FCC to Vote Thursday on Open Set-Top Box Ruling

The Federal Communications Commission is set to vote this Thursday on a rule that would require pay-TV operators in the United States to make their services available on third-party devices in addition to the set-top boxes (STBs) that they currently require subscribers to rent from them.  This week’s vote has more drama than usual because one of the five FCC commissioners may not vote with her party, which would defeat the proposed rule.

The ruling originated in an investigation of pay-TV industry practices by two Democratic senators.  The FCC is set up so that a majority of the commissioners come from the party currently occupying the White House, the Democrats in this case.  So under normal circumstances, the ruling would breeze through in at least a 3-2 vote. But this time, one Democratic commissioner — Jessica Rosenworcel, a respected FCC veteran — is on the fence.

This ruling is intended to force cable, satellite, and telco TV providers to stop making subscribers pay them an average of $231 per year in fees for STB rental, and instead offer them a choice of receiving devices.  (Some have disputed the $231 figure.  I pay a little over $150 to Time Warner Cable in NYC.)  In its original form, the ruling would have required pay-TV operators to create open interfaces to their services so that any device or app maker could access them.

In addition to pay-TV operators, this ruling has big implications for two industry factions: the tech industry, which makes Internet STBs that could be adapted for use with any pay-TV operator’s service; and the media industry, whose programming would then be able to flow to any such device.

The pay-TV and media industries fought hard against the original version of the proposed FCC ruling, depicting it as a giveaway to Big Tech that would enable companies like Apple, Roku, Google, and Amazon to not only “provide” studio and network content without paying for it but also to earn revenue by inserting advertising into it.  Pay-TV providers’ particular objections to the ruling were fairly obvious: it would put a major chunk of revenue for them — $14 to $22 billion annually, depending on whose fee figures you believe — in jeopardy.

The objections of the media industry were a little more subtle.  The way things work today, pay-TV operators negotiate licenses to content from major movie studios and television networks for different devices under different conditions, such as release windows, resolutions, device hardware requirements, DRMs, and so on.  The process used to be straightforward, but the availability of Internet video services and the constant proliferation of possible playback devices have made it quite complicated.  Yet the larger pay-TV operators continue to engage in this Byzantine process, because competition from over-the-top (OTT or pure Internet) services like Netflix, Amazon Prime, and SlingTV have forced them to make their content available through as many devices as possible.

The result is a marketplace in which the larger pay-TV operators can generally get the content they want from Hollywood as long as they make deals with each of the studios and networks.  Despite the complexities, it’s an arrangement that both the studios and operators are comfortable with: The operators can compete (to some extent) with the Netflixes of the world while (again, to some extent) shutting out smaller operators that don’t have the legal or technical resources to do all those deals and build all those apps.  Meanwhile, the studios get the flexibility to license their content to the operators they like under the conditions they want.

Under the first version of the FCC’s proposal, these contractual relationships between studios and operators would have been subverted.  In effect, the rules would have forced studios and networks to license their content to an operator for use on any device that could talk to the APIs that the rules would cause to be defined.  To use the legalese term, the rules would have created a compulsory license, like the one that exists for licensing broadcast television content to cable TV or the one for music on broadcast radio.

The studios had several problems with this.  Most generally, they want to preserve flexibility to license their content into whatever networks and devices they want under whatever conditions they want.  Studios routinely offer more liberal terms (e.g., earlier release windows, higher resolutions, permission to DVR, looser DRM) or stricter terms (later windows, lower resolutions, no DVR permission, stronger DRM) to service providers when it makes business sense to do so.  For example, a studio might help a new service provider get to market more quickly by offering less onerous technical requirements on a temporary basis, because it wants that new player to inject competition into a segment of the market where there isn’t enough competition.

For a more specific example, here’s a deep dive into the guts of DRM requirements, which are included in content license agreements. As DRM geeks know, the security strength of a content protection scheme depends not just on the specification and core code but also on the robustness of the implementation.  This is specified in separate “robustness rules” that are part of technology license agreements from DRM vendors like Microsoft and Google Widevine, or it is guaranteed contractually by the conditional access technology vendors (such as Irdeto, Nagra, and Cisco) that pay-TV operators trust to protect their own services.

Today, if a pay-TV operator implements an Internet video service, the content licensor has leverage to enforce robustness in the operator’s DRM implementations: if it finds a lack of robustness (through an audit or a hack), it can revoke the license or invoke other penalties.  But under the FCC’s proposed first set of rules, the operator — not the content owner — would assume responsibility for ensuring DRM robustness.  For the studios, that’s not good enough.  They want direct contractual relationships with the developers of those devices or apps.

The media industry objected to the first set of rules, and the Copyright Office delivered a lengthy opinion stating that the proposed rules ran contrary to copyright law precisely because they interfered with a copyright owner’s exclusive rights to license content as it wishes.

The cable industry responded with a proposal that, instead of opening up their signals to all comers through APIs, would require operators to implement their own apps on a wide range of device platforms.  (Smaller operators would be exempt from this requirement, while midsize operators would get more time to comply than large operators.)  Apps would be required to be developed in HTML5, which is easy to use because of its portability across many platforms, but its functionality is limited on some platforms compared with native apps. Apps would also not include DVR functionality; subscribers would need to use operators’ STBs to get that.

This proposal would eliminate the potential “free ride” that third parties would get on media companies’ content, and it would ensure that operators retain control over the user experience and the way the content is presented. Yet Hollywood didn’t like this plan either, because it still provides for mandatory licenses for content on a wide range of devices, and therefore still interferes with a copyright holder’s right to license as it sees fit.

The proposed rule that goes up for a vote on Thursday resembles the cable industry’s proposal, but it includes a requirement that the apps include DVR functionality, and it allows operators not to use HTML5 for app development if not practical or impossible to do so on the platform in question.

The latest FCC proposal requires operators to provide subscribers with free apps on “widely deployed platforms, such as Roku, Apple iOS, Windows and Android.”  The FCC hasn’t offered a definition of “widely deployed,” but presumably it’s based on the size of the platform’s installed base.  This means that if a company wants to market a new device that works with major pay-TV operators, it can use a “widely deployed” operating platform, such as Android. But if it wants to introduce a new operating platform (say, if Samsung wants to introduce new mobile OS, as it has tried to do), it faces a “chicken and egg” issue: the platform would only get to be “widely deployed” by being usable with content that isn’t available through the major pay-TV providers — such as YouTube, Periscope, Vine, and so on.

Aside from that, let’s look at the effects that this proposed ruling would have.  It would help make up for the appalling lack of competition for video and broadband Internet services in the United States by forcing operators to compete with third parties on reception devices.  They’d have to offer STBs that are cheaper and easier to use, and they’d have to get creative in thinking of new ways to add value to their devices compared to the Rokus, Apple TVs, and Amazon Fire TVs of the world, not to mention Smart TVs, iPads, Google Chromecasts, etc.  (Better end-to-end tech support would be a good starting point.)

The ruling would also limit Hollywood studios’ flexibility in negotiating deals with operators for individual platforms and features.  That’s why the MPAA still objects to the latest version of the ruling, saying that “it still amounts to a compulsory copyright license that the FCC does not have authority to grant” and pointing to the Copyright Office’s analysis.

But apart from that, this latest proposed ruling doesn’t appear to change much. It would mainly accelerate a process that’s been in the works for years.  Major operators are already falling over one another trying to introduce more apps with more content that run on more devices as quickly as possible, in order to compete more effectively with the Netflixes and Amazon Primes of the world and stem the tide of cord-cutting.

Comcast, the country’s largest pay-TV operator, still objects to the latest version of the proposal, though seemingly more on the general principle that government-imposed technology mandates interfere with business and have a poor track record of success — an opinion shared by the FCC’s two Republican Commissioners.  Yet some top executives at major operators may find that forcing this process is not a bad thing.  It would help them overcome the entrenched fiefdoms that want to protect legacy revenue from traditional STBs by limiting over-the-top functionality, and it would make the lives of their content deal-makers easier. And it’s a good thing for OTT platform providers like MLBAM and NeuLion, which will get a deluge of business, particularly from midsize operators racing to comply with the ruling if and when it goes into effect.

Finally, the proposed rules would fulfill the basic premise of the original legislation by bringing consumers more choice for access to pay-TV services, possibly at lower prices (if operators don’t raise their subscription fees to make up for the lack of STB rental revenue).  They would stop short of introducing real competition into broadband services for most Americans, but it’s still progress.



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