Consumers Would Benefit from Deregulating the Video Device Market

by

Seth L. Cooper *

Perspectives is here.]

The ways that consumers view video content continues to change. In August, the launch of Time Warner Cable's app for the Xbox 360 was announced. The TWC App lets consumers watch 300-plus channels on their video game console. And in September, Verizon rolled out its Enhanced Mobile FiOS App. This one allows consumers to watch programming from several cable network channels as well as on-demand selections on wireless devices and tablets.

Both apps allow consumers to watch video content without cable set-top boxes. Before our eyes, the idea that set-top boxes are the sole means of viewing subscription video services is being upended.

With the video market changing so rapidly - especially with regard to the ways consumers access video - it is not surprising that a bill has been introduced in Congress that would align federal policy toward video devices with today's competitive market. H.R. 3196, just introduced by Congressmen Bob Latta and Gene Greene, would remove regulatory roadblocks to further video device innovation.

Importantly, H.R. 3196 would eliminate one of the most misguided aspects of the current video device regulation regime: the "integration ban." This FCC-created rule prohibits multi-channel video programming distributors (MVPDs) from making available to consumers devices that contain both navigation of video content functions and security functions. It belies common sense to think that consumer welfare in the broadband era is enhanced by the FCC banning - or at least requiring a waiver for - video devices that download security functions. Hopefully, H.R. 3196 gets a prompt hearing that leads to its enactment.

For its part, the FCC has ample means to set policy better suited to today's competitive video market. It can remove the regulatory barriers that prohibit or at least inhibit MVPDs from offering innovative, integrated video devices to consumers. Section 629 of the Communications Act contains a provision that requires the FCC to sunset set-top box regulations if it finds that the market is "fully competitive." The FCC should employ this sunset provision. Just as the FCC solicited public comment earlier this year on how it should approach the sunset of the legacy public switched telephone network (PSTN), the FCC should also take action aimed at the eventual sunset of legacy cable-set top box regulations.

Keep in mind, however, that the integration ban is the FCC's own creation. And the Commission appears uninterested in removing that barrier. H.R. 3196 should therefore be the preferred vehicle for consumer welfare-based regulatory reform. In addition, H.R. 3196 would go a long way to counter the FCC's push for broader regulation of broadband-enabled video devices.

The Commission's ill-conceived "AllVid" proposal would impose wide-ranging government controls over how MVPDs design and operate video devices. Fortunately, the AllVid concept has gone nowhere in the time since the FCC proposed it. If anything suffers serious design defects, it's the AllVid concept. The FCC's proposal is beset by policy and jurisdictional flaws, not to mention it potentially violates the First Amendment.

Furthermore, the FCC is now mulling over whether to re-impose decade-old set-top box-related encoding rules. Those are rules that the D.C. Circuit Court of Appeals threw out earlier this year. Pro-regulatory advocates are using the occasion to renew calls for AllVid or a similarly intrusive set of government controls over broadband-enabled video devices. Advocates of regulation want CableCARD-related regulations to serve as a placeholder until AllVid or something like it could be imposed and govern how video devices are designed and operate in the broadband era.

Much more important than the fate of encoding rules is the broader question of whether video devices will be subject to more regulation or less regulation. In this respect, the 2003 encoding rules and EchoStar v. FCC (2013) saga offers important lessons about the downsides of government attempts to engineer the future of video device viewing. The FCC's 2003 order imposing the encoding rules recognized that subjecting only one set of market players to restrictions would put them at a competitive disadvantage in meeting consumer demand. This points up a much more general concern: Regulating the design and operation of video devices provided by MVPDs could harm MVPDs' future ability to compete with unregulated manufacturers of mobile devices, tablets, video game consoles, and other video viewing devices.

Also, the FCC's 2003 order imposed regulations out of concern for HDTV early adopters and the DTV transition. Time and change have rendered those rationales obsolete. Similarly, obsolete rationales still govern FCC policy toward video devices. Section 629 of the Communications Act, the primary source of FCC authority over video devices, was premised on early 1990s assumptions of cable monopolies. But cable operator market share has dropped to near 60%, with competition from DBS, telco entrants, and now online video distributors (OVDs). Relying on those same outdated premises to impose a new government framework controlling how video devices are designed and operate surely creates a mismatch with actual competitive conditions in the broadband era.

While the D.C. Circuit's ruling in EchoStar vacated the FCC's 2003 order and thereby threw out the encoding rules, plenty of regulations remain that are simply unfit for the video market's future. H.R. 3196 would put a stop to perhaps the worst excess of the FCC's video device regulatory regime. This welcome legislation would ensure that in the future, consumer choice will not be diminished by video device regulations that prohibit innovations from coming to the market.

The FCC shouldn't risk banning or even inhibiting future inventions from the video device market. Consumers deserve better. In light of today's dynamic market and the Section 629 sunset provision, the Commission should consider ways to reduce government set-top box controls and eventually eliminate them. Even better, H.R. 3196 now offers an additional avenue for removing regulatory barriers and promoting video consumer welfare.

* Seth L. Cooper is an Adjunct Senior Fellow of the Free State Foundation, an independent, nonpartisan free market-oriented think tank located in Rockville, Maryland.