Wednesday, May 1, 2013

The Lack of Competition in Cable Television Set Top Boxes

            Recently Comcast migrated from offering 2 free digital to analog converters to offering a rental at $1.99 per month.  It got me thinking why cable operators persist in this line of business when other ancillary markets, such as wireless routers and even cable modems have competitive options.  The authors of Wobbling Back to the Fire: Economic Efficiency and the Creation of a Retail Market for Set-Top Boxes offer plenty of answers and economic theories; see http://www.phoenix-center.org/papers/CommLawConspectusSection629.pdf.

            According to T. Randolph Beard, George S. Ford, Lawrence J. Spiwak, and Michael Stern there does not seem to be any financial upside for cable operators, or marketplace harm in sole sourcing and rentals.  So are cable operators simply providing a service that no one else wants to provide?  The authors correctly note that cable operators do not manufacture such devices, but instead contract for the manufacture by unaffiliated companies.  So what’s in it for the cable operators?

            I have a few empirical observations, again generated by personal experience.  First the possibility exists that the rentals of set top boxes, converters and modems represent a unrecognized profit center.  I suspect that the Pace converter that allows cable subscribers to continue using older analog televisions costs less than the devices used to convert off air digital signals into analog.  These more sophisticated devices retail for about $40—50.  So if Comcast can rent the simpler and cheaper mini-converters for $2 a month, the company breaks even in a matter of months even though subscribers might use the device for many years. 

            As to those more expensive set top boxes the time to break even will take longer, but again the length of rental without replacement may span many years.  How many generations of set top boxes have you run through in your years of cable television subscriptions?  Bear in mind that cable operators typically offer one set top box free and then charge $5 or more per month for additional units.

            Second the possibility exists that cable operators believe that their proprietary, non-compatible set top boxes provide greater opportunities to lock in consumers and limit them only to features the cable companies and content providers are willing to offer.  Once upon a time these stakeholders did not want companies like Tivo offering digital video recording opportunities, so interconnection and technical compatibility issues provided a means to thwart and stall competitive options.

             Third, cable operators, their trade associations and their sponsored researchers have expressed opposition to extending the Carterfone policy to television.  Carterfone supports the right of consumers to attach any device that does not cause technical harm.  If applied to cable television, it would enhance consumer freedom by preventing strategies to block or limit access by devices cable operators don’t control.  From my vantage point the lack of progress in cable efforts to promote “true two-way” access by televisions without a converter box means that cable operators see upsides in mandating access only via their soul sourced devices.  Additionally with digital transmissions, subscribers must have a set top box or converter for each and every television set thereby eliminating the previous free option of using a “cable ready” set.

            Also the fact that consumers have not embraced CableCards may reflect their lack of knowing that such an option exists, possibly the product of a strategy by cable operators not to promote such an option.

            My bottom line: the lack of a competitive market for set top boxes probably reflects market failure artificially induced by cable operators.

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