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FCC’s set top box policy displays no understanding of markets

On 18 February 2016, the Federal Communications Commission issued a notice of proposed rulemaking that would allow third parties access to a consumer’s cable television set top box (STP) to gather information that could be used to provide competitive viewing services. Specifically, the third party would have access to:

1. Information about what programming is available to the consumer, i.e., channel listing, video-on-demand lineups;

2. Information about what a device is allowed to do with content; and

3. The video programming itself.

The Commission’s rationale for allowing a firm like Google access to these information streams is that with this information, third parties could create services i.e., apps and hardware, to compete with a cable company’s STP.

Will this policy increase demand for content thus driving up prices, revenues, and returns on the capital it takes to create content? No, it won’t. What the Commission’s policy will do is create a shell game for content. It’s not clear whether there will be a change in demand for content and while alternatives for accessing content will increase incrementally, unless the policy entices more consumers to go online, the policy won’t do much for increasing economic activity in the content markets.

In addition to not creating additional demand in the content markets, the Commission ignores the competition that already exists for cable and the movement from STP to apps. Steve Pociask makes this observation in a recent piece for Forbes.com where he argues that:

“Absent the plan, cable competition already exists and its growing”, and that, “the market is currently moving away from STB to apps, but the plan would forever require STBs.”

The Commission’s proposed policy is indicative of an ongoing problem of failing to focus on the primary market that its policy impacts, in this case the content market. Where information is proprietary, the Commission should protect the content owners’ rights. Otherwise, the Commision should advocate policy that promotes content flows.

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Aereo should not call itself a cable company

Aereo is trying to reinvent itself after its June 2014 loss in the U.S. Supreme Court where the high court held that Aereo activities were substantially like those of a cable company; therefore it met the definition of performance under the Copyright Act and was required to compensate broadcasters for the performance of their content.  Aereo, like other cable companies, should have to pay re-transmission fees to over-the-air broadcasters whose signals Aereo was capturing via miniature antennas and providing to Aereo’s subscribers.

Aereo’s reportedly new approach will be to ask the courts to treat the company as such, as a cable company, so that Aereo can move forward with a business model that allows it to make some money fast.

Well, Aereo may not want to move too fast with that classification redux.  According to U.S.C. 47 sec. 522 (5), a cable operator means any person or group of persons (A) who provide cable service over a cable system and directly or through one or more affiliates owns a significant interest in such cable system, or (B) who otherwise controls or is responsible for, through any arrangement, the management and operation of such a cable system.

A cable system is defined as a facility consisting of a set of closed transmission paths and associated signal generation, reception, and control equipment that is designed to provide cable service which includes video programming and which is provided to multiple subscribers within a community, but such term does not include (A) a facility that serves only to transmit the television signals of one or more television broadcast stations; (B) a facility that serves subscribers without using any public rights of way; (C) a facility of a common carrier which is subject, in whole or in part, to the provisions of sub-chapter II of this chapter, except that such facility shall be considered a cable system (other than for purposes of section 541(c) of this title) to the extent such facility is used in the transmission of video programming directly to subscribers, unless the extent of such use is solely to provide interactive on demand services; (D) an open video system that complies with section 573 of this title; or (E) any facilities of any electric utility used solely for operating its electric utility system.

Yes, I know that’s a mouthful, but bear with me.  I believe one can make the argument that while Aereo looks like a cable operator because it grabs broadcast signals out of the air and retransmits them to subscribers, under the Communications Act the company isn’t a cable company.  Aereo falls under the exception carved out in section 522(B) because its antennas are stored in a warehouse, not in a public rights-of-way.  The signals are distributed to subscribers via wireless spectrum licensed to a wireless company or via fixed wired facilities owned by a telephone or cable company.

Aereo itself may be buying access to a wireless or wired broadband provider but again these facilities are probably owned by these carriers.  Even if Aereo owned facilities that connected its warehouses to a broadband provider, that ownership would not amount to enough to be described as a cable operator.

I believe Aereo fails under section 522 (A) of the Communications Act also since, according to its published business model, Aereo captures and re-transmits the signals of broadcast television channels only.

Aereo may be able to sell its technology to an existing cable company or to some other upstart that wants to get its unique content into the hands of subscribers, but Aereo, in my opinion, would only dig itself a deeper hole if it tells the 11 cities it was providing services in that it is now a cable company.  Its financial woes would only be compounded if it held itself out to a local franchise authority as a cable company only to find itself being squeezed by the regulatory gestapo located in a cable office in some county or city government.

Not labeling itself a cable company would give Aereo and its investors some wiggle room as it determines its next best course of action.