It's Time to Remove the Costly Integration Ban

by

Sarah K. Leggin *

On October 24, Congressman Bob Latta delivered keynote remarks at the Free State Foundation's event, "A New FCC or the Same Old, Same Old." Congressman Latta discussed the need to review and update existing laws and regulations to ensure that they reflect today's marketplace realities and promote continued innovation and growth in the Internet economy. He noted the remarkable development of the communications and technology sectors over the past few decades, and he urged Congress to undertake reform of FCC processes as well as a comprehensive review of the "outmoded" 1996 Telecommunications Act.

Congressman Latta targeted the FCC's so called "integration ban" as one area that is clearly ripe for reform, given the developments in the video marketplace since the enactment of the ban. Vigorous competition now characterizes the video and set-top box market segment, and the integration ban is now unnecessary and burdensome.

In the Telecommunications Act of 1996, Congress gave the FCC authority to create rules that would facilitate the ability of consumers to purchase "navigation devices" - set-top boxes, remote controls, and other equipment - from third-party retailers, rather than exclusively from cable providers. At the time, cable providers still dominated the multi-channel video marketplace, and Congress thought the FCC might promote competition by instituting regulations that would allow third parties to enter or grow in the video market. Under the authority granted to it by Section 629 of the Act, the Commission instituted rules that banned cable providers from offering customers set-top boxes that contained both security and navigation functions. This "integration ban" required that set-top boxes provided by either third parties or by cable providers be able to receive cable video content, so that consumers, in theory, would have greater choice in set-top box manufacturers, and competition in the market for such equipment would grow.

Despite whatever may have been the best intentions of Congress and the Commission, the integration ban did not cause competition to increase in the video device marketplace. Instead, innovation and change in technology, business models, and consumer needs have driven the growth and development of the video marketplace, including navigation devices. Today, the integration ban is merely hindering investment and innovation and should be removed.

This September Congressman Bob Latta and cosponsor Congressman Gene Green introduced a bipartisan bill, H.R. 3196, the Consumer Choice in Video Devices Act, to remove the integration ban. The bill would prohibit the FCC from "adopting any rule or policy prohibiting a multichannel video programming distributor from placing into service navigation devices for sale, lease, or use that perform both conditional access and other functions in a single integrated device." The bill also "repeals any such rule or policy adopted by the FCC prior to enactment of this Act." Upon introducing the bill, Congressman Latta stated: "In today's ultra competitive video marketplace, cable operators have no incentive to make it more difficult for their customers to use their preferred devices to access their video programming services."

In July of this year, the FCC released its 15^th Annual Video Competition Report, which stated that by the end of last year, cable providers represented only 55% of the more than 100 million households that subscribe to all multichannel video programming distributors ("MVPDs") overall. Meanwhile telephone and direct broadcast satellite MVPDs gained marketshare, claiming about 8.4% and 33.6% of all MVPD subscribers respectively. At the end of 2012, 98.6% of subscribers or 130.7 million households had access to at least three MVPDs, 35.3% or 46.8 million households had access to at least four, and some areas had access to as many as five MVPDs.

Additionally, the online video distributor ("OVD") market segment continued to grow and evolve. OVDs allow consumers to access content through game consoles, OVD set-top boxes, smart TVs, and other technologies. The FCC's Report cited an SNL Kagan study, which estimated that by the end of 2012, there would be 41.6 million Internet-connected television households, representing 35.4% of all television households. The Report also noted the continued growth of non-cable MVPDs, rapid deployment and adoption of other new technologies that enable time and space shifting, and other developments that offer further options for consumer video viewing.

Furthermore, consumers today can access the video content of cable providers through a wide range of devices, many of which bypass the CableCARD mandate. Video access devices available today include IP connected MVPD provided set-top boxes, multi-room DVR and home networking solutions, cloud-based user interfaces, mobile applications, portable media players, gaming consoles, Internet-connected smart phones and table computers, and home monitoring systems that act as extensions of cable MVPD networks. Many of these innovations are the result of consumer demand to access content while avoiding the high cost of leasing set-top boxes, which are encumbered by the CableCARD and its accompanying expenses. The integration ban has forced cable operators to include CableCARDs in equipment they supply even though the same access and security functions could be performed using less expensive technology.  

Given the robust competition in the video marketplace today and the unnecessary costs imposed by the navigation device technological mandate, the integration ban should be lifted. Congressman Latta's bill offers one way for Congress to recognize that the competitive video market does not require such regulatory interference, and provides a way to promote continued innovation and growth in video services.

* Sarah K. Leggin is a Legal Fellow of the Free State Foundation, an independent, nonpartisan free market-oriented think tank located in Rockville, Maryland.