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How Proposed FCC Rule to Allow Third-Party Set-Top Box Makers Would Hurt Pay-TV Providers

The Federal Communications Commission recently proposed new regulations for set-top boxes — rules that would open the market to third-party device-makers.

Pay TV providers have largely opposed the regulations, and no wonder: Set-top boxes and their user interfaces are practically the only differentiator the companies have when it comes to the viewing experience, given that the content itself is essentially the same on every provider. The companies also claim that they’re voluntarily opening up their platforms to third parties and that there’s plenty of competition from connected devices like Roku and Apple TV.

What providers aren’t saying is the biggest reason they oppose the current regulations: the contribution that revenue from equipment makes to their business. Most of the big providers don’t release that information, but Time Warner Cable does, and its figures offer insight into the scale of the income from such rentals, and how painful it would be to forego.

sources: Company Reporting, jackdaw research Analysis

TW Cable breaks its video revenue into five buckets, of which video-equipment rental and installation accounted for about 16% in the first quarter of 2016. Over the past year, that amounted to $1.5 billion in revenue.

If you take TW Cable’s numbers and apply them to the other three big public cable companies — Comcast, Charter, and Cablevision — as they stood at the end of the first quarter, you can generate a ballpark figure for total revenue from equipment rentals and installations.

There are two ways to calculate this: One uses as a guide TW Cable’s average equipment revenue per subscriber; the other uses the percentage of video revenue from equipment. The total that emerges from either calculation is more than $1.5 billion for first-quarter 2016, and between $5 billion and $6 billion for each of the last four years.

sources: Company Reporting, jackdaw research Analysis

These figures aren’t precise, as there are differences in the manner in which each company charges for its equipment. Additionally, this calculation excludes other big cable companies, the two major satellite providers, and AT&T and Verizon’s telecom-based TV services — so the total industry figure is significantly higher.

Not all of this revenue would be threatened under the proposed regulations. But if the reforms are well-designed, they should force the pay TV companies to compete in the set-top box market on merit, rather than through monopoly control. That creates a strong incentive for the industry as a whole to fight set-top-box regulations in any way it can.

Jan Dawson is the founder and chief analyst at Jackdaw Research, an advisory firm for the consumer technology market.

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