Cable Companies under Regulatory Siege?

FCC_New_LogoEarlier this year Michael Powell (the head of the National Cable Television Association) complained that the FCC has launched a regulatory assault again cable companies – and in some ways he is probably right. Some of the regulations ordered or contemplated are clearly aimed at cable companies – yet much of the new regulation was aimed at somebody else but still affects the cable companies.

Consider all of the changes affecting the cable companies right now:

  • Net neutrality has meant that cable companies and other ISPs can’t make lucrative deals with content providers to bundle content as part of broadband access.
  • But the biggest change from the net neutrality order is the advent of Title II regulation of the internet. This is resulting in a raft of new regulations for broadband. All of a sudden the FCC is looking at data caps. The agency has demanded that all ISPs disclose all of the details of their broadband connections to customers. Cable companies are suddenly covered by customer privacy regulations – the biggest being that they probably can’t use the information they gather as an ISP without a customer’s approval.
  • The cable companies have become huge sellers of broadband transport and data pipes to businesses. The FCC is about to make major changes in the special access market and that is likely going to lower prices for these products. Special access rates are incredibly high and cable companies and CLECs have made a living out of selling services to businesses at a discount from the published special access rates. The result is that businesses pay a gigantic premium for dedicated broadband connections, and everybody expects the FCC to lower rates across the market.
  • The FCC’s move to somehow eliminate settop boxes is aimed right at the cable companies. To a large extent the industry brought this on themselves as they’ve raised rates to rent a settop box from $5 to $10 or more in most markets. But the idea that there can be some sort of generic solution that can work on every type of network sounds idealistic, at best.
  • The FCC seems to want to allow anybody to carry video content on the Internet without saddling the new providers with the same rules that govern cable companies. So cable companies, for now, are stuck with rules that force them to offer certain kinds of tiers of service while OTT providers can cook up any creative package they can cobble together.

As a telecom guy I find this all to be somewhat ironic. I remember when I first read through the Telecommunications Act of 1996 that my first reaction was that the FCC had let the cable companies completely off the hook. The big telcos were being forced to unbundle their networks to offer voice loops and DSL connections while the cable companies had no corresponding obligation to unbundle for cable modem connections. In the decade following the Act, most state Commissions also excused cable companies from most forms of voice regulation. The cable companies were able to somehow characterize the voice on their networks as VoIP and got out of most voice regulations – but from a customer perspective the cable voice product was indistinguishable from telco voice products. It’s one of the first times that the FCC made an exception for a product based upon the technology used to deliver it – a trend that has since led to some very odd regulatory rulings.

So now it seems that the wheel has turned and the cable companies are being brought back into the regulatory arena with everybody else. I think Powell is right and those in charge of a cable company must feel like they are under regulatory siege. But except for the settop box issue, which is an odd set of regulations clearly aimed at the cable companies – the other regulations can mostly be described as leveling the playing field – something that the cable companies have always said should apply to municipal broadband providers.

But from a regulatory perspective the protections provided to consumers ought to be the same across all broadband technologies. It makes a lot of sense to finally require cable companies to provide privacy protection and to disclose the details and terms of the products they are selling. I have to laugh once in a while about regulation. Five years ago a colleague of mine said he could foresee the end of telecom regulation. But I countered by saying that regulators like to regulate, and sure enough it seems like we have as many – or more! –  regulations today as ever.

New Settop Box Rules

roku-3-2Chairman Tom Wheeler proposed new settop box rules last week for the eight largest cable companies. The proposal reverses much of the Chairman’s last settop box proposal that would have required each cable company to find a way to support a common cable box that customers could buy.

The large cable companies lobbied hard that the first proposal added a lot of costs without much public benefit (and they were right). The new proposal is based partially on recommendations made by the large cable companies.

The core of the new proposal is that the large cable companies will have to offer free apps that would allow customers to receive their cable signal on a variety of devices such as a Roku box, a smart-TV or a SONY Playstation.  Any customer electing to use the app could return their settop boxes and avoid the expensive fees (which have grown to as high as $10 per box).

I’m guessing that the cable companies will make the app option pretty vanilla and it will provide a channel line-up as well as a way to easily tune between channels. The big question will be if the cable companies will give away their more advanced features for free as part of the apps. For example, today many of these companies have cloud-DVR and other advanced services and we’ll have to see if the companies will make customers lease a settop box to get these additional features.

And as I wrote in an article last week, a few of the biggest cable companies like Comcast have put a lot of development into new features for their latest settop boxes. Having a free app alternative might nudge the cable companies to lower settop box prices compared to today to entice people to instead use the box.

The proposed new rules also have a requirement that the cable companies must include other sources of programming in their search guide. For example, if a customer is looking for a movie not available at the cable company, the search might show that the movie is instead available at Hulu or Netflix. Comcast is already doing this today on a limited basis by bringing Netflix into their line-up as another ‘channel’.

This is a very odd requirement that would seem to favor OTT providers the most. It will be curious to see how customers like idea of constantly being offered programming to which they may not be subscribed. I can foresee one consequence of this move in that it might prompt cable companies and OTT providers to work together to create an ‘on-demand’ product for OTT content. That could benefit both companies.

The FCC will be establishing some kind of clearing house for the apps. They learned a lesson with the cable card order many years ago that if the cable companies are left to their own they will make it hard for customers to find the new alternative. The FCC wants to approve apps and somehow bless them, in a process that would need to be worked out.

These new requirements will not apply to smaller cable providers – which is good since it’s hard to imagine them having to do the work needed to create apps for a wide variety of ever-changing devices. But that doesn’t mean that there won’t be consequences for smaller companies.

If it turns out that customers love the free apps there will be pressure on smaller companies to somehow do the same thing. And perhaps these app, once developed will be made available to the smaller cable providers. But it’s likely that the apps are going to be written for two platforms – standard HFC cable networks and satellite TV. That means that there will probably be nobody writing similar apps for fiber or DSL-based cable systems.

One would also think over time that, if successful, these new rules will lower the demand for settop boxes. Over time that might drive up the cost of settop boxes for everybody else. However, to some extent we are already on that path since the biggest cable companies like Comcast and DirecTV have already migrated to custom settop boxes and don’t buy from the normal industry vendors.

The Shift To Proprietary Hardware

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There is a trend in the industry that is not good for smaller carriers. More and more I see the big companies designing proprietary hardware just for themselves. While that is undoubtably good for the big companies, and I am sure that it saves them a lot of money, it is not good for anybody else.

I first started noticing this a few years ago with settop boxes. It used to be that Comcast and the other large cable companies used the same settop boxes as everybody else. And their buying power is so huge that it drove down the cost of the settop boxes for everybody in the industry. It was standard for large companies to put their own name tag on the front of the boxes, but for the most part they were the same boxes that everybody else could buy, from the same handful of manufacturers.

But then I started seeing news releases and stories indicating that the largest cable companies had developed proprietary settop boxes of their own. One driver for this change is that the carriers are choosing different ways to bring broadband to the settop box. Another change is that the big companies are adding different features, and are modifying the hardware to go along with custom software. Cable companies are even experimenting with very non-traditional settop box platforms like Roku or the various game consoles.

I see this same thing going on all over the industry. The cable modems and customer gateways that the large cable companies and the large telcos use are proprietary and designed just for them. I recently learned that the WiFi units that Comcast and other large cable companies are deploying outdoors are proprietary to them. Google has designed its own fiber-the-the-premise equipment. And many companies including Amazon, Facebook, Google, Microsoft, and others are designing their own proprietary routers to use in their cloud data centers.

In all of these cases (and many other that I haven’t listed here), the big companies used to buy off-the-shelf equipment. They might have had a slightly different version of some of the hardware, but not different enough that it made a difference to the manufacturers. Telco has always been an industry where only a handful of companies make any given kind of electronics. Generally, smaller companies bought from whichever vendors the big companies chose, since those vendors had the economy of scale.

But now the big carriers are not only using proprietary hardware, but a lot of them are getting it manufactured for themselves directly, without one of the big vendors in the middle. You can’t blame a large company for this; I am sure they save a lot of money by cutting Alcatel/Lucent, Cisco, and Motorola out of the supply chain. But this tendency is putting a hurt on these traditional vendors and making it harder for vendors to survive.

It’s going to get worse. Currently there is a huge push in many parts of the telecom business to use software-defined networking (SDN) to simplify field hardware and control everything from the cloud. Since the large carriers will shift to SDN networks long before smaller carriers, the big companies will be using very different gear at the edges of the network – and those are the parts of the network that cost the most.

This is a problem for smaller carriers since they often no longer benefit from being able to buy the same devices that the large companies buy to take advantage of their huge economy of scale. Over time this is going to mean the prices for the basic components smaller carriers buy are going to go up. And in the worst case there might not be any vendor that can make a business case for manufacturing a given component for the small carriers. One of the advantages of having healthy large manufacturers in the industry was that they could take a loss on some product lines as long as the whole suite of products they sold made a good profit. That will probably no longer be the case.

I hate to think about where this trend is going to take the industry in five to ten years, and I add it to the list of things that small carriers need to worry about.