January 17, 2017

I Tell the FCC to End In-Home Video Encryption

In my last post, I asked “Who Killed the Open Set-Top-Box?.” There were some great comments on that post, which inspired me to write up my thoughts and send them to the FCC. The FCC has long tried and failed to mandate that cable companies make their systems more interoperable with third-party consumer devices. Nevertheless, the Commission recently opened a proceeding (11-169) to consider whether to end the “encryption ban” that had preserved the ability of third-party devices to receive basic-tier television signals. Boxee initially protested because its users often rely on these unencrypted signals, but eventually relented when Comcast promised to deliver a Digital Transport Adapter (DTA) workaround that would involve, “the creation of a licensing path for integrating DTA technology into third-party devices.” This push to impose licensing regimes on third-party devices is the latest in a series of such pushes stretching back to the mid-1990’s. I just filed a comment arguing that if the FCC wants to get rid of the encryption ban on basic cable, it should simultaneously think about doing away with problematic licensing and encryption schemes on the consumer-facing side of the set-top box. You can download the PDF from the FCC, or read the text after the jump.
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TV Everywhere: Collusion Anywhere?

FreePress and the National Cable and Telecom Association (NCTA) are talking past each other about TV Everywhere, a new initiative from the cable TV industry. FreePress says TV Everywhere is the cable industry’s collusive attempt to limit competition; the NCTA says it’s an exciting new product opportunity for consumers. Let’s unpack this issue and see who might have a point, and who is blowing smoke.

We’re at a critical point in the history of television. In recent years, most people have gotten TV shows from a traditional cable or satellite service. Now more and more people are getting shows on the Internet. Cable companies need to adapt, somehow, or become dinosaurs.

Which brings us to TV Everywhere. The idea, according to the NCTA, is for cable companies to offer their residential subscribers online access to the same shows they get at home. Existing consumers get more, at no extra charge — who would complain about that? — but only if they keep buying traditional cable service.

FreePress tells a different story, in which cable industry companies have agreed among themselves that this is their sole Internet distribution strategy. If such an agreement exists, it is problematic — it looks like a classic market division agreement, which is bad for consumers and (as I understand it) presumptively illegal.

To understand why this would be bad, consider an analogy. Suppose there are only two pizza restaurants in Princeton, Alice’s Pizza and Bob’s Pizza, and neither one offers home delivery. Customers want delivery, so both restaurants are considering how to provide it. Alice and Bob meet, and they agree that Alice’s will only deliver to customers east of Nassau Street, and Bob’s will only deliver to customers west of Nassau Street. Alice and Bob have divided the market. Customers suffer because of the lack of competition.

Now obviously Alice and Bob are free to set reasonable limits on where they will deliver. Some customers may be too far away, or too difficult to deliver to for some reason. But customers would rightly complain if Alice and Bob agreed to divide the market. Even if we didn’t have smoking-gun evidence of an agreement, there might be very strong circumstantial evidence, for example if Alice offered to deliver to places five miles away while refusing to deliver to homes directly across the street from her Nassau Street restaurant, or if Alice and Bob’s restaurants were right next to each other but had totally disjoint delivery areas.

Notice too that Alice and Bob can’t get off the hook by pointing out that they are offering a new service — delivery — that they had never offered before. The problem is not that they are offering a new service, but that they have agreed not to offer certain other services.

How does this analogy apply to cable TV? Alice and Bob are like the cable companies, which are considering expanding beyond their traditional service. Home delivery of pizza is like Internet delivery of TV shows. As the cable industry expands to offer TV shows on the Internet, are they open to competing against each other, or have they agreed not to do so? If the cable companies have made an agreement to offer online TV shows only to their own residential customers, that looks like an agreement to divide the market — each company will be offering its product only in the limited geographic areas where it has a cable TV license.

So the key question — really the only one that matters, as far as I can see — is whether the cable companies have agreed not to compete. FreePress says, or strongly implies, that there is such an agreement. NCTA says there is not.

Who is right? Unfortunately the publicly available facts are consistent with either theory. Maybe TV Everywhere is just the first step and the cable companies will soon enough be competing with each other to distribute shows to Internet customers wherever they may be. Or maybe the companies have decided as a group to restrict themselves to TV Everywhere style services within geographic limits (or to otherwise restrict business models or prices).

At this point we can’t tell who is right. FreePress offers indirect but suggestive circumstantial evidence that questionable discussions might have occurred within the cable industry. The NCTA mostly just changes the subject, talking about the complexity of their industry and praising cable companies for offering shows on the Internet at all.

Unfortunately, public discourse about industry structure often confuses issues like this. We often say things like “the cable industry is worried about X” or “the cable industry wants Y”. That could be a kind of shorthand, meaning that the individual companies in the industry, facing competitive pressures, generally tend to worry about X or to want Y — perfectly reasonable market behavior. Or it could reflect an assumption that the industry acts as a unit, which of course is problematic. This ambiguity is especially common in political/policy debates, to our detriment. We’d be better off talking saying things like “cable companies worry about X” or “cable companies want Y”, just to remind ourselves that these are supposed to be independent actors who decide independently what they want.

For now, I’d say the cable companies bear watching. As the companies lay out their Internet strategies and products, I hope the antitrust authorities are watching closely. If the cable companies are really acting as competing companies, this will be obvious from their actions.