Wobbling Back to the Fire: Economic Efficiency and the Creation of a Retail Market for Set-Top Boxes

Abstract

Under Section 629 of the Communications Act, Congress directed the FCC to adopt regulations to promote a retail market for set-top boxes. The Commission’s first attempt was the ill-fated CableCard experiment, which - by the Commission’s own admission - was a dismal failure. In response, the Commission is now contemplating an aggressive new “AllVid” regime, whereby the agency would mandate multichannel video program distributors (“MVPDs”) to provide an adapter to serve as a “common interface for connection to televisions, DVRs, and other smart video devices.” Because the FCC is again proceeding without any formal economic analysis of the nature of the service-equipment relationship in the MVPD market, we do so here and our findings are significant. First, our theoretical analysis reveals that the set-top box conveys no additional market power to the MVPD. Second, our analysis indicates that the MVPD has no anticompetitive preference for self-supply. If the equipment can be produced more efficiently and sold at a lower price in a competitive retail market, then the provider will embrace such a market. Third, we show that a government-directed commercial market for set-top boxes is unlikely to provide substantial gains in terms of lower costs, lower prices, or increased innovation. If the set-top box can be made cheaper and sold at a lower price, or made better and sold at the same price, then the MVPD will embrace these changes. In sum, MVPD profits and consumer surplus are aligned. Accordingly, our analysis indicates that until the underlying economic reality changes, perhaps due to some technological innovation, the FCC’s anticipated aggressive AllVid approach towards set-top boxes is likely - as FCC Commissioner Robert McDowell notes - to keep the agency in “the Valley of Unattained Goals.”

Keywords: AllVid, CableCard, Section 629, Federal Communications Commission, Set-Top Boxes, National Broadband Plan

JEL Classification: K20, K23, L11, L21, L22, L50, L51, L52, L96, O33, O38