BIG SIGH OF RELIEF New Set-Top Rules Wont Punish MSOs

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Washington -- Barring a last-minute snag, the FederalCommunications Commission is expected to adopt rules June 11 mandating the retail sale ofcable set-top boxes.

The upshot late last week: The rules won't be ascrippling as industry experts had anticipated earlier in the week.

That's because after months of intense negotiations,the FCC has apparently decided not to bar cable operators from distributing boxes withembedded security features.

"Not at this time," an FCC source said. But FCCand cable sources said key timing issues still had to be resolved.

FCC sources said last Friday that they expected talks tocontinue over the next few days with regard to whether the agency should exclude analogboxes and certain hybrid digital-analog boxes from its retail-sale policies.

"We are still discussing those issues," an FCCsource said.

Cable sources said they expected the FCC to at least exempttraditional analog boxes from the rules.

Circuit City, backed by House Commerce Committee chairmanRep. Thomas Bliley (R-Va.), is pressing the FCC to mandate a separation of securityfunctions from other box features starting in mid-1999. The cable industry has urged thatthe start date for that should be no sooner than September 2000. FCC sources could not sayhow the timing dispute would be resolved.

"It appears that the [National Cable TelevisionAssociation] and Circuit City have come a long way toward agreeing upon an approach tomake the security available," an FCC source said.

Last Friday's word cleared the way for operators tocontinuing providing set-tops. If operators are forced to provide only removable security,the price per set-top could skyrocket up by $85.

All of this made last week a busy one for the set-topsegment of the industry, as manufacturers, retailers and cable operators made their finalpitches to the FCC about interoperable boxes.

All set-tops in the field today contain integratedsecurity, so that operators can protect premium and pay-per-view programming revenues.

Most manufacturers, in cooperation with the OpenCablespecification -- which is still being written -- are planning to someday make boxes withslots for removable security. But none has the feature built in yet.

Bill Wall, chief scientist for Scientific-Atlanta Inc.,said, "We're fully prepared to manufacture set-tops, and we plan to manufacturethem that way, and the removable security modules, as well."

The same goes for General Instrument Corp., said DavidRobinson, vice president and general manager of GI's digital-video division.

The idea of a removable security module holds great appealfor consumer-electronics manufacturers, which want to be able to add the capability intoTVs, VCRs and digital-versatile-disc players so that they can receive and displayscrambled programs on those devices.

But earlier proposals that would have stopped operatorsfrom providing the cheaper, integrated security methods in favor of boxes with receptaclesfor removable security cards would have been costly. Besides the higher costs,time-to-market issues were critical, according to MSO executives involved in the matter,who requested anonymity.

James Chiddix, chief technical officer for Time WarnerCable, said the exact cost penalty to include removable security was hard to quantify, buta ballpark number of $85 per box "doesn't sound unrealistic to me."

"It's much more efficient to embed the securityinto silicon in a set-top than it is to have separate devices," he said.

The delays would come from some vendors that would have toalter existing designs in favor of ones including the security receptacle.

Laurie Schwartz, director of advanced platforms andservices for Cable Television Laboratories Inc. and the key executive leading OpenCable,said plans are under way for OpenCable to release one part of the specification -- the onethat the FCC is seeking from the cable industry -- next month.

Other specs will follow by year-end, OpenCablerepresentatives said last week.

The first spec "describes how to interface toremovable security, in terms of functional requirements," Schwartz said. The spec ispart of a cable-industry concept known as a "POD," for"point-of-deployment" module.

PODs look like PCMCIA computer cards, and they holdset-top-configuration information specific to an operator's system, executives havesaid. The idea: When consumers buy set-tops at a retail outlet, they get with their cablesubscriptions the POD cards that fire up the boxes.

Still, said one cable executive, who asked that his namenot be used, "the POD thing is just a concept, and things like authorization and copyprotection aren't resolved."

Plus, existing and weighty orders between major MSOs andtheir set-top providers -- most of which are on a fast track -- do not yet includeprovisions for removable PODs.

By not being forced to provide boxes with embeddedsecurity, Tele-Communications Inc. is one MSO that will sidestep what "could havebeen a potential disaster," said one executive involved in the cable side of theongoing navigational-device arguments, who requested anonymity.

That's because TCI has a contract with GI for 15million boxes, and that contract calls for the boxes to have integrated securitycircuitry.

One TCI official, who said the matter is too politicallycharged for his name to be used, said the millions of set-tops that it has on order fromGI actually have both embedded security and slots for removable security cards, so that ifthe embedded security is breached, TCI and its "friends and family" that are inline for the boxes have a backup plan.

Still to be resolved is timing.

In its ex parte comments, Circuit City asked for rules thatgive operators one year to stop providing boxes with built-in security.

The NCTA countered with a proposed time line that makes aspec for a separate digital-security module and one for the interface with the "hostbox" available this December. Operators would make separate security modulesavailable by September 2000, the NCTA said.

But the cable industry and Circuit City are not completelyat odds.

Last month, shortly after the National Show in Atlanta,representatives of OpenCable and Circuit City made a joint visit to the FCC to discuss thepending rules.

"I feel that we're in cooperation" withCircuit City, Schwartz said.

Because cable operators do eventually want to moveinteroperable OpenCable set-tops off their balance sheets and into the retail market,cooperation with retailers like Circuit City is necessary and good, she added.