Set-top box shenanigans at the FCC
© Greg Nash

Last May, the Federal Communications Commission (FCC) set forth a controversial notice of proposed rulemaking to promote a retail market for set-top boxes pursuant to Section 629 of the Communications Act. Under this proposal, the FCC sought to force cable and satellite companies to make available to third-party equipment providers: (1) channel listings; (2) information about what a device is allowed to do with content, such as record it; and (3) the content itself.

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Fully understood, however, it became readily apparent that the FCC wanted to do far more than just create a retail market for third-party set-top boxes; what the FCC really wanted to do is create a whole new class of virtual video distributors who profit from the use of others' intellectual property without having to pay for it and without any regulatory oversight.

Needless to say, the opposition to the FCC's proposal was fierce, particularly from content creators who argued that the FCC was improperly trying to give away their intellectual property without proper compensation. Significantly, content creators were not crying "wolf"; even the Copyright Office publicly stated that the FCC's original proposal to unbundle programming would likely violate intellectual property rights.

Trying to find a solution, the cable and satellite industry, with the participation of content owners, embraced the rapid evolution of video technology and offered an app-based approach with HTML5 security as a path forward to eliminate the set-top box altogether yet still protect the intellectual property rights of programmers and content owners. When it came to intellectual property protection, however, FCC Chairman Tom Wheeler would not bite.

On Sept. 8, 2016, the chairman published an op-ed in the Los Angeles Times announcing that he intends to put the issue to a vote at his agency's Sept. 29 open meeting. Concurrently, Wheeler posted a "fact sheet" on the FCC's webpage providing the broad details of his plan. While the chairman claims that the agency is incorporating the "apps-based" approach proposed by the industry, he is just as hostile to the creative community as ever.

In particular, according to the FCC's "fact sheet," the agency's final rules will require "the development of a standard license governing the process for placing an app on a device or platform." While Wheeler promises that programmers "will have a seat at the table to ensure that content remains protected," Wheeler nonetheless wants the FCC to be involved in the licensing process "to ensure that nothing in the standard license will harm the marketplace for competitive devices."

Although Wheeler contends that this standard license "will not affect the underlying contracts between programmers and pay-TV providers," he is not telling the public the truth. This standard license constitutes nothing more than a de facto compulsory licensing regime that requires creators to allow their work to be shared across multiple platforms without compensation and without regard to the creators’ rights to exclusively control their distribution. Adding to the arrogance is that under the plain terms of Section 629 of the Communications Act, the FCC has zero authority to mandate that a central licensing body control the licensing of cable and satellite companies' rights to the proprietary technologies and service that make up their apps.

But does Wheeler care? Apparently not one bit. After being constantly called on the carpet for his various procedural, factual and legal shenanigans throughout this proceeding, he nonetheless seems hell-bent on ramming this proposal through to favor select political constituencies.

Let's start with the way Wheeler rolled out his original proposal.

By way of quick background, several days before the FCC votes on a major item, the agency enters into what is known as the "sunshine" period in which the public is prohibited from contacting the FCC to engage in last-minute lobbying during the final deliberation process. This sunshine period provides an important due process backstop for the American public.

Yet, during the sunshine period for the FCC's AllVid NPRM, someone in the chairman's office had the bright idea to hold a Twitter "town hall" — complete with the participation of an outside party co-host (Alex Nogales from the National Hispanic Media Coalition) — to discuss a yet-to-be-released FCC item. After being called on the carpet for such a naked violation of the law, the agency cancelled the event at the last minute. Still, the fact that the chairman's office could be so cavalier about violating basic procedural due process protections speaks volumes about how badly Wheeler has politicized the FCC.

It is also important to recognize that Wheeler's entire premise for his massive government intervention is based on a total economic sham. In particular, Wheeler argues that (1) there is a separate market for set-top boxes over which multichannel video programming distributors (MVPDs) allegedly exercise market power; and, as such, (2) the rates consumers pay to rent set-top boxes, to put it colloquially, are "too damn high." Both arguments are patently false.

First, if one properly understands the economics of the problem, it becomes readily apparent that market for set-top boxes and programming are not separate markets because set-top boxes are necessary appendages to subscription video services. Indeed, because the provider can obtain all profits from the service itself, the set-top box conveys no market power to the MVPD, even if we assume that the provider of multichannel video services is a monopoly.

As it turns out, not only did the U.S. Court of Appeals for the Second Circuit come to a similar conclusion in its recent decision in Kaufman v. Time Warner, but the court went so far as to find that FCC had conceded the very point as well. In fact, noted the court, the agency's "historic failure" to create a separate market merely "bolsters our conclusion."

And then we have Wheeler's constant use of a statistic produced by Sens. Ed MarkeyEd MarkeyTrump's steps on Iran show cooperation with Congress is possible FCC votes to advance net neutrality repeal Senate Dems appeal to 'everyone who uses the internet' on net neutrality roll back MORE (D-Mass.) and Richard BlumenthalRichard BlumenthalSenators push for enhanced powers to battle botnets Five things to know about Joe Lieberman Special counsel appointment gets bipartisan praise MORE (D-Conn.) which purports to show that Americans spend $231 in rental fees annually. Again, another falsehood. Once the calculations are performed correctly on the senators' survey, it turns out that this number is overstated by a whopping 60 percent. This is a large error, which has been demonstrated publicly on several occasions, that neither the senators nor Wheeler have acknowledged or clarified to date.

Finally, rather than do the right thing and put out for public notice and comment a detailed framework for the FCC's proposed standard license, Wheeler intends to sneak out this framework in the final rules this month, leaving parties with a time-consuming appeal to the courts as their only recourse. Quite obviously, Wheeler is afraid of a legitimate debate on the merits when it comes to the standard license. Telecom experts know, however, that one does not engage in substantive debate with Wheeler — one bows to his benevolent despotism.

Given his recent victory in USTelecom v. FCCwhere the U.S. Court of Appeals for the District of Columbia Circuit upheld Wheeler's controversial decision to reclassify broadband internet access as a Title II common carrier service, Wheeler is apparently betting that he has a hot hand on matters of agency deference.

What Wheeler fails to grasp, however, is that deference is accorded on a case-by-case basis, and his victory in USTelecom resulted more from bad facts and the appellants' legal strategy than from superior legal acumen by the FCC. (Indeed, the court never really ruled on the FCC's net neutrality rules themselves because the appellants never challenged the actual rules, only reclassification.)

As such, perhaps Mr. Wheeler should remember that when the FCC last tried to overreach on Section 629, the D.C. Circuit soundly shot the agency down, holding that the FCC cannot interpret Section 629 in an "unbridled" fashion and impose any regulation "as a means of promoting the commercial availability of navigation devices, no matter how tenuous its actual connection to Section 629’s mandate."

But for a man such as Tom Wheeler who is used to getting his way, none of these shenanigans matter. Although Wheeler recently testified at a Senate oversight hearing that he was open to change in response to bipartisan concerns about his proposal (including from Democratic FCC Commissioner Jessica Rosenworcel), I doubt Wheeler will give up so easily. For a man so willing to ignore the law and facts and abridge Americans' basic due process protections, it appears that the only thing that matters is achieving the White House's populist agenda with a generous dollop of special interest on top.

Spiwak is the President of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, a nonprofit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.


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