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Thursday, March 24, 2005

CableCards Revisited: The Good, the Bad on the Modular
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It was with some regret that I read last week's FCC decision postponing (until 2007) the date when cable operators will be required to use "CableCards" in the set-tops they lease to subscribers. The cards -- which protect against theft of digital cable service -- currently are required only for digital TVs and other devices purchased from consumer electronics companies that enable viewers to surf their favorite channels. Although the FCC moved in the right direction, its decision includes bad news along with the good.

First the good news: by delaying the deadline a second time, the FCC avoided imposing unnecesary costs on cable subscribers at a time when cable critics have alleged the service already costs too much. Although I have questioned whether video market conditions evince any competitive problems, allowing cable operators to continue using cheaper set-tops in which the security function is integrated avoids adding fodder to the cyclical debate over whether consumers should be "protected" from their insatiable appetite for pay TV. The delay also avoids some of the consquences associated with the FCC's insistence on "assur[ing] the commercial availability" of these devices by interpreting the statute to force all set-top makers to separate out functions they otherwise might combine for technical efficiency reasons.

Now, the bad news: in postponing the deadline, the FCC continued clinging to the idea that ensuring the benefits of competition to consumers requires a "modular" approach, whereby the security function is provided separately under a common technical standard. That technical standard could manifest as hardware (i.e., CableCards) or as cheaper security software that all devices could download from the cable operator's system. Indeed, the FCC partly based its decision last week on hopes that the deadline (which now looms a little later) will nevertheless pressure operators into accelerating development of the software-based security solution.

As I have argued previously, this approach is regrettable in that it relies on a simplistic view of competition in this context. Specifically, I argued that the FCC should examine its requirement that security functions be separated from cable set-tops to determine how it may weaken incentives to innovate. I also argued that the FCC should consider more thoroughly the benefits consumers could reap if cable operators were allowed to continue leasing boxes to customers that do not employ CableCards. It seems likely that this kind of analysis would have justified delay of the deadline even more effectively than the rationale the FCC employed last week.

Perhaps that's why the FCC stuck to its oversimplified "modular" competitive analysis -- the analysis I advocated could have justified not simply postponing the deadline but eliminating it entirely. And eliminating the deadline, according to the FCC, would have relieved pressure on cable to complete negotiations with consumer electronics companies over standards that would obviate consumers' use of operator-leased set-tops to access "two-way" interactive cable services, such as pay-per-view. (This hypothesis is supported further by portions of last week's order that require cable and consumer electronics companies to file joint status reports on these negotiations. The Commission insisted that progress in these negotiations is necessary to further the DTV transition, but lamented that the negotiations have been "disappointing to date.")

All of which leads to the question: if the FCC is really after speedier progress on these two-way negotiations, why not just mandate that result without the complications and potential consumer harms associated with the CableCard deadline?

Inquiring minds want to know . . .

posted by Kyle Dixon @ 9:44 PM | Cable , Digital TV , Economics , Interoperability

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