Comcast and Netflix Show The Way

Voluntary content deal demonstrates the uselessness of set-top box regulation

Easier said than done is the task of drafting regulations that require pay-TV providers to provide free apps for downloading pay-TV to any device and for providing access to programming created by independent and diverse voices. Ask Chairman Tom Wheeler of the Federal Communications Commission. His first proposal was torn to shreds. He refuses to even release the full text of his Plan B for public comment.

Meanwhile, Comcast and Netflix have given up on the regulatory process to pursue a mutually-beneficial business arrangement. Brian Roberts and Reed Hastings have voluntarily agreed to combine their programming on Comcast’s Xfinity X1 platform. Netflix gets easier access to millions of Comcast customers. Netflix’s original content improves the appeal of the X1 platform, making it easier for Comcast to sell.

This is not a shotgun marriage. Cloud computing, which makes it practical to stream content to any device, enabled X1 and made it easy to include Netflix. Notwithstanding Chairman Wheeler’s comical last-minute efforts, the FCC’s spectacular failure to implement Section 629 of the Communications Act, passed as part of the Telecommunications Act 20 years ago, has created a vacuum that only sensible and practical business negotiations can fill.

Creating a free market for cable set-top boxes by regulatory fiat may sound appealing in theory, however Sec. 629 has been impossible to implement and should be repealed. “Each era of technology has brought unique challenges” to achieving the goal of a competitive market for the production and sale of cable set top boxes, acknowledges the FCC. The analog technology in use in 1996 when Congress enacted Section 629 “made it difficult” to achieve the statutory purpose. As the years went by, the FCC struggled to provide leadership as the industry transitioned from analog to digital, then again during the transition from one-way to two-way services. Issues including security and privacy proved insurmountable for this expert agency.

We now live in an age of apps. The economics are different — although the cost of developing an app may be significant, the cost of production and distribution is essentially zero. Many apps are free. The security and privacy threats are manifestly more serious. It used to be that a small number of devices could access a limited amount of content. Now every device is expected to be able to access all content, and that requires a lot of software. The more software, the more potential for bugs and opportunity for hacking.

Bureaucrats who are immune from civil lawsuits and who are trying to fashion one-size-fits-all solutions are a recipe for disaster. Only particularized negotiations between parties who stand to gain or lose in the market and in the courts can sort out the myriad security and privacy issues as they relate to specific platforms and software products for the ultimate benefit of consumers.

Industrial-age monopoly theory can’t explain innovative IT markets that produce expanding consumer choice and decreasing prices year after year. Why would a large company like Comcast strike a deal with a small competitor like Netflix? The FCC and many of the “public interest” clients it attempts to serve, are trained in industrial-age monopoly theory. They just don’t understand the real world. That’s why regulation is basically useless.