary pay-TV set-top market.

That's not the way the pay-TV industry sees it, of course. Pay-TV executives and analysts dispute the notion that operators are somehow making a $20 billion profit by leasing out increasingly advanced, multi-tuner DVRs with no upfront charge to the consumer.

Joel Espelien, senior analyst for The Diffusion Group

Espelien

"No way is [leasing] a good business, especially as boxes get more complicated and need constant updates," said Joel Espelien, senior analyst for The Diffusion Group,

Industry denizens also point out that pay-TV is hardly confined to the operator set-top these days, with authentication of services dispersing across a wide variety of products running iOS, Android, Roku, Amazon Fire, Chromecast and Apple TV. The issue, they argue, is much more complicated than a rotary dial phone.

"We agree with Apple's [CEO] Tim Cook -- the future of TV is apps," said Neal Goldberg, general counsel for the National Cable & Telecommunications Association (NCTA). Speaking for the broader cable industry -- representatives from Arris to Mediacom deferred comment on the set-top issue to the lobbying org -- Goldberg added: "We want to get our programming on as many devices as possible, and to as many consumers as possible."

Meanwhile, Daniel Simmons, director of connected home at IHS, questioned the very existence of the set-top. "To me the big question is, 'Do consumers really want to buy a cable box?' I've never really seen that answered by anybody," he said.

Tracking the rise and fall of CableCard

The quest by regulators to establish a robust market for retail set-tops that could be used in the pay-TV ecosystem stretches back decades. More recently, the FCC in 2007 mandated its integrated security ban that required that cable operators use a system called CableCard to make sure that only paying customers could see their signals on set-tops.

CableCard technology would allow a customer to purchase a TiVo DVR at Best Buy and then view a Comcast (NASDAQ: CMCSA) channel lineup. However, cable operators didn't love the system because they had to integrate CableCard into their own boxes, as well.

The result? CableCard failed.

As of September of last year, there were only about 620,000 CableCards for retail devices deployed since the FCC mandate, versus nearly 47 million boxes distributed by cable operators.

Matt Zinn, senior VP of general counsel and chief privacy officer for TiVo

Zinn

Matt Zinn, senior VP of general counsel and chief privacy officer for TiVo, the leading maker of CableCard devices sold at retail, said CableCard didn't work out because cable companies never got behind it.

TV makers, for example, were the first to try to integrate CableCard technology into their sets. "And when they wouldn't work, they would say, 'That's JVC's problem,'" Zinn said. "The FCC has realized that cable operators had no incentive to make sure these products work properly. The cable operators didn't necessarily want third-party devices on their network."

Beyond leasing revenue, cable operators have other good reasons for wanting to control the set-top. Collecting a network of addressable devices, for example, is yielding a growing advertising business for Cablevision (NYSE: CVC), for example. And with their program licensing contracts based on where channels appear in their program guides, operators are loathe to give up the user interface delivery to a third party.

Still, IHS' Simmons, however, sees less cynical reasons for CableCard's failings.

"CableCard only addressed the issue of integrated security, but [not] the other important parts of the service providers' STB, such as middleware/software/operating system," he said. "Most of this middleware is proprietary to the operator or the operator's technology partner, and enables many of their differentiating functions, so operators wouldn't have wanted to supply this to retail partners. Consequently, you could buy an STB at retail but could only access linear TV programming with it through a CableCard. As viewers have migrated towards VOD and catch-up TV, supporting linear TV alone wasn't ever going to be enough for a retail STB to succeed."

Regardless of who or what is to blame for CableCard's shortcomings, the technology's days are numbered.

DSTAC: Another attempt to change the set-top market

In December of last year, President Obama signed into law the Satellite Television Extension Act Reauthorization (STELAR). In addition to ensuring satellite TV customers in rural areas didn't lose access to broadcast channels, this law included language that sunsetted the requirement that operators put CableCards in their own boxes in December 2015. STELAR also called for the FCC to form the Downloadable Security Technical Advisory Committee (DSTAC) in order to examine a successor security technology for CableCard. DSTAC members include Jay Rolls, senior VP and CTO of Charter Communications (NASDAQ: CHTR), and Google's Medin.

In August, DSTAC issued a report proposing a solution based on HTML-5 security APIs and encrypted media extensions. It also made an alternative proposal based on a virtual headend approach, with security access handled not by the device but in the cloud.

However, NCTA's Goldberg doesn't see the committee's work as being impactful because the group is only making suggestions rather than issuing mandates. "Why would Congress set up a committee if they didn't want to do anything? The answer is that this is the way Congress works," Goldberg said.

On the opposite side of the issue is TiVo's Zinn. He's also cynical about the FCC's past efforts, but believes the FCC might be willing to change the game this time around.

"The FCC has never really put its focus on this issue," he said. "They've made half-assed attempts, but they've never really pushed it this far."

Zinn compared DSTAC's proposals to when Apple convinced AT&T to sell its iPhone -- which ran only Apple's user interface. "All of the sudden, you had an explosion of usage," he said.

To be clear, TiVo and other companies in the set-top box market have a major financial stake in the issue. Opening the set-top market could create additional opportunities for companies like TiVo that currently don't supply set-top boxes to the nation's largest cable companies. They may enjoy additional sales of their devices to consumers who don't want to rent their set-top from their cable operator. And other players, like Google with its Chromecast or Apple with its new TV puck, may also enter the fray.

On the other side, established set-top box makers like Arris and Technicolor could see sluggish sales due to additional competition and the opening of the market. (Arris and other cable players deferred comments on the topic to NCTA.)

Interestingly, DSTAC's report also included a proposal for AllVid, which would involve regulators selecting a gateway device that would blend video signals from numerous sources into one box. That box would, in turn, decode a consumer's secure cable signal for any retail device.

AllVid is a technology NCTA doesn't support. "That solution would require an extra box in the home at a time when we're trying to reduce boxes and energy use," Goldberg explained.

Beyond AllVid, the NCTA reacted favorably to the DSTAC report (at least publicly), as did the Consumer Video Choice Coalition, a group that includes Comptel, Public Knowledge and TiVo, among others. Public comments for the DSTAC report are due to the FCC Oct. 8, with reply comments due Nov. 9.

"The DSTAC process was productive, in that it showed that the disagreement between cable companies and others about the set-top box market is not about what technologies are possible, but what outcome the FCC should work for," the Video Choice Coalition said in a statement.

However, The Diffusion Group Espelien thinks the DSTAC proposals are an anachronism amid an evolving pay-TV business that includes services like Sling TV, an app-based service that requires no proprietary set-top at all.

"I don't see any of these approaches amounting to much," Espelien said. "The interface between services and devices is going to be an app.  This is the only approach that works across all types of devices (not just living room STB which is only a part of overall video consumption) and actually relates to the technology ecosystem as it is. Consumers have already voted with their feet in favor of this approach, so there is no point in trying to turn the clock back to the 1990s on this."

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