FCC Set-Top Box Proposal Based Upon Faulty Economic Foundation, Will Harm Consumers, Innovators And Golden Age Of Television, Warns CALinnovates

"Our analysis found that the FCC's proposal would result in higher bills, more advertisements, and less diversity and innovation on TV," said CALinnovates Executive Director Mike Montgomery. "It is apparent that with this set-top box proposal the FCC is missing the forest for the trees.  Specifically, the Commission obsesses over the size of one ancient, crumbling tree – missing the thriving vegetation sprouting around it."

In its filing, CALinnovates warns that the rulemaking is unnecessary given the breakneck speed of innovation in the marketplace. "Indeed, with change proceeding at such a rapid pace, one can only imagine how much the video consumption market will advance and reinvent itself before the FCC could even promulgate, much less implement, a final rule," added Montgomery.

CALinnovates' filing also included an in-depth analysis by Dr. Christian M. Dippon of NERA Economic Consulting. Dr. Dippon's economic analysis highlights the number of ways that the FCC's proposal will harm the entire video distribution ecosystem, including customers, suppliers, MVPDs, and content creators.

"If the FCC nevertheless implements its proposed regulations, there is no realistic promise of lower prices and increased innovation," writes Dr. Dippon. "To the contrary, any intervention in a competitive market stands to harm the market, its participants, and ultimately consumers."

Here are the highlights of the combined filing by CALinnovates and Dr. Dippon:

Reasons for Interfering in the Market Are Misguided. The FCC paints a portrait of the market for video content that bears little resemblance to reality. The FCC grossly understates the rising amount of competition in the video marketplace.  Contrary to the FCC's bleak depiction, many content providers have embraced applications to showcase their programming.  These providers include popular names such as ABC, Comedy Central, Disney, ESPN, MTV, Showtime, Sony, and TBS.  Content providers also license programming to OTT services, including Xbox Live, Hulu, Netflix, and Sling TV. Even traditional MVPDs are jumping into the app arena. Consumers can watch this content on an array of devices, including tablets, gaming systems, smart phones, computers, Roku, and smart TVs.

The FCC's Economic Foundation Is Faulty. The size of the current set-top box market as assumed by the FCC is incorrect. The agency is also mistaken in its belief that set-top boxes should have followed the same downward trend as other hardware and are currently overpriced. The alleged drop in other hardware prices since 1994 flows from a mistaken understanding of how the Bureau of Labor Statistics calculates changes in its CPI, and completely fails to account for the improvements in the quality of today's set-top boxes.

The Proposal Will Impede Innovation. The current market for video content creation represents a delicate balance of negotiated interests.  Content creators invest in high-quality programming because they can trust that MVPDs will offer them a reasonable return on that investment. These MVPDs are willing to provide these contracts because they face robust competition from other MVPDs.  The FCC's proposal risks upsetting this creative balance by allowing third parties to make money distributing content without negotiating with content creators. Instead of promoting innovation, the proposal amounts to the FCC picking winners and losers in the market for video programming.

The Commission Cannot Lawfully Promulgate the Proposed Rule. The problems with the Commission's proposed rule are not confined to its merits.  The rule cannot be lawfully promulgated under the FCC's authority.  Indisputably, Congress enacted Section 629 of the Telecommunications Act of 1996 to create a competitive market for the devices that access MVPD programming, so Congress gave the FCC authority to regulate set-top boxes. 

About CALinnovates

CALinnovates serves as a bridge between the thriving and fast-paced technology communities based in California and the public policy communities in Sacramento and Washington, DC.

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