The venerable cable set-top box is about to break the bonds of industry control and show up on retail shelves… but not all at once.
“I wouldn’t call it a flood… we envision them popping up in retail,” said Dave Clark, director of product strategy and entertainment products for Scientific Atlanta. “As far as the vast majority, we still see the leased model as very strong.”
Since the inception of cable TV, subscribers have leased their set-tops from cable companies at around $4 to $5 a month, but a 10-year-old dictum to make set-tops a retail item is about to take effect.
(click thumbnail)Will the integration ban mean more CableCARD-enabled set top boxes on the market? Don’t count on it yet, say manufacturers.As of July 1, cable operators can no longer distribute set-top boxes that include the encryption technology that determines which channels are accessible. That security function must reside on a separate device so set-tops can work on any cable system and be sold in retail stores. This so-called “integration ban” was engendered in the 1996 Telecom Act to induce a competitive market for set-top boxes or other cable access devices. It took another six years for the cable and consumer electronics industries to hammer out a game plan known as “plug-and-play.” The initiative was based on an SD-like apparatus—a CableCARD—that contained the cable access technology, and could be plugged into any compliant device deemed “digital cable ready.” That was December 2002.
THIS IS NOW
Today, there are 8 million such compliant TV sets in the market, only 250,000 CableCARDs in use, and plenty of blame to go around for the sluggish adoption rate. The cable industry at one point blamed consumer electronics makers for turning out defective CableCARD interfaces. The consumer electronics industry said cable operators were discouraging the deployment of CableCARDs through a variety of stunts. It wasn’t unusual for the folks in service departments to have never heard of CableCARDs. Cable technicians were said to be sent on calls armed with inferior software.
Whatever the case, the plug-and-play agreement disintegrated into bickering and the integration ban deadline kept getting delayed—from January 2005 to July 2006 then to the current date. In the meantime, the cable industry fixed its focus on newer technology that would allow interactive, two-way features not available with current CableCARD TVs. The cable lobby last August sought one more (preferably indefinite) postponement, but the FCC boiled it down to “no dice.”
Brian Dietz is vice president of communications for the National Cable and Telecommunications Association, which represents cable operators serving 90 percent of the market. He said the industry has accepted the inevitability of “707,” the idiom for the July 1, 2007 deadline, but that cable subscribers will suffer for it.
“The integration ban doesn’t require set-tops to be sold at retail,” Dietz said. “It just requires cable companies to separate the security.”
As a result, he said, scads of set-tops won’t suddenly appear on retail shelves come July. Indeed, the two biggest set-top makers for the U.S. market—Scientific Atlanta (which shipped 1.8 million set-tops worldwide last quarter) and Motorola in Schaumburg, Ill.—have no immediate plans to go into the retail market, according to Clark and Paul Alfieri of Motorola. That does not preclude them from doing so down the road. One third-party player, TiVo, has entered the market with a $700 multiple-stream CableCARD digital video recorder, but for now, cable operators will likely remain the dominant source for consumer set-tops.
Cable operators, in turn, will have to recoup some of the higher cost of the nonintegrated boxes or face a pounding on Wall Street over increased capitol expenditures.
Ian Olgeirson of Kagan said, “in general, operators are faced with spending between $40 and $50 more for each digital box—the CableCARD plus the additional cost in the box of accommodating the card.”
At the same time, cable is capped on what it can charge for equipment, so the set-top business is not the industry cash cow it’s commonly perceived to be, Dietz said. The cap on set-top leases is around 11 percent over cost amortized over the life of the box, he said. The new boxes are expected to lease for $2 to $3 more than current models.
“The ban will essentially be a tax on cable customers,” Dietz said.
The NCTA estimates that the integration ban will cost in the neighborhood of $600 million—the average number of new set-tops deployed each year—8 million—times the estimated $75 cost of CableCARD-compliant set-tops.
Consumer electronics manufacturers and retailers are over the arguments against the integration ban. Jason Oxman, vice president of communications at the Consumer Electronics Association, said when cable operators are required to deploy CableCARD-compliant set-tops, they’ll be motivated to make CableCARDs work properly. Once that happens, the retail market for cable set-top boxes will materialize, he said.
“The key here is that manufacturers are looking to build equipment for a competitive marketplace; retailers are looking to sell equipment in a competitive cable marketplace, and more importantly, consumers want to buy equipment in a competitive cable marketplace,” Oxman said.
He said the assertion about the integration ban costing $600 million is disingenuous.
“The argument that development of a competitive cable equipment market will result in a higher price for consumers is completely antithetical to the commonly accepted principles of economics,” he said.
The integration ban comes at a time when the cable industry has plenty of other fish to fry. Subscriber numbers have dropped in the past few years under pressure from satellite TV, from over 70 million to 65 million today. That market pressure is only expected to increase as Verizon and AT&T roll out their own television offerings.
For years, the cable industry’s competitive strategy has involved incentives like video-on-demand, pay per view, interactive program guides and the like. Such features are not achievable without two-way technology, so it behooved the cable industry to delay the integration ban until a two-way agreement could be reached. However, since content copyright is a part of that equation, parties involved said negotiations are much more complicated than those resulting in plug-and-play.
As 707 approaches, the traditional course of events would indicate a lawsuit from the cable industry, but Dietz said he was not aware of one in the works. There are still several waiver requests from various cable providers pending with the FCC, which will be dealt with according to efforts under way at each of those concerns, an FCC spokesman said. For the most part, the integration ban is finally expected to become a reality July 1.
“We’ve been shipping separate security set-tops since May 1,” Clark said. “The boat has left the dock.”