Cable to Appeal FCCs 2005 Box Phase-Out

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Washington -- The Federal Communications Commission voted
last week to exempt analog set-top boxes from 1998 rules designed to promote the retail
sale of set-tops, but the revision failed to meet two key cable demands.

Shortly after the vote, the National Cable Television
Association said it was dismayed that the FCC refused to allow cable operators to provide
new boxes with integrated security functions beginning Jan. 1, 2005.

"The NCTA will appeal that decision," president
Decker Anstrom said in a prepared statement.

In a second decision, the FCC refused to exempt hybrid
analog-digital boxes -- the transition boxes operators will deploy in the millions before
the full transition to digital-only is complete one decade or more from now.

The NCTA did not indicate whether it would ask a federal
appeals court to review the inclusion of hybrid boxes.

"It's an important issue because these are the
boxes everybody's going to be rolling out for the next few years," Time Warner
Cable spokesman Mike Luftman said.

Luftman added that Time Warner had 400,000 hybrid boxes for
immediate deployment.

"For the foreseeable future, the first 550 megahertz
are going to remain analog. There will a transition period over a period of years, but it
will be a long time before we get any analog spectrum back," he said.

Cable operators currently dominate the distribution of
set-tops. But in 1996, Congress ordered a change, authorizing the FCC to draft rules
promoting the entry of electronics retailers and giving consumers more choice in the broad
array of new services that will be delivered through advanced set-tops.

The FCC found that the only way to make set-tops
commercially available was through the mandated physical decoupling of security functions
from channel-surfing functions.

The commission theorized that if cable operators could
continue to deploy boxes with embedded security indefinitely, the industry could use its
market power to frustrate the development of the retail market.

The FCC said that after separate security modules become
available in 2000, it would consider accelerating the phase-out from 2005 to 2003.

In a partial dissent, FCC commissioner Michael Powell said
the ban on cable-operator deployment of integrated boxes was inconsistent with the
statute. He added that Congress ordered that set-tops be commercially available, not
commercially viable.

"I don't see any justification or support in the
statute itself that we were told to do anything other than to ensure its availability, and
not to guarantee its success," Powell said.

The cable industry argued that the ban would deny consumers
the right to lease integrated boxes from cable operators, which might be more
cost-efficient for consumers than buying nonintegrated box from Circuit City Stores Inc.,
a key player in the FCC's rulemaking.

Circuit City is the third-largest employer in the
congressional district of House Commerce Committee chairman Tom Bliley (R-Va.), who
sponsored the set-top law and closely monitored the FCC's deliberations.

The cable industry applauded the analog exclusion as a sign
that the FCC understood that market demand for analog-only boxes was waning and that
signal-security concerns could not be addressed in a cost-efficient manner.

"We think it makes sense," said Bill Wall,
technical director of subscriber networks at Scientific-Atlanta Inc., a major set-top
vendor. "In analog, security is integrated so tightly that it would have been
difficult to break it out in a mechanism that would have been highly cost-effective."

S-A appealed the FCC's original order after it was
released last June.

FCC chairman William Kennard and commissioner Susan Ness
issued separate warnings to the cable industry at last week FCC meeting.

Kennard said he would be watching to ensure that cable
operators do not use advanced set-tops in a manner limiting competition in the
electronic-program-guide market -- an apparent reference to Microsoft Corp.'s $5
billion investment in AT&T Corp. in order to gain wider deployment of its Windows CE
operating system.

"This is an area we have been monitoring, and we will
continue to monitor it to make sure consumers have robust choice of services from the
box," Kennard said.

Ness said she was concerned that the FCC had "left
open a loophole" in the 2005 sunset on integrated boxes. She added that the ban on
"new" integrated boxes would allow cable operators to bypass the FCC's rule
by maintaining large inventories of integrated boxes until December 2004.

"Those providers should use this six-year transition
to draw down, not to stockpile, their inventory of integrated boxes," Ness said.