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Technology July 2, 2007, 12:01AM EST

An Early Independence Day

A new FCC rule frees customers from having to rent set-top boxes from cable operators as of July 1

Forget July 4.

July 1 is the real Independence Day for 65 million cable TV subscribers in the U.S. As of that date, says the Federal Communications Commission, they are free of the tyranny of being forced to rent miserable set-top boxes from their cable companies. Eventually, this declaration of independence could bring dramatic change to the way we get and watch television programming. It could also affect the financial prospects for cable players from Comcast (CMCSA) and Cablevision (CVC) to Time Warner (TWX). The big question is just how long this will take.

It has already been 11 years since Congress ordered the cable industry to make it possible for consumers to buy their cable boxes in stores instead of renting. The theory, then and now, was that creating a retail market for boxes would make better and cheaper models available. A new FCC rule finally puts that congressional mandate into effect. As of July 1, cable operators are prohibited from distributing the familiar boxes that combine the functions of tuning cable channels and telling the cable system just what content you have paid for and are entitled to receive. Instead, the security piece, called "conditional access," must be moved into a separate piece of hardware called a CableCARD. And the CableCARD can be used either in a box supplied by the cable company or in one bought independently by consumers.

This opens the door to a potentially vast variety of devices that can serve as set-top boxes, including DVD players, video recorders, computers, or televisions themselves, with these functions combined in any way you like. It also opens up the market from essentially two suppliers, Motorola (MOT) and Cisco's (CSCO) Scientific Atlanta, to almost anyone, from TiVo (TIVO) and Apple (AAPL) to Sony (SNE) and Hewlett-Packard (HPQ).

Changing the Game

The rub is that with the exception of the TiVo Series3 recorder ($800, though you can find it at a substantial discount), a couple of high-end Windows Media Center PCs with cable tuners from ATI, and a relative handful of CableCARD-ready big-screen TVs, the promised third-party products have yet to materialize. The reasons aren't hard to uncover. When CableCARDs first became available a couple of years ago, manufacturers rushed in with products, especially TVs. But consumers had trouble getting CableCARDs from cable operators and when they did, they often didn't work very well. The products didn't sell well, and the manufacturers lost interest.

The new rules change the game because the cable operators now have to use CableCARDs in all equipment, whether it's a set-top box leased from the company or a third-party retail product. "The Consumer Electronics Assn. (CEA) views the July 1 [deadline] as providing the necessary certainty to manufacturers that cable companies will finally support CableCARDs, because they will have to use them for their own customers," says Jason Oxman, CEA vice-president. "As such, we can expect more deployment of retail alternatives to rental cable boxes."

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