Washington-A major electronics retailer complained that it can't enter the digital set-top market, in part because federal law apparently permits cable operators to subsidize the lease of advanced boxes to subscribers.
At a House hearing on Oct. 5, Circuit City Stores Inc. executive vice president of merchandising John Froman said cable operators lease $400 digital set-tops for less than $4 a month. That's because MSOs recover their costs by overcharging for analog set-tops that have already been amortized, he said.
"This subsidy from the monopoly analog market is unfair to consumers and forestalls entry into the digital market," Froman said in testimony before the House Telecommunications Subcommittee. Circuit City has more than 600 retail stores in 155 markets.
The cable industry, claimed Froman, has apparently found a legal loophole to price digital boxes in the manner he described.
One provision of the law, he said, prohibits cable operators from subsidizing navigation equipment. Another allows MSOs to aggregate equipment costs on a franchise, system, regional or company level.
"I believe that the anti-subsidy provisions are not working effectively," Froman said. "I think what Congress and the FCC need to do is eliminate that provision."
Rep. Edward Markey (D-Mass.), who questioned Froman about competition in the set-top market, said Congress "would try to work" on the problems he raised.
Froman asserted that the cable industry and Hollywood filmmakers have frustrated competition in digital set-tops in other ways. But he acknowledged that Hollywood appears to be dictating copy-protection terms to cable.
He said cable's specifications for competitive boxes fail to support full interactivity, which means subscribers would still need to lease boxes from their cable operators.
With regard to Hollywood, Froman said, the movie industry has insisted that competitive set-top makers agree to severe licensing terms to guard against illegal copying of digital content.
A cable industry source called Circuit City's complaints off base, saying cable equipment remains a regulated service under federal law.
"Since the 1992 Cable Act, cable equipment prices have been regulated, but there is no singular way that MSOs set their equipment prices within those parameters," the source said.
The source said it was ironic that someone has decided to complain to Congress about cable rates that are too low. "They complain when our rates are too high, and now they are complaining that the rates are too low."
In the 1996 Telecommunications Act, Congress wrote several provisions designed to open set-top sales to competition without jeopardizing cable operator efforts to secure programming from theft.
Two years later, the FCC adopted rules requiring cable operators to furnish subscribers that have purchased digital set-tops at retail with point-of-deployment (POD) modules. Those regulations do not apply to analog boxes.
When inserted in retail set-tops, the POD descrambles encrypted digital programming. The cable industry insists it has overwhelmingly complied with the FCC's rules.
In 2005, the FCC said, cable operators will be prohibited from leasing set-tops with embedded security functions. However, the agency is considering advancing that deadline to 2002 at the request of Circuit City.