Fair Winds for TiVo
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TiVo -- ‘God’s machine,’ in the words of former FCC Chairman Michael Powell -- could get a substantial boost from two federal court decisions last week. The first came Thursday, when a federal judge in Texas ordered EchoStar to pay the company nearly $90 million and shut down its DVR service, which a jury had found to infringe willfully on TiVo’s patents. The second came Friday, when the U.S. Court of Appeals for the DC Circuit upheld the FCC’s order that cable operators stop providing converter boxes with built-in security.
The EchoStar ruling helps TiVo more directly. Although an appeals court stayed the injunction on Friday, providing immediate relief to EchoStar’s time-shifting customers, the pressure on EchoStar to cut a licensing deal with TiVo has grown significantly. Yes, a recent Supreme Court ruling (in the eBay-Merc Exchange case) removed the presumption in favor of injunctions in infringement cases. Nevertheless, EchoStar knows that its DVR-addicted customers won’t wait patiently for a fix if the injunction is restored.
Even if EchoStar licenses TiVo’s technology, though, the satellite company is likely to do the same thing as TiVo’s ally-turned-competitor DirecTV: find a non-infringing way to cut TiVo out of the subscriber fees. That’s why TiVo -- which had 4.4 million subscribers as of April 30, 2.9 million of them through DirecTV -- has put such an emphasis on selling standalone set-top boxes. Most consumers, however, want a single box that can receive and record cable or satellite TV. That’s why the FCC ruling is so important to TiVo, whose only significant cable partnership is its still-nascent relationship with Comcast. The ruling makes it much more feasible for TiVo to develop and sell cable-ready DVRs without needing to woo (or split proceeds with) the cable operators. The same can be said for computer manufacturers and anyone else who wants to innovate in the field of TV receivers.
Here’s the background. The Telecommunications Act of 1996 ordered the FCC to take steps to insure that cable and satellite TV customers would have the option of buying a set-top box that would work anywhere in the country, rather than having to pay monthly rental fees. Lawmakers were trying to unleash the same kind of innovation that transformed telephones when the FCC ended AT&T’s monopoly on customer equipment. So the FCC came up with rules requiring the cable operators to separate their security systems, which needed to be kept secret, from the rest of the set-top box’s functions, which anyone could build. That move ultimately gave birth to ‘digital-cable ready’ TVs, which can perform many (but not all) of the functions of a cable set-top box. Instead of renting a converter box, owners of a digital-cable ready TV can obtain a plug-in ‘CableCARD’ from their local cable operator and plug the cable TV wire directly into the back of the set. (Unless they want to use video-on-demand or other interactive services, which still require a converter box. Sigh.)
The problem is, the plug-in cards haven’t taken off. There are 3.8 million sets with a CableCARD slot, but only 80,000 cards have been issued, the Consumer Electronics Association said in January. Set manufacturers blame the cable operators for not supporting the cards, and cable operators blame set manufacturers for lousy implementation. Still, it’s hard to argue with the FCC’s solution: requiring cable operators to switch all of their converter boxes to industry-standard ones that rely on the plug-in card for security. That sauce-for-the-gander approach will force CableCARDs to be mass produced, cutting costs and improving standardization -- two developments that are vital to TiVo and other companies that want to offer an alternative to the cable companies’ boxes. It should also hasten the arrival of a less expensive solution, one that relies on security software that’s downloaded through the cable network instead of burned onto a chip on a card.
Cable operators complained that the FCC misread the law and ignored developments in the market. The requirement, which is due to take effect next July, would also raise costs for cable customers, the operators argued (not that they’re averse to raising prices, something they’ve done as an annual rite). But the appeals court deferred to the FCC’s judgment this one critical point: unless cable operators take the same approach to security as consumer electronics manufacturers, the market for set-top boxes will not develop the way Congress ordered in 1996.
The promise of this ruling is that consumer-electronics companies will develop the same variety of devices to plug into a cable wire as they did for the telephone wire. Some of that innovation is happening already, thanks to the growing competition to cable from satellite and phone companies. But cable operators have by far the largest slice of the market -- about 60% of all US homes are cable subscribers -- so this ruling should be an even more powerful boost to new ideas. The proof will be on the store shelves, if and when a cable-ready version of TiVo and other manufacturers’ all-in-one solutions arrive to compete with whatever the local cable company is offering.