Set Top Box Competition: What’s Not to Like?

            Only in this pay to play, partisan world could two out of three FCC Commissioners rise in opposition to an overdue initiative to save consumers billions of dollars.  Cable and DBS companies will join the opponents along with sponsored researchers who will trot out all sorts of bogus rationales.

            I’ll start by using two words to dismiss what appears to be the first gambit rationalizing a monopoly set top box marketplace.  The narrative goes something like this: “Why fix something that isn’t broken?  Just look at those so-called Tivo boxes.  Have you seen their prices?

            My response in two words: umbrella pricing.  Tivo charges what the market will bear, and in an artificially uncompetitive market it can use the outrageous set top box rental box rates to establish an equally outrageous sale price.

            If the FCC removes the government-sanctioned near monopoly, then cable, DBS and set top box manufacturers simply will have to sharpen their pencils and offer consumers a far better value proposition.

            Competition opponents will bolster their arguments for maintenance of the status quo by framing the FCC initiative as overbearing and unnecessary regulation.  How is it not deregulation when government eliminate previous rules that fostered a monopoly making it possible for above market set top rental and sale prices?

            This long overdue deregulatory effort reminds me of the adage about the stock market where bulls make money, and bears make money, but pigs get slaughtered.  Premium television companies have gouged consumers for years on a device that has become bundled with service.  Technological initiatives, which made it possible to offer more channels and compress more signals, also eliminated the ability of consumers to buy “cable ready” television sets useable without a set top box.  So the box has become a necessary device and pay TV operators get the privilege of charging a monopoly price, because they have no incentive to achieve progress on an open interface for competitive boxes that can provide both upstream navigation functions and downstream piracy prevention. 

            Cable operators have a lame, hassle-filled option available that they make every effort to obscure: the cable card.  Join the crowd if you have never heard of this option, one that typically requires an appointment with the “Cable Guy” to plug the card in, at considerable expense for the premises visit.

            The lack of set top box competition runs counter to a 60 year Carterfone precedent favoring the right of consumers to attach technically compatible devices like telephones, cable modems and wireless routers.  Incumbents do not want a free consumer option as they lust over the rental fees they cannot charge. 

            Consumers should think of an ecosystem where they have to pay a monthly rate to carriers for the privilege of attaching a modem, router and telephone.  We do not standard for such extortion, but even now inertia and ignorance of the ripoff allows cable operators to charge $10 a month for a cable modem that costs less than $50.  Bear in mind that unlike wireless handsets, consumers use the same cable modems and wireless routers for years. 

            Incumbents also will try to characterize the set top box as so complex in functionality that there could not possibly be a common interface usable by companies like Roku, Apple, Google and any television set manufacturer.  Nonsense.  Of course cable operators have never gotten around to finding a way for television sets to have “true two way” access to security and program guides, but their nonfeasance does not make the task undoable.

            In a nutshell: set top box competition does what I would have expected Republican regulators to applaud--competition unfettered by regulations that created a fake monopoly that has extracted billions from consumers.

AT&T and Comcast Violate the First Rule of Regulation During a Pending Acquisition

              One would think AT&T and Comcast would be on their best behavior while the FCC considers the merits of multi-billion dollar acquisitions of DirecTV and Time Warner Cable.
Why come across to the court of public opinion as greedy, small-minded and mean-spirited?  Why provide opponents with evidence of just how uncompetitive the marketplace is?

            What was AT&T CEO Randall Stephenson thinking when he threatened to reduce capital expenditure on next generation networks on grounds that the FCC might impose greater regulation?  See AT&T to “pause” 100-city fiber buildout because of net neutrality rules; available at: http://arstechnica.com/business/2014/11/att-to-pause-100-city-fiber-buildout-because-of-net-neutrality-rules/.  He probably was attempting to blame “regulatory uncertainty” as grounds for reducing investment in plant.  To my mind, he comes across as showing the absence of competitive necessity to build out the AT&T network as quickly as possible.  The company can try to leverage investment as a reward to the FCC and the public for retaining possibly inadequate and ineffectual regulation.  Such a generous and noble consolation prize.

            Comcast goes one step further in violating the rule requiring a low profile.  The company has doubled its broadcast signal carriage fee in many markets.  This comes across as both sneaky and not cost-based. It’s sneaky, because the company recently created and now doubled a new line item that consumers might infer as required by government, or as some kind of legitimate cost-pass through, somehow not covered by the overall cost of doing business.  It’s not cost-based, because retransmission consent costs have not doubled in the last year and the company charges the same amount regardless of the number of local signals it carries.  In simple terms Comcast has raised rates at time when it probably should not do so, unless it has such a low opinion of our ability to decode the impact of a 100% increase in its “Broadcast TV Fee.”

            The fact that AT&T can threaten to ration or cut capital expenditure and Comcast can raise rates may mean that both companies see no need in playing nice during the pendency of it 90+ billion dollar acquisitions.  Fine, but don’t tell us how hard you have to work to stay competitive and how your mergers are essential for your continuing ability to serve.

7+ Examples Where Consumers Don’t Call the Shots

            There are plenty of examples where the marketplace’s invisible hand does not seem to favor consumers.  As much as I want to believe unconditionally in the power of the marketplace, there are too many powerful examples where consumers lack sovereignty.  Here are 7+ examples in the information, communications and entertainment marketplace:

1)         Take it or Leave It Contracts that Include Binding Arbitration Clauses 

            Perhaps you can show me a wireless contract that does not require subscribers to give up their day in court if a carrier cheats them.  There are too many instances where a wireless carrier imposes an unjustified charge, or demands payments for one.  Where is the marketplace punishment when this occurs?  There is none, because consumers cannot vote with their feet and migrate to an alternative service provider that allows subscribers a judicial forum.  Every major carrier in the U.S. has received a sizeable fine from the FCC for unlawful and bogus charges, but I don’t want to rely on a regulatory remedy that could evaporate, or apply only if the politics are right.

2)         The Supreme Court’s Aversion to Class Action Law Suits

                I support tort reform that seeks to eliminate frivolous law suits, but another powerful remedy has evaporated when telecom ventures cheat.  Class action law suits make it possible to remedy a problem that collectively add up to millions of dollars, are not worth the bother for any one victim to sue—assuming they still have that option.

            For example, Verizon collected a cool $52 million in unauthorized data access charges in $1.99 increments.  An individual subscriber could not recover the overcharges given the cost of litigation, or even arbitration.  Verizon continued the practice for over four years, before the FCC made the company stop.

3)         Walled Gardens

            I appreciate that most of us are content to treat the millions of wireless apps as more than enough options.  However, compare what Apple allows versus what the complete and unwalled Internet has to offer.  With the rising importance of wireless data access, some content and app creators already have opted to concentrate on App Store availability in lieu of plain old web access.  A lot of time, money and effort goes in creating different versions of the same content accessible by handsets using different operating systems.

4)         Internet Access From a 7 Inch Screen

            Consumers readily accept an inferior web experience for the opportunity to access it via a mobile device.  Okay, the market has functioned and allocated resources accordingly.  In some places in the world, wireless constitutes the first and only medium that offers an affordable and available option.  Still I lament that consumers may have access to fewer and fewer options via 20 inch, fixed screens.

5)         Throttling

            I find it hard to understand why a wireless carrier would deliberately degrade service to a “power user.”  Why not send them a fruit basket and new service options?  Carriers want the option of upselling, but also to punish users, even ones who have acquired so-called unlimited service.

6)         Tiering When Extra Usage Costs Little

            Unmetered, All You Can Eat (“AYCE”) service is economically inefficient when it stimulates “excessive” consumption and triggers cross-subsidies from low volume users to high volume users.  This can occur when everyone pays the same price, or there are negative consequences resulting from excess use, e.g., the need to build more electric power plants.

            Internet access may have different characteristics, particularly if carriers can provide additional units of service without significant additional cost.  Absent congestion, a broadband service provider incurs little cost if it allows subscribers to binge watch Netflix.  That’s why fixed, wireline broadband consumers have AYCE access, or sizeable monthly data allowances in the 100s of Gigabyte range.

            It probably makes economic sense for wired broadband carriers to tier service based on bit transmission speed, but perhaps not on the basis of download volumes.

7)         Video Access Constraints

            Yes the marketplace has made significant accommodations of consumers’ impatience with access constraints.  Video on demand and television everywhere provides alternatives to “appointment television.”   However do not fool yourself into thinking the consumer can demand unlimited access, anytime, anywhere, via any device and in any presentation format.  There are legitimate copyright and content windowing constraints, and there are plenty of questionable ones.

            Why can’t cable subscribers select content on an a la carte basis?  It surely is technically feasible and while the savings depend on the 10-15 channels most consumers would choose, the absence of this options is telling.  ESPN and other very high cost networks understand that they and their cable partners can generate far more revenues by forcing every subscriber to pay for a bundle of channels than by charging even higher rates (above the $6-$7 a month for ESPN) from the smaller base of voluntary subscribers.

            Why can’t consumers access ESPN, HBO and other premium content sources without also subscribing to cable or satellite television?  This access pre-condition constitutes what antirust experts call a tying arrangement. HBO has begun to experiment with alternatives, but until direct access becomes an option, legacy ventures can close ranks and add to consumers’ costs.

            Speaking of costs, how can both content and broadband access providers treat the monthly consumer subscription as just one revenue center?  Does one’s broadband subscription contract contain language allowing the carrier to degrade service to particular upstream content sources unless they agree to pay a surcharge?  Put differently does a broadband carrier have a duty to provide adequate service to its subscribers even if it fails to receive surcharge payments?

            Comcast officials recently claimed that Netflix deliberately caused their content downloads to degrade as a way to improve the odds that the FCC would reject the merger with Time Warner, or impose more burdensome conditions.  I know that Comcast on occasion has intentionally degraded its service, but why would Netflix, particularly given low consumers’ pain thresholds for inferior video?

            Lastly, why do subscribers have to pay the full monthly rate when compensation disputes temporarily block access to “must see” channels?  Where’s my refund?