CableCards: The Million-Dollar Questions

6/15/2007 8:03 PM Eastern

How many millions of dollars cable operators will end up spending to meet the Federal Communications Commission’s ban on integrating security features into set-top boxes — set to go into effect in two weeks — is not certain.

But one thing’s for sure: The industry is stuck in a time warp in projecting those costs.

The National Cable & Telecommunications Association, in lobbying against the ban, currently claims that requiring every new set-top deployed after July 1 to separate security controls from the guts of each box will cost cable subscribers more than $600 million annually.

That’s to cover the cost of set-top boxes that can accept CableCards, the credit-card size devices that contain the circuitry to regulate access to cable-television services. The NCTA contends the FCC rule will result in an additional $2 to $3 per month in set-top rental charges.

But each of those NCTA estimates is based on numbers at least five years old — and date back to figures supplied in 1998 by set-top maker General Instrument, now part of Motorola.

In August 2002, the NCTA was fighting the same integration ban. The changeover was to take effect Jan. 1, 2005.

In an FCC filing that month, the association cited Motorola and Scientific Atlanta estimates that set-tops with removable security would cost $72 to $93 more than integrated boxes. The head of regulatory affairs for AT&T Broadband — now folded into Comcast — calculated the potential monthly lease increases based on the midpoint of that estimate ($82.50) would be $1.99 (in the third year of a five-year depreciation cycle) or $2.98 (in the second year of a three-year cycle).

Those general cost assumptions go back even further. In Nov. 15, 2000, AT&T filed a response with the FCC asserting that devices with separable security would be “approximately $75 to $90 more expensive than an integrated device performing the same functions.” In that letter, AT&T refers to a 1998 General Instrument filing that estimated an increase of at least $75 per unit.

General Instrument, Sept. 23, 1998, filing: “GI’s own internal estimates indicate that even employing the most conservative assumptions, application of the ban to integrated digital devices is likely to result in the imposition of at least $75 in additional equipment costs per customer.”
AT&T, Nov. 15, 2000, filing: “These additional design and component requirements will mean that a POD [point-of-deployment]/host combination is approximately $75 to $90 more expensive than an integrated device performing the same functions.”
NCTA, Aug. 2, 2002, filing: “Media Bureau staff observed that the cost data in the record has been submitted over 20 months ago and asked if we had more recent data. … [A recent report] demonstrates that the combination of a separate security POD and a host device… would cost a cable operator approximately $72 to $93 more [than] an integrated set-top.”
NCTA, Aug. 16, 2006, filing: “The cable industry has estimated that the re-engineering required to enable their leased devices to work with CableCARDs would add approximately $72-93 per box.”

Is it possible the cost of manufacturing a cable set-top box with a piece of removable hardware has not dropped since the late 1990s?

Yes, according to NCTA vice president of communications Brian Dietz, and the costs appear to be even higher in some cases. “We don’t have more recent estimates [than those in the 2002 filing], although data submitted in some recent waiver requests suggests that actual production costs of non-integrated boxes is significantly higher,” he said — as much as $180 more per unit.

$180? The costs are more likely “south of $50” per box, said SNL Kagan senior analyst Ian Olgeirson, who tracks the cable set-top market. Olgeirson’s figure includes costs of making set-tops with a card slot and internal circuitry needed to read the cards, as well as the manufacture of the CableCard itself, an item the NCTA’s estimates don’t include.

Still, Olgeirson said, there hasn’t been a significant decline in costs to produce CableCard devices because there has been no volume production of them. “You’re dealing with a technology that has been relatively static,” he said. “It’s certainly cheaper than it was five to seven years ago but not a lot cheaper because there’s not a ton of volume.”

Meanwhile, the Consumer Electronics Association has an even lower per-unit target cost for adding the ability to plug in a CableCard: $10 to $15. The trade group, which has vigorously pushed the FCC to enact the integration ban on the notion that forcing cable to use CableCards will improve how well they work, is naturally skeptical of cable industry cost estimates.

CEA senior director and regulatory counsel Julie Kearney said the cost of PCMCIA cards, the same hardware specification that CableCards use, has dropped about 90% since 1999. “This is not an expensive piece of equipment — the cost of the CableCard is de minimis,” she said.

The CEA claims its members have shipped 8 million CableCard-ready TV sets to date. Kearney said adding CableCard slots costs between $10 and $15.

But Dave Clark, Scientific Atlanta’s director of product strategy and management, said upgrading a low-end set-top box for a CableCard is not comparable to doing the same thing in a high-end TV.

“In a $1,500 TV, you have considerably more horsepower in those things,” he said. “When you’re trying to be lean and mean, taking a simple, digital-only, low-end box with limited memory and trying to keep the costs down, then you try to add the CableCard capability to it … you’ve just doubled the cost of that box.”

Clark said the $72-to-$93 premium for CableCard set-tops still applies, and added, “I don’t want to scare people, but in certain categories, it could be more than that.”

Scientific Atlanta, however, declined to provide pricing for its CableCard-enabled boxes. Neither would Motorola, saying in a statement only that it “stands by the figures cited by the NCTA.”

While analysts expect costs of producing CableCard boxes to go down over time, manufacturers are quickly developing set-tops with software-downloadable security mechanisms that won’t require CableCards at all. Motorola and Scientific Atlanta expect to ship set-tops with downloadable security in early 2008.

In any case, the FCC’s integrated set-top ban will end up costing cable operators tens of millions of dollars, an expense the industry has signaled will result in higher subscriber fees. (The FCC has granted some operators waivers, including Charter Communications for certain low-end boxes and Cablevision Systems, which uses removable smart cards in its equipment.)

Time Warner Cable estimates it will have to spend an additional $50 million of capital in 2007 to comply. That’s money “that we would not have had to spend last year,” chief financial officer John Martin told Wall Street analysts on a conference call in February.

“The costs are certainly going up, but different operators have different approaches to how and when they raise prices,” said Paul Glist, a partner with law firm Davis Wright Tremaine in Washington, D.C.

Comcast, the largest operator, expects to increase fees to both new and existing subscribers to recover the costs of CableCard-based set-top boxes.

Under FCC regulations, in markets where a cable operator is deemed to not be subject to “effective competition,” local franchise authorities regulate rates for equipment based on an average of costs reported by the cable operator. Operators must file updated equipment and installation charges annually.

In markets where competitors have significant share, however, Comcast’s individual systems will determine how to recoup CableCard costs. Fees may be incorporated into digital-cable tiers, or take the form of an additional box charge, for instance.

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