7/09/2000 8:00 PM Eastern

Washington-After listening to regulators beef for years about cable's iron grip on the set-top market, the cable industry entered a new era last week that should someday allow consumers to buy their boxes from popular retail chains.

When that day will arrive, though, was not exactly clear.

Despite cable's overwhelming compliance with federal rules crafted to open the set-top market, retailers have not placed any orders to stock their shelves, temporarily dashing hopes that a robust equipment market would materialize quickly.

"We've met every requirement. I stand up with great satisfaction and pride that we have done it. The market hasn't stepped up and said, 'I am ready for it,'" said Ken Klaer, vice president and general manager for business development for cable set-top maker Scientific-Atlanta Inc.

Circuit City Stores Inc., which lobbied hard for rules that would give it a toehold in the set-top business, is not planning to sell any cable boxes soon, blaming cable for withholding key specifications. The industry has denied the allegation.

Klaer said retailers are probably holding back because their economics don't match up well with cable's. To make it work, he added, retailers probably need a piece of cable's revenue in exchange for selling boxes, but the two industries have not found common ground.

But Klaer did not dismiss the idea that an agreement could be reached. He said cable operators have a financial incentive in seeing that when consumers enter one of the 600 Circuit City locations, they can comparison-shop between cable set-tops and equipment already in the stores to access satellite television.

"There's value in that" for the cable industry, Klaer added.

In 1998, the Federal Communications Commission determined that to create a retail market, cable operators had to separate signal-security from channel-selection functions.

The FCC gave cable until July 1, 2000, to complete the job. Starting in 2005, the agency said, cable operators are prohibited from deploying boxes in which security and channel selection are integrated features. But the FCC rules did not require retailers to enter the market.

Under the commission's approach, subscribers could buy boxes at stores, then call their cable operators for channel-descrambling devices called point-of-deployment security modules. Roughly the size of credit cards, the PODs are inserted into the boxes.

On June 30, Cable Television Laboratories Inc. announced that it had completed testing on PODs made by Motorola Inc. and S-A and found that they should work with boxes sold at retail.

"All of the specifications that a manufacturer needs to create an OpenCable, retail-ready set-top box have been available for some time," CableLabs vice president of advanced platforms and services Don Dulchinos said in a prepared statement.

"My POD will work with anybody else's box," Klaer said.

FCC rules do not apply to analog-only boxes, but they do apply to the hybrid analog-digital boxes that the cable industry is widely deploying today so that subscribers can upgrade to digital while retaining access to traditional analog programming. About 8 million of cable's 67 million subscribers are leasing hybrid boxes.

The cable industry is in hot water with the FCC because 11 cable operators have asked for waivers from the July 1 separation requirement. The requests cover at least 3.6 million basic and 300,000 digital subscribers.

Although the FCC has not acted on the merits of the waivers, the agency decided two weeks ago not to enforce its rules against the waiver-seekers for 45 days ending Aug. 14.

Deborah Lathen, chief of the FCC's Cable Services Bureau, questioned the timing of the waiver requests, as nine of them were submitted less than 30 days before the deadline, giving the commission insufficient time to seek public comments and make a decision.

"We seriously question whether waiver petitions filed so close to the effective date of a commission rule can be considered to be filed in 'good faith,'" Lathen said in a June 30 FCC order.

Some in the cable industry took umbrage at Lathen's statement, but she declined to respond. "We plan on using the next 45 days to review the additional information that the parties submitted and to act on those requests for waivers," she said.

The operators seeking waivers want relief for a few months to a few years based on the fact that no one is making PODs that will descramble analog programming.

To comply with FCC rules, MSOs are duplicating scrambled analog programming in digital. In that case, subscribers with set-tops bought at retail can use digital PODs to view scrambled analog programming.

But duplication eats up digital channels, and the MSOs seeking waivers said they do not currently have the bandwidth to comply with FCC rules in that fashion, but they will in a few months or, in some cases, a few years.

The MSO said they had several alternatives. They could unscramble the analog programming or remove current analog or digital services to make room for the duplicated services.

But those methods would either lead to higher rates for all subscribers or reduce the number of channels subscribers have grown accustomed to.

The FCC might not buy the theory that the stated alternatives are as consumer-hostile as the waiver petitions allege.

As one cable attorney observed, the commission might decide that the MSOs knew the deadline was approaching and they should have made the digital space available in a timely fashion.

"This is not playing terribly well over at the Portals," a Washington cable attorney said.

Realistically, the waivers would affect only a small subset of cable subscribers-those among the 300,000 digital subscribers in waiver systems that had also subscribed to scrambled analog services such as Home Box Office.

If subscribers bought hybrid set-tops at retail, their digital PODs obtained from the local operators would not unscramble HBO because the operators are not duplicating analog HBO in digital.

"It's a very, very narrow and tailored suspension of the application of the rules," a Washington cable attorney said. "If [Lathen] grants every one.of these, it's peanuts."

But the FCC could choose to look at the numbers differently. Instead of focusing just on the digital subscribers, it might elect to concentrate on the overall number of subscribers-3.6 million-who are served by the cable systems seeking waivers.

Those subscribers would be in the same boat as the digital subscribers to the extent that they elected to upgrade to digital while a waiver was in effect.

Sincerely Seeking Waivers

Company Basic Subs Digital Subs




AT & T Broadband






















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