Googling Hollywood’s Next Epic Disaster

The FCC’s pending rules to deregulate the market for cable TV set top boxes is sparking fears among content creators that they won’t be fairly compensated while the Silicon Valley tech giants get a free ride on their creativity.

The FCC calls it the “unlock the box” proposal.

Critics call the FCC’s pending action to deregulate the market for cable TV set top boxes a disaster for Hollywood, niche cable channels, producers and distributors of indie movies and TV, and many others.

It sparks fears among content creators that they won’t be fairly compensated while the Silicon Valley tech giants get a free ride on their creativity.

The rule making is expected to come up for a final vote on April 28 at the next FCC open meeting. It won preliminary approval in February on a 3 to 2 vote. It is widely expected to win final approved.

It makes for a great sound bite when FCC Chairman Thomas Wheeler promotes the idea as a way to open the marketplace for cable TV set top boxes to third party vendors in order to give consumer’s greater choice and savings.

“Ninety-nine percent of pay-tv subscribers are chained to their set-top boxes,” says an FCC press release, “because cable and satellite operators have locked up the market. Lack of competition has meant few choices and high prices for consumers.”

The rapidly consolidating and ever more powerful cable TV distribution companies, led by Comcast and Charter, have few fans - but this isn’t just about them.

This seemingly consumer friendly idea comes loaded with it’s own Trojan Horse, a hidden agenda. The tech giants have spent years lobbying for this. It isn’t about who sells a set top box full of chips and LED lights. It gives Google, Apple, Sony and other tech companies a level playing field when consumers turn on their TV, and opens the door to new opportunities to sell increasingly important targeted advertising.

These rules will not be a problem just for cable, satellite and Telco companies, but also loom as a disaster at all levels of the entertainment industry – from powerful studios to indie producers.

The fear is that like the effect the Internet has had on the value of content, compensation will drop precipitously. The only survivors will be those with high profile event programming that can command top prices. For an indie filmmaker, it will mean less payback and a harder time finding small distributors who will be able to compete with the deep-pocketed tech titans and studios.

This is especially threatening to struggling niche cable channels, supporters of diversity in media and even consumers, who the FCC chairman claims he is championing.

In reality, the proposal should be called “the Google giveaway.”

The new rules are an invitation to tech companies in Silicon Valley, including Google and Apple, to not only offer hardware (boxes) but also control software that could provide new sources of viewing data and create advertising opportunities while avoiding paying compensation to content creators (who attract the viewers). It also threatens the existing system of contracts between studios and distributors that makes it possible for channels that offer niche content to exist alongside the ESPNs and broadcast networks.

This comes in the wake the arguments made about ala carte. It sounds great and for some it will result in savings. But for most viewers it will ultimately mean fewer choices and higher prices. For the creators of intellectual property, it will mean dilution in the value of their product, which means lower prices. That, they say, makes it harder to pay for development and production of new content.

“If this passes we are dead,” an indie film distributor told me recently. “These tech companies are only interested in the big mass market titles and will squeeze the rest of us out of business.”

“Media executives expressed concern that the change could undermine the foundation of their businesses,” the New York Times reported in February. “The concern is that the new arrangement could negate contracts between cable companies and entertainment companies, in which the cable companies pay television groups billions of dollars a year for the rights to distribute programming. Those contracts stipulate how the programming can be distributed, for instance, whether it is included in video-on-demand packages, how it is branded, certain copyright protections and the treatment of advertising.”

“The executives said the proposal could allow a new set of companies, like Google or Apple, to step in to distribute and sell ads in and around television programming that they neither paid to create, or license,” continued the New York Times article. “A set-top box can control the flow of data on users’ viewing habits, the sort of information that is at the heart of Google’s business.”

Former Congressman Henry Waxman came out against the FCC set top rules, which he said harkened back to the All-Vid proposal that was considered and rejected in 2010- for good reason.

Waxman pointed out that there are already ways to get a range of new channels using smart TV’s and apps like Roku. The growth of online and streaming has fed a boom in the creation of original content by TV networks, cable channels, streaming services, digital producers and others.

Waxman said he is mystified by why the FCC is doing this, adding that passage, “would apply the reverse-Midas touch to this golden age of television, because it would disrupt the delicately balanced competitive forces that are behind the explosion of creativity we’ve benefited from in recent years.”

“Today,” added Waxman, “emerging producers can invest in new content knowing they are likely to receive a reasonable return through agreements with distributors covering advertising, channel placement, on-demand rights, and anti-piracy protections.”

“A new AllVid mandate,” added Waxman, “risks reversing this progress by letting large companies take shortcuts to create new services on the backs of investments made by others, disrupting the carefully-negotiated arrangements between content companies and current multichannel pay TV video providers. Companies would essentially be able to poach TV programming without paying for it.”

A coalition of African American Asian and Latino civil rights groups has asked Wheeler to at least slow down the process so an analysis can be done of the impact n “diversity and inclusion.”

The groups say they fear the new rule “disaggregates content in such a way as to likely disadvantage people of color and traditionally underrepresented voices in this space.”

In a letter to the FCC, the coalition warned that if passed, “it will empower emerging platforms from a tech industry that has shown very little to no commitment and progress in effecting diversity and inclusion in their own industry. After years of resisting disclosure, many tech giants released their employment diversity numbers for the first time in 2014, which highlighted an astonishing lack of inclusion.”

The other odd thing is that Wheeler’s proposal seems to seek to lock in the set top box at a time there is significant movement toward getting rid of it altogether. In the not too distant future, smart TV’s will allow consumers to select a range of content providers without any box.

“It would be a 20th century solution to a 20th century problem,” wrote Waxman, “that the market is already solving on its own.”

By Wheeler’s estimate the average cable customer pays less than $8 a month to rent a box currently from a cable provider. He suggests that will go away which is absurd. Google and Apple and others are not going to give away boxes for free. They will be sold or rented to users.

Like so much of the deregulation push of the past few decades, such as electricity and natural gas prices, the idea of increased competition sounds great but actually turns out to mean even higher costs for consumers and greater profits for Wall Street.

The preliminary vote to approve the new rules was passed by the five FCC commissioners along party lines, with Wheeler and fellow Democrats Mignon Clyburn and Jessica Rosenworcel in favor and Republicans Ajit Pai and Michael O'Rielly against.

Pai said the FCC is "doubl[ing] down on the necessity of having a box…Our goal should not be to unlock the box, it should be to eliminate the box. This goal is technically feasible and it reflects most consumers' preferences, including my own."

Not surprisingly, the big cable companies are against the proposed rule, as Comcast Senior Executive VP David Cohen said in a statement: "Today’s action inexplicably ignores the market-driven 'apps' based approach suggested by the technical committee [that advised the FCC], which is rapidly proliferating in the market and giving consumers unprecedented options to receive video programming services.”

This time they have Hollywood’s top lobbyist on their side. The Motion Picture Association of America has come out strongly in favor of a no vote on the proposed rules.

“What AllVid proponents are actually seeking is federal rules to siphon pay-TV content and repackage select portions of it for their own commercial exploitation through fees, advertising, or data collection, and without having to enter into agreements with the creators like others in the marketplace must do. This amounts to government-compelled speech—striking at the core of First Amendment and copyright law—and would undermine programmers’ ability to develop and make available high-quality content.”

Challenging claims it wouldn’t impact copyrighted material, it added: “Such a technology mandate could also increase content theft by weakening security, making it easier for piracy-laden ‘black boxes’ to connect to legitimate services, and by prominently displaying stolen content from the Internet alongside authorized content.”

The Future of TV Coalition, a group created by the MPAA and a large number of others in the entertainment industry to stop piracy, has come out against the new rules even though Wheeler insists it will not be a threat to copyright holders.

A cable TV set top box

The group said in a statement: “Chairman Wheeler correctly points out that apps-driven innovation is already allowing consumers to watch video on a wide range of devices — without hurting small and independent programmers, invading privacy, or undermining copyright protections. Why then is he proposing a sweeping mandate that explicitly rejects this apps approach and strips TV providers of the technical and contractual tools they currently use to ensure these protections remain in place?”

Actress and activist Eva Longoria joined with 17 other Hollywood creators to denounce the proposed new rules, which she said would put their business survival “at risk.”

“The programming that we produce and our audiences enjoy does not come free,” said Longoria. “Passion and creativity alone won’t keep the lights on; if the revenue we generate from our work isn’t sufficient to cover the cost of producing it, our businesses won’t survive very long and our audiences’ viewing options will shrink. That’s why true media diversity requires a level playing field where independent voices like ours can negotiate with distributors and advertisers to build lasting, sustainable businesses.”

“The set-top box proposal,” added Longoria the day before the February FCC hearing, “would fundamentally undermine this level playing field, stacking the deck against creators by giving tech companies a license to repackage and profit from our work without any need to negotiate, much less pay, for the rights.”

“Rather than promoting competition in set-top boxes,” The Future of TV Coalition has stated in a filing to the FCC, “the proposed approach would create a federal rule for others to siphon the creative work of others for free, appropriating pay-TV content and repackaging select portions of it for their own commercial exploitation through fees, advertising and data collection without having to enter into agreements with the creators like others in the marketplace must do.”

The Coalition also explained why they do not agree with Wheeler this is not a threat to copyright holders: “Licensed distributors follow rules about channel placement, brand protection, advertising and appropriate search. The supporters of the Google proposal make clear they do not plan to follow those limits.”

I have been a supporter of many of President Obama and Chairman Wheeler’s moves to modernize communications and make the new technology available in rural as well as urban areas. I even agree with their passage of the controversial Net Neutrality rules.

However, I believe unlocking the set top box right now is a mistake. The market is already hurdling toward its own solution to ensure every channel on any distribution platform is only a click away on your smart TV.

Instead of saving consumer’s money I believe this will cost them money in the long run. Some homes will need two boxes instead of one, and still have to subscribe for cable, broadband, voice service and security.

As the White House did in the 2011 fight over online piracy in the SOPA battle, the President is once again is taking the side of Silicon Valley over Hollywood.

The tech industry is large, wealthy and enormously powerful, and most times when they face off, the entertainment business is almost always the loser.

This wrong-headed rule-making could spread the pain far beyond Hollywood.