FCC Requires Retail Sale of Set Top Boxes

(June 12, 1998)  The Federal Communications Commission Thursday announced new rules allowing retail sales of set top boxes.  Cable companies now have a monopoly on these hardware devices, which usually sit on top of TVs and act as an interface between the TV and the cable company.  The decision was expected.

Today, most set top boxes are simple devices which connect a cable TV analog signal to an input signal to a TV set.  However, with the development of the Internet, and the impending convergence of TV, telephone, and computer technologies, set top boxes are likely to operate as the connection between an individual at home and the outside world.   These hardware devices will likely enable people to use their "TVs" for video channels, video on demand, email, web access, online shopping, phone calls, database access, data upload, and other functions.

Presently, monopoly cable companies require that their customers rent set top boxes from them, usually for about $2 to $4 per month.  The FCC rules will end this monopoly on set top boxes.  Consumers will be able, starting in July 1,2000, to purchase their set top boxes in retail stores.

Cable companies have an interest in security features to protect their networks from hackers and pirates.  Under the new rules, security devices will not be built into set top boxes, but rather will be contained in an electronic card, which would be owned and controlled by the cable company.  People who buy their set top boxes from retail stores would obtain a security card from a cable company.  The card would be inserted into a slot or port on the set top box.

The FCC adopted the new rules to carry out Section 629 of the Telecommunications Act of 1996.

The section 629 and the new FCC rules are broad in that they cover all multichannel video programming distributors (MVPDs).  Included are not only cable operators, but also multichannel broadcast television, direct broadcast satellite (DBS), multichannel multipoint distribution service (MMDS), and satellite master antenna television (SMATV).

Furthermore, section 629 and the new rules apply not only to cable set top boxes, but also to any televisions, VCRs,  personal computers, program guide equipment, cable modems, or other equipment used to access "other services offered over multichannel video programming systems."

The ruling will allow electronics companies and computer makers to enter the set top box market.  Meanwhile, software companies are competing to develop operating systems and other software for future versions of these devices.

Commissioner Michael Powell dissented from the decision.

FCC Press Release.
Re: Set Top Box Competition Rules, Report No. 98-11, CS Docket 97-80.
Date: June 11, 1998.
Source: FCC.

COMMISSION ADOPTS "NAVIGATION DEVICES" RULES CREATING CONSUMER MARKET FOR SET TOP BOXES AND OTHER EQUIPMENT USED WITH VIDEO PROGRAMMING SYSTEMS
(CS DOCKET 97-80)

The Commission has adopted rules providing for the commercial availability of set top boxes and other consumer equipment used to receive video signals and other services. In the Telecommunications Act of 1996, Congress directed the Commission to create rules that would allow consumers to obtain "navigation devices" -- meaning the set top boxes, remote control units and other equipment -- from commercial sources other than the service provider. This order will benefit consumers and further the Commission's goal of providing competition in the telecommunications marketplace by creating a major market for consumers to own equipment used to access video programming and other services in their homes.

Multichannel video programming distributors must separate out security functions from non-security functions by July 1, 2000. An exception is made for navigation devices that operate throughout the continental United States and are commercially available from unaffiliated sources, which includes direct broadcast satellite ("DBS") providers. The selection of this date is premised on the representations of the various interests involved that they will agree on relevant specifications, interfaces, and standards in a timely fashion, thus permitting the manufacture and sale of navigation devices by unaffiliated sources. For the time being, multichannel video programming distributors may continue to offer devices that have security and non-security functions integrated. The Commission believes that 2005 provides a sufficient period of time for a reasonable transition and therefore it is establishing a prohibition on the sale or lease of new integrated boxes as of January 1, 2005. In the year 2000, once separate security modules are available, the Commission will assess the state of the market to determine whether that timeframe is appropriate.

Section 629 of the Communications Act, as amended by the Telecommunications Act of 1996 instructs the Commission to "adopt regulations to assure the commercial availability, to consumers . . . of . . . equipment used . . . to access multichannel video programming and other services offered over multichannel video programming systems, from manufacturers, retailers, and other vendors not affiliated with any multichannel video programming distributor." Additionally, Section 629 states that Commission rules "shall not prescribe regulations . . . which would jeopardize security of . . . services offered over multichannel video programming systems, or impede the legal rights of a provider of such services to prevent theft of service."

Summary of key elements of the order:

• Section 629 is broad in terms of the multichannel video programming distributors ("MVPDs") involved. The MVPDs covered include cable television, multichannel broadcast television, direct broadcast satellite ("DBS"), multichannel multipoint distribution service ("MMDS"), and satellite master antenna television ("SMATV"). The Commission determined that open video system operators are not covered as a consequence of the specific open video system provisions of the Communications Act which exclude open video system operators from certain regulations applicable to cable operators.
• Section 629 covers not just equipment used to receive video programming, but also equipment used to access "other services offered over multichannel video programming systems." Such equipment includes televisions, VCRs, cable set-top boxes, personal computers, program guide equipment, and cable modems. The focus of Section 629, however, is on cable television set-top boxes and cable modems, devices that have historically been available only on a lease basis from the service provider.
• Subscribers have the right to attach any compatible navigation device to a multichannel video programming system. We conclude that the core requirement, to make possible the commercial availability of equipment to MVPD subscribers, is similar to the Carterfone principle adopted by the Commission in the telephone environment. The Carterfone "right to attach" principle is that devices that do not adversely affect the network may be attached to the network. The order also notes that commercial availability is furthered only if consumers are aware of the availability of equipment from alternative sources.
• Service providers are prohibited from taking actions that would prevent navigation devices that do not perform conditional access functions from being made available from retailers, manufacturers, or other unaffiliated vendors.
• Cable operators and other MVPDs can take the necessary steps to guarantee the security of their systems and their programming. The order follows the provisions in the Communications Act that prohibit the manufacture, sale and distribution of equipment designed to allow for the unauthorized reception of service.
• Service providers must provide, upon request, technical information concerning interface parameters that are needed to permit navigation devices to operate with multichannel video programming systems.
• Existing equipment rate rules applicable to cable systems not facing effective competition fulfill the statute's requirement prohibiting subsidies.
• The order adopts rules implementing the statute's waiver and sunset provisions.

The Commission believes that the steps taken in this Report and Order, if implemented promptly and in good faith, will result in a broad expansion of the market for navigation devices so that they become commercially available through retail outlets. This will create incentive for innovation, choice and better prices. The Commission will monitor developments with respect to the availability of information to consumers, retailers, and manufacturers necessary to the functioning of a commercial retail market for navigation equipment, as well as developments relating to standard means of attaching and using equipment with the networks of service providers. The Commission also will monitor developments with respect to the compatibility of set-top boxes and digital televisions, and the availability of program guides. The Commission also is requiring the filing of reports at six month intervals to ensure that the CableLabs OpenCable process, a private effort by several cable companies, is progressing towards the requirement of separation of security by July 1, 2000.

Action by the Commission June 11, 1998, by Report and Order (FCC 98-116). Chairman Kennard, Commissioners Ness, Furchtgott-Roth and Tristani with Commissioner Powell dissenting and Commissioners Ness and Powell issuing statements.

Statement of FCC Commissioner Susan Ness.
Re: Set Top Box Competition Rules, Report No. 98-11, CS Docket 97-80.
Date: June 11, 1998.
Source: FCC.

June 11, 1998

Separate Statement of Commissioner Susan Ness

Re: Commercial Availability of Navigation Devices

Today we implement Section 629, one of the most pro-consumer, pro-competitive provisions of the Telecom Act. I believe development of a retail market for the devices covered by the provision may significantly improve the competitiveness and accessibility of broadband networks.

The "set-top device" that traditionally has consisted of a cable decoder and tuner is rapidly becoming a network computer with far greater capability and flexibility. Section 629 is far-sighted and requires the Commission to ensure that a range of consumer equipment -- including new types of set-top devices -- will be available in retail stores and through distributors other than program service providers. The legislative history makes clear that the Congress recognized consumer benefits that flowed from deregulation of telephone customer premises equipment (CPE) and enacted this provision to achieve the same ends with devices that connect to cable systems and other multichannel video programming services.

I support the item fully. I write separately to underscore some of the practical concerns that may affect the degree to which a robust market for devices covered by the statute will develop, and to caution that we may need to take further action if retail markets do not begin to emerge as envisioned by the statute.

No one disputes that separation of the security element from these devices is the centerpiece of effective implementation of Section 629. I am sensitive to the need for cable operators and other multichannel video program distributors to ensure that only authorized users have access to their services. The commenters have fully discussed whether security can be maintained if the security element is separate, and we have determined that it can be.

The second issue regarding security is the time frame in which new modular security "Point of Deployment" elements ("PODs") will be available. We are requiring cable operators to meet a July 1, 2000 deadline for POD availability. To some, this date may seem unduly far off, but we believe it is as aggressive as we can reasonably make it, bearing in mind that the POD development process is in its very early stages. We have also targeted 2005 to phase out distribution of any device that contains embedded security, while scheduling an assessment of that target when PODs become available.

We have, in other contexts, provided a phase out of equipment. For example, in the spectrum refarming decision (Report and Order and Further Notice of Proposed Rulemaking, 10 FCC Rcd 10076 (1995)), in order to make a more efficient use of the spectrum, we ruled that only equipment operating with new specifications would be permitted after a transition period. And again, when the Part 15 regulations were changed in 1989 ( First Report and Order, 4 FCC Rcd 3493, corrected, 4 FCC Rcd 5404 (1989)), we adopted several transitional rules for various types of equipment, to provide clear guidance to manufacturers and users of the eventual changeover to new equipment. This is also the standard practice in Part 68 rule changes.

Let me be clear. The phase-out of integrated devices does not mean that cable operators will be unable to lease or sell devices to their subscribers. As the statute provides, they may continue to make available such devices -- but those devices simply will have PODs in lieu of integrated security. Cable operators will be full and fair competitors in the new marketplace for set-top devices.

I believe we should also consider whether and to what extent these devices will work with new DTV receivers. I have been closely following the announcements by certain cable operators that they had placed orders for devices that would pass through only certain of the ATSC formats. I have also become concerned about the delay in the adoption of an industry-generated standard for the IEEE 1394 "firewire" which will connect DTV receivers to an array of digital peripheral devices. Development of the retail market for set-top devices would be bolstered by consumer confidence that there are available a variety of devices capable of decoding the ATSC formats compatible with their TVs and more fundamentally, that consumers are confident that the digital devices they buy will connect and distribute digital information between them. The record on this issue, however, is not fully developed in this proceeding, so we have stopped short of requiring compatibility.

It may not be sufficient to rely on the open-ended time frame for adoption of the 1394 "firewire" standard and it may not be sufficient to hope that the devices will work with all ATSC formats. If it becomes apparent that the goals of Section 629 are not being fulfilled because of consumer confusion over DTV compatibility, I would hope and expect the Commission would revisit the matter.

Achieving the goals of Section 629 will mean that consumers will have more choices and more reasonable prices. Unbundling of our telephone networks has reaped benefits for consumers. Entrepreneurs with new ideas and new products have found a way to enter and bring these products to market.

Standards for navigation devices have been developed or are being developed in the marketplace. The industries involved have assured us they are committed to making sure that navigation devices will be available for consumers at retail from unaffiliated manufacturers, retailers and other vendors. We have decided to fashion our rules so as to allow the industries to continue their work. We are giving the market the opportunity to fulfill the goals of Section 629 with minimal government regulation.

However, we fully intend to monitor the market. We fully intend to monitor the status reports provided by the industries. If the goals of the statute are not being realized -- if navigation devices are not commercially available -- I expect the Commission to revisit our rules and make the appropriate changes.

This item is based on trust. We are trusting the cable industry to move ahead on POD availability according to the schedule they have provided. We are trusting that retailers will provide sufficient information to consumers about new choices as they become available and that consumers will not face obstacles in the process of selecting new devices to work with their multichannel video programming services. We are trusting that open cable standards will be suitable or adaptable to the needs of other digital service providers outside of the cable arena. Most of all, we are trusting that the industries will all continue to work expeditiously and effectively to adopt voluntary standards to ensure that all of the devices contemplated by the statute will work together. Given the steps we have taken today, I am confident that our trust is well placed and I look forward to the opening of new markets and the introduction of new products and services, for the benefit of consumers.