The Federal Communications Commission (FCC) has continued its campaign to regulate as much of the digital economy as possible before the next election. As usual, its regulations are guided by a superficial ring-true narrative with little underlying analysis. The supposed target this time is cable TV set-top boxes, and the stated goal is to give consumers more choices. The real objective, however, is to remold the structure of the entire video market.
The FCC says the big problem in the video market is the rental price for set-top boxes (STBs), and that its proposal to “unlock the box” will reduce costs and expand the number of STB providers. But this is a diversion, easily exposed. In fact, the central quantitative metric of the FCC’s case is bogus. As Hal Singer shows (0), although the FCC claims that set-top box prices have exploded by 185 percent since 1994, “the true rate of inflation in STBs is likely closer to zero.”
STB prices are a decoy. The agency’s real goal is to unbundle video programming across the landscape with a set of policies that will benefit some firms and harm others.
Where is this lack of innovation the FCC speaks of?
The idea that the set-top box is inhibiting innovation in the video market is laughable. The last decade has given us the largest-ever explosion in video content and delivery channels — even bigger than the arrival of cable TV in the 1970s and 80s.
Broadband Internet, which now reaches 100 million homes, created a massive competitive channel to traditional video programming, and nearly everyone has benefited — consumers, independent video producers and artists, Web content companies, and even the cable and telco firms, for whom broadband is their best product. YouTube, Netflix, Amazon, and endless video providers offer consumers a more diverse array of video than ever. Wireless broadband to smartphones and tablets has only accelerated the consumer benefits.
Set-top boxes themselves are an anachronism that some believe will go away entirely. In any case, they will look far different in the next couple years. In 2015, consumers purchased 42 million streaming devices (1), led by Google’s Chromecast and followed by Apple TV, Amazon Firestick, and Roku. Since its inception, Apple has sold 37 million of its TV-streaming devices, while Google has sold 27 million. Then there are smart TVs and gaming consoles (which also act as streaming devices), of which consumers bought 220 million units in 2015. These new devices ignore substantial changes by the incumbents themselves. The cable firms already deliver most of their channel line-ups to smartphones and tablets, and AT&T just announced it will do the same with its new DirecTV content.
The change in viewing habits made possible by DVRs and streaming is astounding. In 2005, according to Nielsen, sports accounted for 14 percent of viewership of live video, with all other content accounting for 86 percent. By 2015, however, sports totally dominated live viewership with 93 percent of the market, while live TV watching for everything else plummeted to just 7 percent.
But even the live sports market is ripe for change. According to Wired, Facebook is thinking about entering the live video market (2) and, specifically, is contemplating bidding on the rights to the NFL’s Thursday Night Football. More and more network and content firms are coming to agree with Apple that apps are the future of TV. So why would we follow the FCC’s backward-looking rule that set-top boxes are the future of TV?
The real reason the FCC wants to regulate set-top boxes
If pressed, the FCC might admit that, in fact, the set-top box proceeding (and other video proposals) are designed to pry open the video programming relationships of cable and satellite firms so that Web firms can become virtual cable providers. No doubt, it would be a fantastic business model — provide the same video services as the broadband firms without having to invest tens of billions in broadband networks. Rent-seeking 101.
Every firm would love for the regulator to force competitive firms to unbundle and sell portions of their platform at below-market rates. Consumers would often like it, too — or they think they would. Many viewers, for example, would like to purchase “House of Cards” or “Making a Murderer” without subscribing to the whole catalogue of stale Netflix content. Some HBO viewers would like to purchase “Game of Thrones” without paying for all of HBO. But neither Netflix nor HBO could afford to buy and produce the range of content they do without their bundling model.
The FCC wants new, open set-top box standards to be ready in two years, and therefore for equipment to be on the market in around three years. But by then, the broadband, mobile, Web, cloud, and video content firms will have already churned through several more cycles of innovation, making the STB proposal look even sillier than it does today.