FCC plan to unlock the set-top box may be too little, too late

A new Federal Communications Commission proposal to "unlock the cable box" is receiving the kind of hype and adulation usually reserved for royal weddings and rocket launches.

"Requiring cable-TV systems to make room for competing devices should similarly lead to a boom in new types of services and technologies," the New York Times editorial page opined, comparing the plan to the FCC's famed 1968 ruling allowing consumers to connect their own telephones to Ma Bell's network. "FCC Chairman Tom Wheeler dropped a bomb on the cable television industry," Nilay Patel, co-founder and editor-in-chief at top tech site The Verge, declared.

There is no denying that it is an exciting time for the evolution of television. And the FCC plan, which hasn't even been adopted as a preliminary proposal yet, could be another helpful step in the right direction. But the plan's benefits have been massively exaggerated, even if it works as intended, which is yet another open question.

First, a quick summary. FCC Chairman Tom Wheeler is asking his fellow commissioners to approve a preliminary proposal at the agency's upcoming meeting on Feb. 18. Under Wheeler's plan, cable companies like Time Warner (TWC) and Comcast (CMCSA) would be required to work with technology companies like Apple (AAPL), Alphabet's Google (GOOGL) and others to develop an open standard for attaching set-top boxes to the cable infrastructure in a consumer's home. Once everyone agrees on a standard, which must include privacy and copyright protections, consumers will be able to choose any compatible device to run their cable TV service. Cable companies will still be able to offer their own set-top boxes, along with their usual monthly leasing fees, but they'll be under more competitive pressure to offer a better experience, at least in theory. Assuming a majority of the FCC goes along with Wheeler's plan, the proposal will be issued for public comment and subject to revision before a final vote in six months or so.

Which all sounds great -- in theory. But there are a few hurdles before the unlocked set-top box brings about cable television nirvana.

1. Allowing competition for set-top boxes won't change the fundamental economics of the cable business.

Won't it be great when Apple, Roku and Amazon (AMZN) can integrate cable channels into their set-top boxes? Viewers will be able to pick and choose to watch and pay for whatever they want, drop all the junk no one watches and take control of the whole experience, right? Well, not exactly.

Actually, the new futuristic set-tops will still have to play by the cable industry's rules. Nothing in Wheeler's plan makes it any more likely that cable companies will start breaking up their bundles and offering more channels a la cart. And despite the threat of cord cutting, the industry remains a financial powerhouse with about 100 million paying customers, most of whom have little or no choice for alternative TV service. In fact, with the cable industry helping set the standards, the new boxes may not even be as flexible and useful as some boxes currently on the market that aren't cable-compatible.

2. We tried this before and it failed.

The 1996 Telecommunications Act included provisions to unlock the cable box and the FCC proceeded to create rules requiring the industry to allow third-party devices onto the network. That time, cable companies were allowed to control the standards and required compatibility with the dreaded CableCard, a physical add-in required to make third-party devices compatible. But the cable industry hobbled the standard and limited the features on CableCard-compatible devices. In the end, almost no outside companies played along, with Tivo (TIVO) as the lone surviving exception -- and it had to license its set-top box software for use in cable companies' own boxes.

Another challenge for outside box makers is that consumers will have to pay their cable company for all the channels they want, plus pay for a set-top box and whatever premium services it may offer. And consumers may save a few bucks by avoiding cable company set-top box leasing fees, but the cable companies are a creative bunch. They can easily come up with new fees to make up for lost revenue (my current cable bill includes a "Federal Universal Service fee," "Regional Sports network Fee," "FDV Administrative charge" and five other mystery fees which are not government-mandated taxes). As long as the cable companies maintain control of the popular channels and content many consumers want, they can capture a significant share of the profits, which in the past hasn't left much left over for set-top box makers.

To be fair to both the New York Times editorial board and The Verge editor Patel, both also mention this past history as a caveat.

3. The future is moving from channels to apps.

Tim Cook had a cute line ready when he introduced the latest Apple TV set-top box last September. "We believe the future of TV is apps," he said. He was referring to apps that can run on Apple's box, but cable channels have spent the past few years racing to offer apps on a bunch of platforms, including Google's Android system, Microsoft's (MSFT) XBox videogame player and standalone boxes from Roku. Some apps mimic the offerings of a single cable channel, others offer a group of channels not unlike an old-fashioned cable bundle, and some function more like libraries of old and new shows. Meanwhile, post-cable video services like Netflix (NFLX), Amazon's Prime and Google's YouTube continue to grow. So it's quite possible that the FCC will unlock the set-top box to cable channels just as cable channels become irrelevant to set-top boxes.