Set-top shakeup is in the cards

New FCC-mandated system relocates cable TV security outside the cable box. Don't count on any real benefits.

A new Federal Communications Commission rule that requires cable operators to change the hardware in their set-top boxes has finally gone into effect, but few industry experts believe it will do much good for consumers or jump-start competition.

As of Sunday, cable operators must provide new TV subscribers with set-top boxes that have a slot for a special PC card known as a CableCard. This card contains decryption mechanisms that determine if a user is allowed to view the video content coming from the cable operator.

In the past this security, which provided conditional access, was integrated into set-top boxes that people leased from their cable operators. But now, due to the new FCC rule, that security mechanism will reside on a separate card that fits into a slot on the set-top box.

So how will consumers be affected? The truth is there is very little benefit to this switch for consumers, some industry experts say. Most people won't even notice if a CableCard has been inserted into their set-top box, because the card itself provides no additional features or functions. What's more, the rule applies only to new set-top boxes.

Some people argue that the change will actually cost consumers money, because cable operators have complained that the changes are costly and anticipate passing along the added expense to subscribers.

"There really aren't any benefits to consumers," said Mike Paxton, an analyst with In-Stat. "It might offer them more choice, but consumers seem happy with what they already have. And it could even raise prices, since the costs associated with the upgrade will likely be passed on to subscribers."

Long time coming
The July 1 deadline has been a long time coming. The Telecommunications Act of 1996 ordered the FCC to help electronics companies compete with devices that cable operators leased to subscribers. The market today is dominated by two major players: Motorola and Cisco Systems' Scientific Atlanta.

The idea was that increased competition would help lower prices and provide more functionality for consumers. But working out the specifications and technical details took a long time. In 2003, the cable industry finally agreed on a decoder, the CableCard. But for the past four years, the cable industry has lobbied the FCC to delay putting the rule into effect.

Some cable operators are still trying to get out of complying with the new requirement. Telephone company Verizon Communications, which offers a TV service through its Fios network, has applied for a waiver, arguing that its technology is new and different enough from the old cable system that it should be granted the waiver. The company is still waiting to hear from the FCC.

"We are optimistic that the FCC will grant our waiver," said David Fish, a spokesman for the company. "Verizon's Fios TV offering is exactly what Congress envisioned when it adopted the waiver provision: new competition to incumbent cable providers and a technologically advanced video offering and technology platform. Verizon's Fios network is transforming the broadband landscape."

"This will help make the set-top box truly portable so it can be installed on any cable operator's network in the country."
--Michael Fidler, CEO, Digeo

Consumer electronic makers have touted the enforcement of the CableCard rule as a breakthrough that could finally help them establish a consumer retail market for alternative set-box devices and other CableCard-enabled devices like TVs and PCs.

For example, a small company called Digeo is planning to release a set-top box in retail stores this fall that will provide an enhanced digital user guide, multi-room digital video recording for high-definition programs, and an integrated DVD player that will allow video streaming into multiple rooms.

The device also will connect directly to the Internet and provide programming from companies that offer content via the Web, such as Joost or Movielink. Digeo hasn't yet announced which providers it will work with, but it will have at least one Internet movie provider signed up when it launches the device this fall, said Michael Fidler, CEO of Digeo.

The company has been selling its products to smaller cable operators like Charter Communications. But it has had a harder time partnering with larger providers like Comcast and Time Warner, because the market is dominated by Motorola and Cisco's Scientific Atlanta.

Fidler said he sees the CableCard requirement as an opportunity for Digeo.

"The enforcement of this rule allows for a very small crack in the door that we can use to get our foot in the market," he said. "This will help make the set-top box truly portable so it can be installed on any cable operator's network in the country."

Fidler said he believes that the only way to drive innovation in the market is to encourage competition. Indeed, this has worked to some degree in the past. When TiVo came to market with its DVR (digital video recorder), which it sold through retail chains, and satellite companies started offering DVR services, cable operators quickly responded by adding DVR functionality to their own set-top boxes.

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