Set Top Boxes: The Other Privacy Debate

A government official issues a directive to the technology industry. Corporate spokespersons protest. And the general public leaps into a privacy debate.

The highest profile story that reflects this sequence of events, of course, involves Apple’s refusal to unlock the iPhone that belonged to one of the San Bernardino assassins. But there’s another privacy story, now brewing under a lower profile, that might ultimately wield a greater impact on the future day-to-day lives of most Americans.

It’s the cable television set-top box controversy. Most of us don’t even think about the little computerized boxes that sit on our television sets, and that convert the transmission signals into images and sound.

At the moment, virtually all Americans obtain those little boxes from the same technology companies that transmit the cable signals. But as a result of a recent Federal Communications Commission directive, that is likely to change.

Why? Because the directive opens up the set-top box market to competition. Very soon, the cable television companies will be required to allow their customers to use Apple TVs, Google Android TVs, and other third party devices to perform that conversion task. And, under these circumstances, such competition might generate undesirable consequences.

Huh? Isn’t competition a good thing? Well, yes, it is. But given that companies like Apple and Google already manage so much of our private information, access to our television viewing habits would massively magnify existing concerns about the concentration of our personal information in the hands of these firms.

Of course, the San Bernardino controversy is extremely important too. So, the next time you hear about the great privacy debate in regards to that terrible event, by all means, please feel free to deliberate about its ramifications.

But, at the same time, please don’t overlook the set-top box privacy discussion. It’s the “other” great policy debate, and it might well determine whether the firms that already know everything we do on our phones and computers also end up knowing everything we watch on television.

Not The Game

If you were browsing through your cable television channels last weekend, you might have stumbled across the most historic sports series in American history. More historic than the World Series of baseball, which was first played in 1903. And even more historic than the Olympic Games, which were first held in 1896.

What series might you have seen? It was the Harvard / Yale annual football game, first played in 1875 and now simply known as The Game. Except for breaks during the first and second world wars, the teams have faced off every year since the dawn of the industrial age. Under Walter Camp, a player on Yale’s 1876 team who later became the father of American football, the game grew into the business juggernaut that dominates our modern sports world.

“Modern,” though, is a relative concept. Had you attended any football game at the Yale Bowl prior to last weekend, you would have taken a seat in a stadium that has never installed permanent lights for night games. Yale is the only team in the Ivy League that plays all of its games during the daylight hours, the way that Walter Camp played football in the 1870s.

Nevertheless, at least temporarily, the day-time tradition did change last weekend. Why? Because this year, for the first time in history, The Game was played into the evening hours under the lights. NBC Sports wanted to televise it, and noted that it could generate higher television ratings by broadcasting into the evening. So Yale University installed a temporary field lighting system, and The Game entered the modern age.

For the fans, of course, a night event under the lights on a chilly November evening is not The Game that was played in the sunlight of an autumn afternoon. The essential fan experience is a different one, whether one is watching in the stands or on television.

Isn’t it ironic, though, that NBC Sports was initially drawn to televising The Game because of its historic nature … and then modified the essential fan experience in pursuit of higher ratings? Although Yale undoubtedly shared in the wealth that was generated by the shift to evening hours, it sacrificed a daytime tradition that was uniquely historic in nature.

Comcast, Time Warner, And Antitrust Law

Last week, America’s largest cable television provider Comcast announced that it is acquiring its biggest rival Time Warner Cable. The resulting merger of the nation’s two greatest cable television customer networks will establish Comcast as a dominant firm in nineteen of America’s twenty largest markets. It will also bequeath Comcast with 30 million customers, 50% more than the 20 million customers served by its closest competitor DirecTV.

You would think that a merger of the top two organizations in an industry, a transaction that leaves the surviving firm with a dominant market position over its remaining rivals, would be scrutinized carefully by antitrust regulators … wouldn’t you?

Well … think again! The transaction is expected to receive relatively little government scrutiny because cable television firms negotiate exclusive franchise arrangements for their customer markets. According to Comcast’s acquisition announcement, “Importantly, the proposed transaction will not reduce competition in any relevant market. Comcast and Time Warner Cable do not currently compete to serve customers in any zip code in America.”

So although Comcast competes against telephone companies that offer television services (like Verizon’s Fios and AT&T’s U-verse), as well as satellite communication companies that do the same (like DirecTV and Dish Network), Comcast does not directly compete against Time Warner Cable (or Cox Cable, or Cablevision) in its established service areas.

Because of its non-competitive franchise agreements, Comcast can benefit from the manner in which American antitrust laws have been written and enforced during the past century. Indeed, it has been that long since President Theodore Roosevelt first signed and then wielded antitrust legislation to “bust up” the great trusts of the late 1800s and early 1900s.

The laws tend to prohibit corporate acquisitions that would eliminate direct competition between firms in the short run. However, they tend to permit acquisitions that would help organizations build dominant market positions in the long run.

That’s why Comcast isn’t even bothering to suggest that the economies of scale to be achieved through industry consolidation may result in lower customer prices. Comcast’s Executive V.P. told reporters “We’re certainly not promising that customer bills are going to go down or even that they’re going to increase less rapidly.”

It is undoubtedly reasonable to argue that, under certain circumstances, the two largest organizations in an industry sector should be permitted to merge with each other. But if antitrust law in the United States is written and applied in a manner that precludes significant scrutiny of such mergers, how will American society be able to maintain the competitiveness of its markets?

If you were Edith Ramirez, the Commissioner of the Federal Trade Commission, would you petition the United States Congress to pass antitrust legislation that revises the criteria for regulatory reviews of proposed acquisitions? 

Time Warner vs. CBS: An Anti Trust Quagmire

Today is the one month anniversary of the financial dispute that has deprived three million Time Warner cable viewers of access to the CBS television network. And now, with the launch of the NFL football season right around the corner, sports fans are beginning to worry about missing the pleasure of viewing their favorite teams.

Why is it proving so difficult for the two corporations to reach an agreement? Although financial disputes are often contentious in nature, they seldom reach a stage of intractability when the underlying business proposition – in this case, television broadcasts of NFL games – is a highly profitable enterprise.

Indeed, the NFL economic colossus – not to mention all of the other programming that airs on CBS — generates more than enough revenues to satisfy both parties. So why can’t Time Warner and CBS reach an agreement?

Perhaps the parties are struggling because of the challenges of maintaining an implicit business model that skirts the edge of anti-trust law. Time Warner and its fellow cable television companies have always forced their viewers to purchase entire collections of network channels in order to access the ones that they actually wish to buy.

Likewise, the television networks have always forced the cable television companies to purchase their entire rosters of shows, from the least watched re-runs in the early morning hours to the most popular professional sporting events in prime time. And the Disney Corporation, like other conglomerates, has always required the cable firms to purchase access to most or all of its networks, from ABC TV to the Disney Channel to the myriad of ESPN channels.

In theory, such forced bundling terms are called tying arrangements. They have been illegal in the United States as a means for maintaining market power for over a century, having been implicitly banned by anti trust law under the Sherman Act of 1890 and then explicitly banned by the Clayton Act of 1914.

So why do they persist? Firms often argue that each bundle of services should be perceived as a single unified product, and not as a collection of tied-together products. Microsoft famously argued that point when it defeated a challenge from Netscape by embedding its Internet Explorer browser directly into its Windows operating system.

Although of questionable legality, the strategy proved to be a wildly successful one for Microsoft. Internet Explorer remained the #1 browser in market share until Google’s Chrome finally surpassed it last year, while Netscape faded and was then discontinued in 2008.

In the continuing case of Time Warner vs. CBS, however, the Tiffany Network’s channels and programs have been missing from the cable television firm’s roster of offerings for one full month. The fact that Time Warner’s remaining channels and programs have been unaffected by the absence of CBS lends credence to the argument that the cable firm’s full set of offerings (including CBS’s content) do not actually function as a single unified product.

And now legislators are threatening to require cable television firms to sell channels on an individual “a la carte” basis. Furthermore, the television networks are themselves making individual series available on DVD products, as well as independent episodes available for viewing on services like Netflix and Amazon Prime.

In other words, the forces of competition are placing incredible strains on the tradition of tying contracts in the cable television industry. That might indeed explain why Time Warner and CBS are struggling so fecklessly to finalize a contract that preserves this status quo business strategy.