Why the FCC’s AllVid remains a really bad idea

Under Section 629 of the Communications Act, Congress directed the Federal Communications Commission (FCC) to adopt regulations “to assure the commercial availability … of converter boxes, interactive communications equipment, and other equipment used by consumers to access multichannel video programming … from manufacturers, retailers, and other vendors.” Yet despite considerable effort and more than $1 billion spent to implement the agency’s CableCARD regime, the FCC repeatedly conceded that its “efforts [to implement Section 629] to date have not led to a robustly competitive retail market for navigation devices that connect to subscription video services.”

{mosads}Frustrated by its billion-dollar policy dud, the FCC in its 2010 National Broadband Plan, and then in a subsequent “Notice of Inquiry,” contemplated a do-over for Section 629, hoping that another hardline regulatory approach will succeed where the CableCARD paradigm had failed. Referred to as “AllVid,” the commission’s idea was to force all cable and satellite video providers to establish a common interface for connection to televisions, DVRs and other smart video devices.

Fortunately, after looking at the record, cooler heads prevailed and the FCC let its AllVid proposal die on the vine. In fact, recognizing the folly of at least a portion of the CableCARD regime, last year — as part of the STELA (Satellite Television Extension and Localism) Reauthorization (STELAR) Act of 2014 — Congress removed the “integration ban” which required cable operators (and cable operators alone) to use CableCARDs in the boxes they lease to customers even though that unnecessary requirement provided zero benefits to customers and merely added more energy consumption costs to those leased boxes.

That said, proponents of AllVid are a stubborn bunch, and they have recently launched a renewed campaign to resuscitate AllVid via the FCC’s Downloadable Security Technology Advisory Committee (DSTAC) process. While the purpose of DSTAC was to explore next-generation security approaches for set-top boxes after CableCARD, by DSTAC’s own admission, “[o]ne of the points of contention within the advisory committee [was] whether examination of non-security related issues [was] beyond the scope of the congressional mandate.” In particular, some members of a DSTAC Working Group sought to reintroduce AllVid because of an ostensible need for “competitive navigation systems.” Although the final DSTAC Report ultimately made no collective recommendation for any new FCC technology mandate, the FCC’s Media Bureau nonetheless put the DSTAC Report out for public comment. While we don’t know what the FCC’s intentions are at this point, the political pressure from Capitol Hill to revisit the issue is already growing .

But here’s the rub: As we demonstrated in a published paper a few years back, given the economics of the problem, AllVid made little sense when the FCC first proposed the idea in 2010. These economic fundamentals have not changed. As a result, with modern advances in technology and market developments over the last three years, AllVid makes even less sense today.

First, in contrast to the common view that the self-supply model of set-top boxes is anticompetitive and anti-consumer, the set-top box conveys no market power to the cable and satellite video provider, even under the assumption of monopoly supply for multichannel services (so that market power exists). Set-top boxes are necessary appendages (i.e., complements) to subscription video services and, as such, the provider can obtain all profits from the service itself.

Second, contrary to popular belief, cable and satellite companies have no anticompetitive preference for self-supply. If the equipment can be produced more efficiently and sold at a lower price in a competitive retail market, then the provider will embrace such a market to the benefit of both provider and the consumer. However, if the equipment can be sold at a lower price through self-supply, then the providers prefer that option, also to the benefit of both provider and consumer.

Third, a government-directed commercial market for set-top boxes is unlikely to provide substantial gains in terms of lower costs, lower prices or increased innovation. If the set-top box can be made cheaper and sold at a lower price, then cable and satellite providers will embrace the cost reduction; profits are higher and consumers are better off. Also, if the set-top boxes can be made more innovative to increase the value to consumers, then cable and satellite providers are incented to implement that innovation (see, e.g., Comcast’s X1 system and Cablevision’s “Cloud DVR“); again, profits are higher and consumers are better off. Since the incentives to reduce prices and increase innovation are intact, the prospects for a forced commercial market leading to lower prices and more innovation are slim. If a commercial market leads to lower costs and more innovation, then there is no reason for the FCC to mandate such a market; it will be willingly adopted by the industry. (Indeed, smaller cable operators use TiVo as a competitive supplier for their leased boxes when it is the more efficient solution.)

Finally, advances in technology now allow consumers to access lawful content from both multichannel video providers and “over the top” providers on an array of third-party devices (including mobile devices) through dedicated apps. Consumers appear to enjoy this huge banquet of choice, as evidenced by the fact that U.S. viewers have used these and other apps and devices to access legally 7.1 billion movies and 66 billion television episodes in 2014 alone. Under the AllVid approach, however, cable and satellite video providers would be forced to act as suppliers of programming for commercial use by third parties in violation of carefully negotiated programming agreements with content creators.

At bottom, the notion that AllVid makes any economic sense, just as folks thought that its predecessor CableCARD regime made any sense, is misguided. Cable and satellite video providers prefer an efficient outcome, and since markets detest inefficiency, a heavy-handed regulatory approach to Section 629 is doomed to fail. Instead, the economics of the service-equipment relationship in multichannel video prescribes a light-touch (or no-touch) approach for set-top boxes. It’s time for the FCC to recognize economic reality and avoid the clarion calls to regulate a market that needs no regulation.

Spiwak is the president of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, a nonprofit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.