Advertising

The Seattle Times Company

NWjobs | NWautos | NWhomes | NWsource | Free Classifieds | seattletimes.com

Business / Technology


Our network sites seattletimes.com | Advanced

Originally published June 25, 2007 at 12:00 AM | Page modified June 25, 2007 at 2:00 AM

E-mail E-mail article      Print Print      Share Share

New rule for TV set-top boxes sets stage for higher cable bills

On the gizmo glamour scale, the TV set-top box is a bit of a frump — something the cable company dumps on the doorstep, not the quarry...

Chicago Tribune

CHICAGO — On the gizmo glamour scale, the TV set-top box is a bit of a frump — something the cable company dumps on the doorstep, not the quarry of a shopping spree at Best Buy.

But starting Sunday, a new federal rule goes into effect that's aimed at creating a retail market for set-top boxes and fostering more competition and innovation in a business dominated by Motorola and one other company.

While that may sound like admirable policy, some analysts doubt it will work well: They say consumers will be reluctant to pay a few hundred bucks for a box when they can rent one for a few dollars a month, as they do now.

Electronics manufacturers, including TV industry upstart TiVo, beg to differ.

What seems more certain is consumers' monthly cable bills are likely to rise a few dollars after the new rule takes effect.

That's because the cable box born from the regulation costs more to produce, a cost likely to get passed down to TV watchers, analysts and cable operators say.

The rule change pivots on security technology, which allows consumers to watch only the channels they've paid for. That technology is integrated into the set-top box.

As of Sunday, it will be separated via a "cable card" that's plugged into a slot in the back of a set-top box.

The rule change doesn't require cable customers to get a new cable box. Only boxes deployed after Sunday must have separable security.

And cable companies can pre-install the security card before delivering boxes to new subscribers. That's what Comcast, Motorola's largest cable customer, plans to do.

Separable security in cable boxes was mandated in a landmark 1996 telecommunications bill. But until recently, neither Congress nor the Federal Communications Commission (FCC) put pressure on box makers and cable operators to implement the rule, said Mike Paxton, a cable and broadband analyst at tech researcher In-Stat.

Little reason to change

advertising

Neither party has much of an incentive to change.

For cable operators, the integrated security system has done a bang-up job thwarting thieves, and it's helped them control the distribution of TV programming.

For makers of set-top boxes — well, no corporation is likely to rush into something aimed at giving it more competition.

The cable set-top box business is dominated by Motorola and Scientific Atlanta, a unit of communications-equipment maker Cisco Systems.

In the first quarter, Motorola had a commanding 41 percent share of the combined U.S. cable and satellite set-top business, according to ABI Research, a market researcher. Policymakers believed that decoupling security from a set-top box would lead to more competition.

The world's biggest consumer-electronics makers can't compete now because Motorola and Scientific Atlanta effectively have a lock on cable-security technology in this country.

With the new rule, security will be an external element to the box, via the cable card. Motorola and Scientific-Atlanta make the security cards, which can be plugged into a box made by another company.

"There will be nothing preventing a Samsung or Sony in effectively providing the electronics," said Lawrence Harris, an analyst at Oppenheimer. And a Samsung-made or Sony-made set-top box could then be peddled through traditional electronics channels such as Circuit City or Best Buy stores.

Electronics manufacturers have pushed hard for separable security. "It's a really important thing," said Matthew Zinn, TiVo's general consul.

TiVo invented the digital video recorder, distributing it through satellite TV operators and electronics retailers. Seeing the popularity of TiVo's DVR, the cable operators followed.

But for hardware, they turned to suppliers Motorola and Scientific Atlanta.

"I doubt the cable industry would be using DVRs if TiVo had come out with them," Zinn said.

TiVo has been historically hurt by its lack of sales through cable networks. It stands to gain if a retail set-top market gets a boost from the new FCC rule.

Retail skepticism

But some cable-industry analysts are skeptical that cable boxes and DVRs will be a big sellers at retail.

"Retailers — Wal-Mart, Best Buy — have shown virtually no interest in set-top boxes," said In-Stat's Paxton. They take up valuable shelf space but offer retailers relatively low profit margins and little post-sale service revenue, he said.

The outlook isn't bright, either, for the other side of the retail equation — consumers, said Paxton and other analysts.

A set-top box with built-in DVR would cost $300 minimum, more likely at least $400, Paxton said. , Renting a similar box through a cable company costs $5 to $10 a month, he said.

Plus, by renting, consumers can easily upgrade to a new box when a new technology like HDTV becomes available.

"Consumers have no interest in buying a set-top box," Paxton said. "They're very comfortable leasing the box."

TiVo's Zinn acknowledged that while many people are happy renting a box, others want more sophisticated options.

As for the cost of a box, Zinn and other electronics makers expect that to fall over time as the market develops.

"That's the way of electronics," Zinn said. "Things get much cheaper very quickly."

In the short term, the new FCC regulation will add to the cost of a set-top box.

That's because a cable-card box involves more complicated engineering than a box with integrated security, said Mark DePietro, vice president of strategy for Motorola's digital video solutions operation.

Motorola says cable-card technology tacks on $70 to $75 to the cost of a box, regardless of whether it's a cheaper model or a more sophisticated DVR.

Thus, the cost of Motorola's low-end digital box will effectively double.

TiVo's Zinn scoffed at Motorola's estimate.

"That's nonsense," he said. "Seventy dollars may be the difference they are charging Comcast, but it's not the difference in cost," said Zinn, who estimated the extra cost per box at around $20.

Whatever the cost, cable subscribers will end up paying part of it. "Customers will ultimately end up paying more," said Rich Ruggiero, a Comcast spokesman. He declined to elaborate on how much more.

Matthew Polka, president of the American Cable Association, said consumers with basic digital packages will likely see their monthly rental charges double, in order for cable operators to cover the doubling of the box's price.

Polka's group represents 1,100 smaller cable operators, many of whom serve rural areas.

Those operators charge subscribers about $2.50 per month to rent a digital box in a basic package, Polka said, so consumers would end up paying an extra $30 a year if their rental rates are doubled.

The added cost for separating security should go away in a couple of years.

By then, the cable-card method of separating security will give way to a cheaper technology — software downloads directly from the cable company to the set-top box.

"What's really ironic about this, most people believe that in two years you will have downloadable [security] and won't have the need for cards," Paxton said.

E-mail E-mail article      Print Print      Share Share

More Business & Technology

UPDATE - 09:46 AM
Exxon Mobil wins ruling in Alaska oil spill case

UPDATE - 09:32 AM
Bank stocks push indexes higher; oil prices dip

UPDATE - 08:04 AM
Ford CEO Mulally gets $56.5M in stock award

UPDATE - 07:54 AM
Underwater mortgages rise as home prices fall

NEW - 09:43 AM
Warner Bros. to offer movie rentals on Facebook

More Business & Technology headlines...


Get home delivery today!

Video

Advertising

AP Video

Entertainment | Top Video | World | Offbeat Video | Sci-Tech

Marketplace

Advertising