Video Programming: FCC Should Conduct Additional Analysis to Evaluate Need for Set-Top Box Regulation

Millions of households subscribe to cable, satellite, and telephone companies—known as MVPDs—for television, which is generally delivered via a set-top box attached to a television. Congress directed FCC to adopt regulations to assure a commercial market for devices to access MVPDs, and in February 2016, FCC proposed a rule intended to do so. Many industry stakeholders raised concerns about the proposal's potential effects, and FCC did not issue the proposed rule. This report examines: (1) the role of set-top boxes in accessing video programming content and (2) views of selected stakeholders and experts on the need for FCC regulation regarding set-top boxes and FCC's analysis of such need.

GAO analyzed data from a media research group regarding the video market and interviewed 35 industry stakeholders including 12 MVPDs, 5 video content producers, 3 device manufacturers, 12 industry associations, and others; GAO selected stakeholders based on comments filed with FCC on its 2016 proposed rule. GAO also interviewed 11 industry analysts and experts selected based on industry coverage and publications.

Set-top boxes play a significant but diminishing role in delivering video content in an evolving video market. Subscribers to multichannel video programming distributors (MVPD)—companies that provide pay television services via subscriptions such as cable and satellite companies—generally need a set-top box to access MVPD television services, and most subscribers lease a set-top box from their MVPD. However, consumers can now access video through a wide range of Internet-based services without a set-top box, using a variety of Internet-capable devices, such as tablets. Internet-based services include those providing on-demand video such as Netflix and some, such as Sling TV, providing live content similar to that from MVPDs. Some Internet-capable devices, such as Roku, allow people to watch Internet-based video on televisions. In recent years, subscriptions to MVPDs have fallen as more Internet-based services have become available. Partly in response to this competition, many MVPDs have begun offering content over the Internet to subscribers, accessible on many Internet-capable devices, including streaming devices that display it on televisions. While in most cases, MVPD subscribers still need a set-top box, a few MVPDs GAO interviewed now allow subscribers to access content they subscribe to solely over the Internet, without a set-top box.

The Federal Communications Commission (FCC) has conducted limited analysis of the need for regulations to assure a commercial market for devices, such as set-top boxes, to access MVPD services. Most stakeholders and experts GAO interviewed said that further regulations for this purpose were not needed, given recent changes in the video content market. FCC is directed by law to set regulations to assure a commercial market for devices to access MVPD services. However, the law also specifies that any such regulations may no longer apply if FCC determines that the markets for both MVPD services and devices to access MVPDs are fully competitive. Moreover, while it does not extend to independent agencies, Office of Management and Budget guidance says agencies could use analyses to evaluate the need for proposed actions. However, FCC proposed a new rule in 2016 to promote a commercial set-top box market without undertaking a comprehensive analysis of the competitiveness of the market to support the proposed rule. FCC did not enact a final rule. Stakeholders had differing views on the potential effects of the proposed rule, but some raised concerns that the rule could have had negative effects on MVPDs and content providers. As described above, widespread changes in the video market in recent years have expanded consumers' choices for video services as well as devices to access those services. Nineteen of the 35 industry stakeholders GAO interviewed said rules are not needed at this time, while 8 said rules are still needed. (The rest gave uncertain answers or did not comment on this issue.) Without a comprehensive analysis, FCC lacks information on the extent of consumer choice and, furthermore, the extent to which increased options for video services affect the relative importance of consumer choice for devices to access MVPDs. Such an analysis could help FCC determine if additional regulations are needed and, as the market likely continues its rapid evolution, could serve as a benchmark in FCC's further consideration of whether market conditions have been met such that regulations may no longer apply.

GAO recommends that FCC conduct a comprehensive analysis of how recent industry changes related to video services affect consumer choice for devices to access video services.

FCC agreed with GAO's recommendation and provided technical comments that GAO incorporated as appropriate.

Television programming has long been an integral part of society and the  economy, delivering news, entertainment, advertisements, and more to  the vast majority of American households. Multichannel video  programming distributors (MVPD)—which include cable, satellite, and  telephone companies—enable consumers to subscribe to a large  package of video programming that includes local broadcast channels  (such as local NBC stations) as well as an array of cable channels (such  as ESPN and CNN). Over 75 percent of households subscribe to an  MVPD for video programming services. To do so, the household typically  needs a set-top box, which provides the video feed from the MVPD’s  network to the television, while securing the content to ensure, for  example, that only channels included in the subscription can be  accessed. According to an analysis cited by the Federal  Communications Commission (FCC), in 2016 approximately 99 percent of  households that subscribed to MVPD service leased a set-top box,  spending an average of $231 per household.

In the Communications Act of 1934, as amended by the  Telecommunications Act of 1996 (herein known as “the Act,”) Congress  directed FCC to adopt regulations to assure the commercial availability of  devices—such as set-top boxes—that can access MVPD services. FCC  has made efforts to meet this directive, including by issuing a Notice of  Proposed Rulemaking in February 2016 that would have required MVPDs  to offer certain information to companies that are not affiliated with an  MVPD to allow those companies to design and build devices to access  video services from MVPDs, giving subscribers more alternatives to  leasing set-top boxes from their providers. However, in May 2017, the  new FCC Chairman said he did not believe that the proposed rulemaking  from the previous Commission furthered the goal of promoting a clear,  consumer-focused, fair, and competitive regulatory path for video  programming delivery, removed the proposed rule from circulation, and  said he does not intend to resurrect it. Since FCC proposed the rule, a  variety of stakeholders have disagreed on whether further regulation in  this area is needed. In addition, some have claimed that the proposed  rule would have negatively affected MVPDs and other industry  stakeholders.

You asked us to review FCC’s efforts to address the Act’s requirements  to assure commercial availability of devices to access MVPD services.  This report examines: 1) the role of set-top boxes in accessing video  programming and 2) views of selected stakeholders and experts on the  need for FCC regulation regarding set-top boxes and how FCC has  analyzed such need.

To review the role of set-top boxes in accessing video programming, we  contracted with Kagan, a unit of S&P Global Market Intelligence, a private  company, to obtain data and research on the video programming  industry. We obtained data on the video programming industry, including  data on subscriptions to MVPDs, online video distributors, and sales of  devices including set-top boxes and devices to access Internet-based  content, among other types of data. The timeframes for these data vary  based on the specific data points available. To determine the reliability of  these data we interviewed representatives of Kagan, reviewed  documentation on their data collection and analysis methodology, and  conducted a literature review to gauge how Kagan’s analysis has been  used in the industry, as well as in previous GAO reports. We also  considered the fact that Kagan’s data are often used and cited by FCC in  considering the reliability of the data. We did not assess all aspects of  Kagan’s methodological techniques, such as its forecasting and  estimation procedures, due to the proprietary nature of this information.  We determined that these data were sufficiently reliable for reporting on  trends in the video programming industry in this report.

To address both objectives, we reviewed the following: relevant federal  statutes and regulations including the Communications Act of 1934, as  amended by the Telecommunications Act of 1996, and FCC’s regulations  issued in response to that statute; proposed rules, including FCC’s  February 2016 proposed rule on set-top boxes; and relevant literature  identified through a literature search that discussed FCC’s efforts to  respond to the Act. We also reviewed Office of Management and Budget  criteria for conducting regulatory analyses. In addition, we interviewed  officials with FCC and the United States Copyright Office—part of the  Library of Congress—and conducted semi-structured interviews with 35  stakeholders selected to include a range of industry stakeholders: nine larger MVPDs, including the five largest cable providers, as  measured by number of subscribers, two satellite providers, and two  telephone providers;  three smaller MVPDs, selected based on recommendations from an  industry association, WTA-Advocates for Rural Broadband;  three manufacturers of set-top boxes and other devices to access  video content;  three independent, minority, or diverse programmers and interest  groups;  two large video broadcast networks;  ten industry associations, including associations representing MVPDs,  technology companies, owners of copyright content, and others; and  two others representing different interests.

In selecting the industry stakeholders beyond the MVPDs, we considered  comments filed with FCC on its 2016 proposed rule. Finally, we  conducted semi-structured interviews with 11 industry experts and  analysts. We selected these experts and analysts based on prior GAO  work that included interviews with industry experts and analysts, a review  of relevant publications and literature, a review of industry analysts who  cover relevant companies, and recommendations from industry experts  and analysts already interviewed. These interviews with industry  stakeholders and analysts and experts covered the market for video  programming, the role of set-top boxes and other devices to access video  content, FCC efforts to increase consumer choice in the market for  devices to access video content, and the need for FCC regulations  regarding set-top boxes. Following the interviews, we analyzed responses  across the interviews to identify and report on common themes. The  results of these interviews are not generalizable. For a complete list of  industry stakeholders and industry experts and analysts we interviewed,  please see appendix I.

We conducted this performance audit from September 2016 to  September 2017 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.

Set-top boxes provide a variety of functions, including enabling  consumers to access their video subscriptions. They also secure the  video provider’s content to ensure that the subscriber can access only the  channels subscribed to, and prevent unauthorized use, such as recording  of content that subscribers do not have the right to record. Among other  features, set-top boxes may also allow subscribers to:  view a channel guide and search for programming and record content  for later viewing;  view linear programming—meaning video programming that appears  on a given channel at a given time; and  view video on demand—meaning video programming available for  consumers to access when they want to instead of at a specific time.

Traditionally, video content flows from content producers to households  through various intermediaries (see fig. 1). Content producers negotiate  and agree to a variety of terms and conditions with the networks or local  television stations that carry the content, and those networks further  negotiate and agree to terms and conditions with the MVPDs that  distribute the content to subscribers. For example, a content producer  may agree that in addition to its program showing on the linear cable  channel at a specific time, its program is also available on demand, but  only for a specific period of time. Furthermore, networks may negotiate for  and agree to a range of terms with MVPDs regarding channel placement  and other items. Protections programmed into the set-top box help ensure  that such agreements are implemented.

For over two decades, federal statutes and regulations have sought to  foster consumer choice for video services and devices to access such  services. The Cable Television Consumer Protection and Competition Act  of 1992, for example, requires FCC to report annually on the status of  competition in the video marketplace. Furthermore, Section 629 of the  Communications Act of 1934, as amended by the Telecommunications  Act of 1996 (“the Act,”) directed FCC to assure the commercial availability  of devices that access MVPD service (which currently are typically set-top  boxes) by making them available from third parties unaffiliated with  MVPDs.

In response to the Act, FCC adopted regulations in October 2003 that  allowed the direct connection of digital navigation devices (typically, set- top boxes) purchased from third parties to MVPD systems. To receive  and display MVPD content, these devices require a CableCARD, a card  provided by a subscriber’s MVPD and installed in the third party set-top  box or other device, allowing a subscriber to view secure content they  subscribe to with their MVPD. As a result, such third party devices,  which remain available today, are known as CableCARD devices.

Subsequent to the adoption of its CableCARD regulations, as noted  earlier, FCC issued a Notice of Proposed Rulemaking in February 2016  that was intended to provide consumers additional choice for set-top  boxes. In the proposed rule, FCC tentatively concluded that despite the  availability of CableCARD devices, the market for navigation devices  (such as set-top boxes) was not competitive, citing a previous analysis  that found that approximately 99 percent of MVPD subscribers continued  to lease a set-top box from their MVPD. Therefore, FCC stated in the  proposed rule that it should adopt new regulations. Moreover, FCC stated  that technological advances since the CableCARD regulations had been  adopted enabled new solutions that, with certain ground rules, would  make it easier to finally fulfill the purpose of the Act. One goal of the  proposed rule was to allow third party manufacturers to create new  devices and user interfaces—the means through which users interact with  a set-top box such as the menus, remote control, and methods of  searching for programming—to access MVPD services. For such devices  to work, the proposal required MVPDs to transmit to third party devices  video programming content and data about that programming, including  channel listings and schedules and data on what programming  subscribers are entitled to access. Such devices, as proposed, would not  rely on a CableCARD and would be compatible with any MVPD’s  service. As such, as envisioned by FCC, the proposed rule would  enable a consumer to switch MVPDs without having to change the set-top  box.

In September 2016, after receiving input from a wide range of  stakeholders, the former FCC Chairman issued a three page fact sheet  providing an overview of a proposed final rule that the Chairman  scheduled for Commission vote in September 2016. According to the  fact sheet, MVPDs would have been required to offer consumers a free  electronic application (commonly referred to as an “app”), which would be  controlled by the MVPD, that subscribers could download onto a variety  of Internet-capable devices such as tablets and smartphones to access  the programming they subscribe to. Under this scenario, control over the  user interface would have been maintained by the MVPD, not the third- party device manufacturer, as the original proposed rule envisioned.  However, the former Chairman ultimately deleted the proposed final rule  from the list of items scheduled for consideration at the September 2016  meeting, and action on the proposed rule is no longer pending for  consideration.

Set-Top Boxes Play a Significant but Diminishing Role in Delivering Programming in an Evolving Video Market

The Internet Provides Opportunities for Viewing Video Programming without the Need For a Set-Top Box

While over 75 percent of households still subscribe to MVPDs for video  services and rely on a set-top box leased from their provider to access  content, the Internet has created more opportunities for consumers to  access video programming services in ways that do not require a leased  set-top box. These providers vary regarding the types of video services  they offer:

Content aggregators (e.g., Netflix and Amazon): These providers offer  video on-demand through a subscription. They aggregate content  from multiple sources and may provide their own content (e.g.,  Netflix’s original series House of Cards) along with content from other  programmers. There are also niche aggregators such as Indie Flix  that provide specialized programming.

Direct to Consumer (e.g., CBS All Access, HBONow, and Univision  Now): Some programmers and networks that distribute their content  through MVPDs are now separately providing live and on-demand  content directly to consumers through the Internet for a monthly  subscription. Consumers do not have to subscribe to an MVPD to  subscribe to such content. For example, HBO provides its content on  demand to its customers through the HBO Now app without requiring  a customer to subscribe through an MVPD.

Virtual Service Providers (e.g. Sling TV, DIRECTV Now, and  PlayStation Vue): These providers use a model similar to the MVPD  model by providing live and on-demand programming from a variety of  networks over the Internet in generally smaller channel lineups. Such  services are targeted to households looking for a smaller channel line- up at a lower cost than from MVPDs.

According to Kagan, subscriptions to content aggregators and direct to  consumer Internet-based services are expected to grow from 109 million  in 2016 to 137 million in 2020. Many new Internet video services have  launched since 2005, and there has been a particularly large growth since  2014. (See fig. 2.)

Subscribers can access Internet-based video services using many  different Internet-connected devices and do not need a set-top box.  These devices include stand-alone devices such as video game consoles  (e.g., Xbox One), laptops, tablets, smart phones, and smart TVs—which  include an integrated computer with an Internet browser, operating  system, and apps to stream Internet video subscriptions without a  separate device. Third party manufacturers have also developed  streaming media devices (e.g., Roku) designed to allow viewers to watch  Internet-provided content on their television set. Some of these devices,  such as tablets, allow consumers to view video programming content in or  out of the home with an Internet connection. Figure 3 below shows the  variety of devices, including set-top boxes, households can use to access  video programming.

These new Internet-based providers offer greater choice in video  services, eliminating the need to lease a set-top box for households that  choose to subscribe to one or more of these providers in lieu of an MVPD  subscription. According to Kagan, the percentage of households  subscribing to MVPDs is down from a peak of approximately 91 percent  of households wired for service in 2009 to 79 percent in 2016, and Kagan  estimates that in 2016 there were 29 million households that either  cancelled their MVPD subscription or never had it. Additionally, Kagan  projects that there will be a continued decline in MVPD video  subscriptions by 2020, when 74 percent of households will subscribe to  MVPDs, in part due to competition from Internet video programming.  Eight of 11 industry experts and analysts we interviewed also stated that  they believed MVPDs’ market share is falling due in part to Internet video.  Kagan reports based on results of an online survey it conducted of  households that never had an MVPD subscription that many in this group  are generally younger and have less income than other households, and  have in the past relied on over-the-air television because the cost of  MVPD service is too high. One industry expert told us that it is unclear  what will happen to these younger households’ viewing habits as they  age. According to this expert, in the past these younger non-subscribers  would eventually subscribe to MVPDs as their income grew, but it is no  longer clear that this will happen due in part to Internet video options.

While consumers are increasingly subscribing to Internet programming  that does not require a set-top box, the market for alternative devices to  access programming is also growing. According to Kagan, sales of these  alternative devices, such as streaming devices and smart TVs, have been  growing. (See fig.4.) For example, Kagan estimates that 70 percent of  television shipments in 2016 were smart TVs.

MVPDs Generally Still Require a Set-Top Box but Have Offered Subscribers Additional Ways to Access Video in Response to the Changing Marketplace

Many subscribers to MVPDs are still reliant on at least one set-top box,  usually leased from their provider, to access video programming. In the  wake of FCC’s 2003 CableCARD regulations, third-party providers  developed CableCARD devices that consumers could purchase at retail  outlets and use to access their MVPD subscription with a CableCARD.  Such devices are still available currently. For example, one of the better- known of these options, the TiVo set-top box, was available on  Amazon.com as of July 2017. However, in spite of the commercial  availability of these devices, according to FCC in its 2016 proposed rule,  about 99 percent of subscribers to MVPDs lease at least one set-top box  from their MVPD. While all five of the large cable providers we  interviewed said that their customers have the option of using a third party  device, they all added that very few customers do so and the majority  lease their set-top box. All five of the large cable providers we  interviewed cited limited customer interest as key reason consumers did  not adopt third party CableCARD devices. Each also cited one or more of  the following reasons:  limited functionality, including limited ability to access on-demand  content when devices were first available; high up-front costs to purchase a third party device; and  the ease of leasing a set-top box from a provider, which will replace  the box if it breaks, compared to owning a third party device where if it  breaks the consumer may have to buy a new one.

However, public interest organizations we interviewed stated they believe  that the low rate of adoption of CableCARD devices was due to limited  support from MVPDs. Specifically, representatives of one public interest  group we interviewed stated that MVPDs have not been advocates of  third party devices and have not devoted customer service toward this  effort, for example by providing their technicians with training. They also  stated that MVPDs have made it difficult for customers to use  CableCARD devices by, for example, requiring technicians to install the  CableCARD.  Representatives of one public interest group also stated  that because MVPDs charge their customers a monthly fee for using  CableCARD devices, as they do for a set-top box, customers have little  financial incentive to adopt these alternative devices. Another public  interest group stated that MVPDs do not make their subscribers aware of  their ability to purchase and use such devices.

Although subscribers to MVPDs generally require a set-top box in most  cases to access content they subscribe to, many MVPDs are also offering  their video programming over the Internet and through alternative  devices. For example, according to Kagan, MVPDs have started to allow  consumers to access their subscription content via the Internet in and out  of the home, on multiple devices, and when they want, for example:

Many cable networks allow subscribers to MVPDs that carry that  network to access live or on-demand content through an app or  website specific to that network. MVPDs do not develop or control  these apps and websites. Such service is often referred to as  “television everywhere.” Kagan forecasts that views of Internet-based  television everywhere from MVPDs will increase from approximately  5.4 billion views in 2016 to 11 billion views in 2020. All nine of the  larger MVPDs we interviewed told us that their customers can access  some “television everywhere” content online.

Many MVPDs have also developed their own apps allowing their  subscribers to access a range of content. Eight of the nine larger  MVPDs told us they have developed apps for Internet-capable  devices such as smart phones and tablets that allow their subscribers  to access content in and out of the home. Such apps may allow for  viewing both live and on-demand content. For example, consumers  can use a Comcast application on their smart phone out of their home  to view content. In addition, some MVPDs have developed apps for  streaming devices such as Roku. In some, but not all, cases such  apps can be used as a replacement for a set-top box; however, only  three of the nine larger MVPDs we interviewed said that their  subscribers may be able to use apps and alternative devices to  access their subscriptions without the need for any set-top box. For  example, one MVPD told us that customers can use an app on a  Roku streaming device to access content without needing any set-top  boxes.

These changes by MVPDs may be due to competition from new Internet- based services; 10 out of 11 industry experts and analysts we interviewed  told us that MVPDs are providing access to their programming through  alternative devices other than set-top boxes due to such competition.

Despite growth in alternative devices and services, a Kagan report  indicated and MVPDs we interviewed told us that set-top boxes will still  play an important role in the near future for accessing video content from  MVPDs as the industry replaces many current set-top boxes with higher  end versions. For example, the set-top box for one MVPD we interviewed  now provides advanced functions such as voice control, universal  searching, and increased storage of programming. All nine larger MVPDs  we interviewed told us that they foresee the set-top box still playing a role  in their service in the near future, and only three said their customers may  be able to access their subscriptions solely on alternative devices without  the need for a set-top box. One MVPD told us that although it sees  video providers moving to apps on their own in the future, there will still  be an option for consumers to access content from their set-top box. This  MVPD has made upgrades to its set-top box to provide more features and  has incorporated Internet video applications such as Netflix directly into  its set-top box. Additionally, eight out of the 11 experts and industry  analysts we interviewed said that they expect the set-top box to continue  to be needed for traditional provider services for households in the future.  One expert stated that the set-top box is the most efficient way to access  and deliver programming, and that it remains the best solution for  consumers and an important component of video programming.

Some Consumers May have Difficulty Taking Advantage of Internet Services That Do Not Require a Set-Top Box

While the Internet has provided consumers with more choice for  accessing video programming without subscribing to an MVPD and using  an associated set-top box, consumers must have broadband access to be  able to use these alternative products. However, FCC, in a 2016  broadband progress report, estimated that 10 percent of the population  does not have adequate access to in-home fixed broadband Internet and  the lack of broadband access is particularly concentrated in rural and  tribal areas.

Although subscriptions to broadband Internet service are rising as those  to MVPD video services are declining, most households are dependent  upon MVPDs to receive broadband Internet service. According to FCC,  97 percent of consumers are reliant on their MVPD for broadband  service, and according to Kagan the ten largest video providers account  for 91 percent of broadband subscriptions. However, as we recently  reported, continuing technological changes may provide new options for  obtaining access to broadband as, in the future, wireless Internet access  may be able to serve as a substitute to in-home broadband for some  consumers, and satellite-provided Internet service may also become an  option for consumers who don’t have access to in-home wired  broadband. For example, Kagan expects wireless broadband to serve  as a growing substitute choice for consumers with the advancement of  higher speeds in the future.

Experts and Stakeholders Suggest Additional FCC Efforts on Choice in Set-Top Boxes are Not Needed, but FCC has Conducted Limited Analysis of this Issue

Generally, Selected Stakeholders and Experts Did Not See Need for FCC Regulation to Increase Consumer Choice for Set- Top Boxes

Most selected stakeholders and industry experts we spoke to did not see  a need for FCC to intervene in the set-top box market at this time, given  the changes taking place that provide consumers with more choices for  services and devices to access video programming. All 11 of the experts  and analysts we interviewed said that the industry is moving away from  set-top boxes on its own by providing content through other means and 9  of those 11 added that, as a result, there is no need for FCC regulatory  intervention. Furthermore, only 8 of the 35 total industry stakeholders we  interviewed stated that regulations are needed. These stakeholders  pointed to the development of apps and devices beyond set-top boxes  that consumers can use to access video content. For example, one of the  larger MVPDs said that competitive pressures have pushed the company  to offer consumers new ways and devices with which to access the  content they subscribe to.

However, representatives of all three public interest organizations we  interviewed said that FCC regulations are still needed to promote  consumer choice for devices. Specifically, representatives of one public  interest organization we interviewed said that although the market has  evolved to provide more device choices for consumers, the fact that  almost all MVPD subscribers lease a set-top box shows that the intent of  the Act has not yet been met. They added that while MVPDs have been  increasing the development of apps for their subscribers to access  content, these apps so far do not have all the functionality of leased set- top boxes, meaning that the apps are not an adequate substitute. As  discussed earlier, despite the growth in apps, most larger MVPDs we  interviewed still require their subscribers to have at least one set-top box.

Some Experts and Industry Stakeholders Raised Concerns about the Potential Effects of FCC’s Recent Proposal to Expand Consumers’ Choices for Devices

Some industry stakeholders and experts and analysts we interviewed  thought that FCC’s proposed rule could have had negative effects on  MVPDs as well as other industry participants, including content providers.  As discussed earlier, the proposed rule would have required MVPDs to  transmit information—including video programming itself—to third party  devices. According to representatives of one industry association we  interviewed, this could have meant that MVPDs, and the programmers  whose content they distribute, would lose control over content that they  had created or purchased the distribution rights to. Programmers  negotiate terms and conditions—such as channel lineup and other  issues—with MVPDs that distribute their content. Some stakeholders  expressed concern that under the proposed rule there would be no  guarantee that third party device and service companies would adhere to  all those terms and conditions under which that content was provided to  the MVPDs. Some MVPDs and programmers expressed concern that  some third-party device companies might modify the stream of  programming by, for example, changing channel placement or overlaying  advertising.

Five of the 11 experts and analysts we interviewed thought that the  proposed rule could have led to copyright violations. Almost all larger  MVPDs, broadcast networks, and independent and diverse programmers  and interest groups we interviewed expressed concerns that should there  be copyright violations, content providers could also be negatively  affected. For example, one industry association said if a third party  device were to overlay advertising on a program, the value of advertising  availability that is usually sold by broadcast or cable networks or by cable  distributors would decrease since there might be competing advertising  displayed to viewers. This stakeholder added that any reduced ad  revenues would, in turn, reduce the ability to invest in content. Seven of  the 11 experts and analysts we interviewed reported that the proposed  rule could negatively affect content providers. Furthermore, some  stakeholders told us that they believed the possible negative effects of the  proposed rule could have especially affected independent and diverse  programmers such as Vme, a national Spanish language network.  According to one independent and diverse programmer we interviewed,  its business is dependent upon agreements with MVPDs that distribute its  programming. Those agreements include a range of terms including  advertising restrictions and channel placement. To the extent a third party  could modify the content—such as by overlaying advertising—that  programmer would have a harder time negotiating with MVPDs,  potentially reducing the compensation received from MVPDs for carrying  its channel, thus harming its business model. Furthermore, according to a  letter written by the Copyright Office, the proposed rule could have  interfered with the rights of copyright owners to license their works by  requiring MVPDs to provide content to third parties that would not  necessarily have a contractual relationship with the copyright owner.

However, some other stakeholders we interviewed stated that they  believed there was little likelihood that the proposed rule would have led  to licensing terms not being followed and reported that the proposed rule  may have provided public benefits, specifically:

Two public interest groups we interviewed said that because there  have not been violations with copyrights on CableCARD devices,  such violations would be unlikely on any new devices that would have  been created under the rule.

Representatives with one industry association representing  technology companies said that the proposed rule could have  benefited independent and diverse programmers by increasing the  number of devices available to consumers to access content,  providing such programmers with increased opportunities for  consumers to find their content.

Representatives with one public interest group said that consumers  would benefit from the proposed rule as new devices created in  response to the rule would increase access to programming on new  devices, thus increasing programming options overall.

Representatives with a device manufacturer said that the proposal  could have provided consumers with new and innovative ways to  access video content.

FCC Has Conducted Limited Analysis to Support Response to Statutory Requirement Regarding Consumer Choice for Set-Top Boxes

In commenting on a draft of this report, FCC noted that the limited action of taking a not- yet-adopted proposal off circulation would not generally be an occasion for providing a  regulatory impact analysis since such an action would have no regulatory effect. limited interest in adopting such devices for a variety of reasons, such as  the ease of leasing a set-top box from a provider, which will replace the  box if it breaks, compared to owning a third party device where if it breaks  the consumer may have to buy a new one.

The proposed rule also contained limited analysis of the potential effects  of this rule on consumers, MVPDs, or others. For example, while FCC  supported the proposed rule by stating that the average household pays  over $230 a year in set-top box lease fees, the proposal did not estimate  the extent to which any increased competition in the market for set-top  boxes might lead to cost savings for consumers. More broadly, FCC has  conducted some analysis of the evolving video market, which, as  discussed earlier, is providing consumers with more choices for both  video services as well as devices to access services. For example, FCC’s  most recent congressionally mandated annual video competition report— published in January 2017—includes discussion of the increasing  popularity of Internet-based video services and the competitive pressures  they have placed on MVPDs, among other things.

While the Act requires FCC to set regulations to assure the commercial  availability of devices to access MVPD services, it also states that any  regulations implemented under the statute shall cease to apply if FCC  deems that: (1) the market for MVPDs is fully competitive, (2) the market  for devices used to access MVPD services is fully competitive, and (3) the  elimination of the regulations would promote competition and the public  interest. While, as discussed above, FCC has conducted some analyses  related to these issues, neither the proposed rule nor the recent video  competition report reflect a comprehensive analysis looking at how these  interrelated issues affect each other. In addition, May 2017 letters to  Congress from the new FCC Chairman stating his intention to not move  forward with this issue did not contain or cite any analysis supporting that  decision.33  Specifically, FCC’s analyses do not consider the effect that increasing  consumer choice for video services has on the importance of consumer  choice for devices to access MVPD services. Increased consumer choice  for services may reduce the market power of MVPDs and may restrict  what they can do and what they can charge for set-top boxes—as well as  potentially spurring innovation in how they offer access to their MVPD  services. While the 2017 video competition report touches on consumer  choice for both services and for devices, it does not discuss the extent to  which new choices for services have affected the importance of consumer  choice for devices. Furthermore, this analysis does not consider what  level of consumer choice for devices must exist for the market for devices  to be “fully competitive.”

While FCC’s former Chairman believed that new regulations were needed  to fulfill the requirements of the Act, the current Chairman believes that  the 2016 proposed rule did not further his goal of promoting a clear,  consumer-focused, fair, and competitive regulatory path for video  programming delivery. As stated earlier, the proposed rule contained  limited analysis. In addition, the new Chairman’s letters to Congress noted  that he had removed his predecessor’s proposal from circulation but were  silent as to whether the Commission would take any future action in this  proceeding. A future Commission may again determine that regulations  are needed or decide not to take any further action on this issue.

In commenting on a draft of this report, FCC noted that the limited action of taking a not- yet-adopted proposal off circulation would not generally be an occasion for providing a  regulatory impact analysis since such an action would have no regulatory effect. access MVPDs. Such an analysis, conducted as part of FCC’s existing  annual video competition reports—which, as discussed, already include  relevant analyses—could help FCC determine if additional regulations are  needed.

The market for video services and devices to access video services has  evolved significantly in recent years so that consumers now have  considerably more choices for video services and devices to access such  services than when Congress passed the Telecommunications Act of  1996. Given the fast pace of change in the video market in recent years  and the likelihood that it will continue to evolve to offer consumers more  choices in how they access video content, it is important that FCC  analyze the implications of these changes for its responsibilities under the  Act to assure the commercial availability for devices that can access  MVPD programming.

However, FCC has not conducted a comprehensive analysis to support  an informed decision as to whether further action is needed or not. FCC’s  recently proposed rule and most recent annual video competition report  contain limited analysis of the extent to which Internet-based providers  affect consumer choice for video programming and what that change  means for the importance of consumer choice for devices in the context  of the Act. In contrast, a comprehensive analysis could inform FCC as to  whether the market conditions of competition for both video services and  devices have been reached under which, as stated in the Act, any  regulations implemented under the statute shall cease to apply. Should  such analysis show that those market conditions have not yet been  reached, a clear articulation by FCC of what elements have and have not  yet been met could help as a benchmark in FCC’s further consideration of  this issue as the market likely continues to evolve. Without more  comprehensive analysis of the industry’s evolution and its effects on  consumer choice for devices to access MVPD services, FCC could  potentially take regulatory action—or choose not to take action—in a way  that is not beneficial to consumers and does not meet the goals of the  Act.

To help ensure that any future decisions by FCC regarding its efforts  under the Act are based on comprehensive analysis, we recommend that  FCC, as part of its future annual video competition reports, analyze how  the ongoing evolution in the video programming market affects  competition in the related market for set-top boxes and devices, including  how this evolution affects the extent to which consumer choice for  devices to access MVPD content remains a relevant aspect of the  competitive environment. (Recommendation 1)

We provided a draft of this report to FCC and the Library of Congress for  review and comment. FCC responded with a letter in which it agreed with  our recommendation. This letter is reprinted in appendix II. FCC also  provided technical comments that we incorporated as appropriate. The  Library of Congress reviewed our report and did not provide any  comments.

We are sending copies of this report to interested Congressional  committees and the Chairman of the FCC. In addition, the report will be  available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-2834 or goldsteinm@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff that made significant contributions  to this report are listed in Appendix III.

Appendix I: Industry Stakeholders and Experts and Analysts Interviewed

The following tables list the industry stakeholders and industry analysts  and experts GAO interviewed as part of this engagement.

Appendix II: Comments from the Federal Communications Commission

Appendix III: GAO Contact and Staff Acknowledgments

Mark Goldstein, (202) 512-2834 or goldsteinm@gao.gov.

In addition to the contact above, Alwynne Wilbur (Assistant Director); Matt  Rosenberg (Analyst in Charge); Amy Abramowitz; West Coile; Leia  Dickerson; Sharon Dyer; Camilo Flores; Joshua Ormond; Nitin Rao; Amy  Rosewarne; and Elizabeth Wood made key contributions to this report.