Why You Should Tune In To The STB Debate

“Don’t touch that dial.” It’s a phrase I remember well from my days of watching Saturday morning cartoons. Like that morning block of cartoons itself, the phrase is an anachronism. Few, if any millennials have ever seen a TV with a dial tuner. In fact, it’s rare to even see one on a radio now.

When I took my first job in a cable system, the “corded remote” was a revelation. For an extra $2 a month, subscribers could have a two-piece slide tuner cable box connected by a long cord. You put the channel selector portion next to the couch and hoped you didn’t trip over the cord or get it caught in the vacuum cleaner.

Corded remote boxes were soon replaced by boxes with wireless remotes. Each technological advancement required a matching change in marketing and navigation. Wireless remotes ushered in an era of interactive guides and one-touch ordering for pay-per-view events — “Click OK to order now.”

As it has in the past, the FCC is again wading into the murky waters of television program navigation. The latest proposed rulemaking is intended to “open up” the set top box.

More At Stake Than Set Top Boxes

There’s already a considerable amount of disruption impacting broadcast television. Included in this is an auction intended to repurpose the spectrum for what used to be known as the VHF and UHF channels on a TV dial.

However, stations need to find some metaphorical bandwidth to dedicate to the set-top box (STB) debate. Regulatory changes, coupled with innovations like voice-activated navigation, have significant potential to further disrupt television’s current business model.

Meredith Senter, a member of the Lerman Senter law firm and former MFM board member, raises this concern in a July/August article for our member magazine, The Financial Manager. In “TV’s Set-Top Battle Royale,” Senter points out that the battle is about more than opening up set top boxes.

In fact, the initial FCC proposal contemplated changes that could “force MVPDs to make their programming services available for free to potential competitors, changing how consumers access TV programs and the economies of the TV station and network business.”

Just yesterday, FCC Chairman Tom Wheeler issued a “simplified consumer-first, app-driven” proposal that he believes will address the copyright concerns of MVPDs and programmers. The agency is scheduled to vote on the proposed rules later this month.

Some Historical Context

On the surface, the mandate to open up STBs may seem like a non-issue. TV Everywhere initiatives supported by both TV networks and cable industry already allow subscribers to access licensed video content on a wide range of devices without the need for a set top. It takes some historical context to understand why the FCC is involved in this battle in the first place.

As Senter explains, the FCC was directed to eliminate the MVPDs’ “monopoly” on set top boxes as part of the 1996 Telecom Act. At the time, consumer electronics (CE) manufacturers argued they were being excluded from the pay TV equipment market as a result of the proprietary security systems used by STB makers. If you were one of the people who purchased a “cable ready” TV set in the late 1980s only to discover you would still need to lease a cable box, you were there for the first skirmishes in the battle.

The FCC’s solution, which was agreed upon by both the CE and MVPD industry groups, was to equip TV sets with a slot for CableCARDs, a removable PC card that could be activated for use by cable subscribers. For a variety of reasons, including consumer demand for DVR and VOD capability, the “Retail CableCARD-Ready Devices” solution never achieved its goal. According to the FCC’s latest video competition report, released this past spring, 99% of MVPD customers are still leasing STBs.

Today’s Battle Royale

Meanwhile, armies for several additional lobbying groups have entered the STB fray. As Senter observes: “On one side are Amazon, Google and the Obama administration. On the other side are the cable, telco and satellite distributors, allied with their traditional adversaries, broadcast and cable networks as well as TV stations.”

Anyone who has purchased a smart TV or a device like Apple TV or Chromecast can understand why online powerhouses like Amazon and Google are proponents of the proposed rulemaking.

Senter notes that the FCC’s plan would allow consumers to access programming distributed by MVPDs as well as through OTT services like Netflix and Amazon using the same device or software app. The potential is there for a provider of a competitive navigation device to replace an MVPD’s menu with its own.

The situation reminds me of the “walled garden” debate that accompanied consumer access to the World Wide Web back in the late 1990s. At issue was whether consumers would be satisfied staying within the walls of a content provider like AOL or Yahoo when they could use browsers like Mosaic and Netscape for finding content that matched their personal interests. As the saying goes, the rest is history.

A Return Of The ‘Walled Garden’

We could be seeing the next chapter in that history. In voicing her support for the rulemaking, FCC Commissioner Mignon Clyburn, who spoke at MFM’s Media Finance Focus 2016 conference in May, said she envisioned an open STB solution that would allow viewers to find video content “similar to the way that internet searches provide consumers with information from various sources.”

Don’t hold your breath for a 2.0 version of WebTV. MFM conference keynoter and longtime cable industry publisher Paul Maxwell warns that the walled garden model has returned. But this time around, it is with “dozens of walled gardens and the nascent explosion of apps for video.”

If you think it’s difficult securing retransmission agreements with an MVPD, imagine what securing real estate for your station’s app on dozens of OTT platforms will be like, especially if retrans rules aren’t extended to these online MVPDs.

New Approaches to Navigation

Even if the new STB rules ensure copyright protection and the retrans rules are extended, Meredith Senter believes that “TV stations and networks still have reason for concern.” As he goes on to explain: “They have invested heavily in creating branded program lineups that are presented linearly in MVPD program guides. The distributors typically organize channels in different groupings. TV stations occupy one ‘neighborhood;’ popular mass-appeal cable networks occupy another close by.”

The navigation landscape is already beginning to erode. Senter gives the example of using a voice command to ask for a desired TV program, say Modern Family, by name. “In addition to seeing the show will air at 9 p.m. on cable ch. 507 (occupied by an ABC affiliate), I would also see that it is also available on demand from Hulu, and the series’ first season is available for rent on Amazon Prime. I wouldn’t see the other shows on ABC’s schedule running before and after Modern Family. Google or Amazon might include sponsored links to other programs.”

Stay Tuned

As I mentioned in a recent column, these uncertainties are among the reasons experts like Preston Padden believe the industry would be better off using a pure copyright negotiation approach toward any distribution agreements. Fortunately, most market forecasts anticipate MVPDs will continue to serve a majority of TV households.

Among the few things moving toward greater certainty is FCC Chairman Wheeler’s plan to finalize the STB rulemaking before the end of this year (and of the Obama administration). While that could be good news for parties looking to gain a greater foothold in the pay TV market, it will come with consequences for TV stations and other content providers whose relationships with MVPDs are fundamental to their business models.

That’s why MFM’s TV Committee continues to follow developments like those around the FCC’s proposed set top box rulemaking. The committee is also active in recommending educational programs to help groups anticipate and respond to these dramatic changes in the TV business landscape. I encourage you to let us know how we can help you prepare for what lies ahead. And, please “stay tuned” to our website for updates.

Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary. She can be reached at [email protected]. Her column appears in TVNewsCheck every other week. You can read her earlier columns here.