Rent or Own? The New Cable-TV Dilemma

Soon, Subscribers Will Have Option to Buy Set-Top Boxes;
Pros and Cons of Cablecards

cable tv rent or own?

A generation ago, federal regulators opened the way for consumers to buy telephones rather than rent them from the phone company. Now, the government has its sights on the television set-top boxes that consumers rent from cable or satellite companies.

Beginning July 1, the Federal Communications Commission has ordered cable companies to supply only set-top boxes that can accept a so-called cablecard that slides into the set-top box and determines a customer’s level of access to cable service. The change is meant to give consumers nationwide the option of buying their own set-top boxes — or TVs that can use the cablecard — rather than renting one.

That new freedom may soon trigger an old question: Is it better to own or rent? On average, cable companies charge $5 a month for a regular set-top box and $7 for one with a built-in digital video recorder, or DVR. The National Cable & Telecommunications Association estimates those costs will increase to $8 and $10, respectively, for a set-top box with a slot for a cablecard.

A standard box with no recording capability, meanwhile, would likely retail for around $130 — the cost of renting for a little more than a year, according to Ian Olgeirson, a Denver-based cable analyst with SNL Kagan, a market-research company. The price of a DVR that can use a cablecard is expected to be much higher. TiVo Inc. sells a version for $700 but plans a less-expensive model.

But this buy-or-rent equation has many variables.

Though the FCC imposed a July 1 deadline on the cable industry, few analysts actually expect sudden demand from consumers to buy their own set-top box when that day arrives. Even if they did want to rush out and buy their own box, they may have a hard time finding an electronics store selling one.

Consumer-electronics makers such as LG Electronics Inc. and Panasonic Electronics, a unit of Japan’s Matsushita Electric Industrial Co., said they don’t expect a retail market anytime soon and that they have no plans to start making boxes for the retail market. Panasonic plans to compete with the dominant box makers Motorola Inc. and Scientific Atlantic, a unit of Cisco Systems Inc., to supply boxes to cable companies so they can lease them out to subscribers, but won’t be rolling them out directly to consumers. Best Buy Co., the nation’s largest dedicated consumer-electronics retailer, says it will stock the devices — but only if there is evidence of consumer demand.

FCC Chairman Kevin Martin, meanwhile, says that the agency’s goal is to “end up making sure that there is a competitive market for set-top boxes.” He says he’s counting on consumer demand to light a fire under manufacturers, retailers and cable companies, with the result being a proliferation of affordable devices.

Some new television sets and DVRs already come equipped with cablecard technology built in. Electronics makers and consumer groups, however, complain that cable companies have been reluctant to hand out the cards. Consumers already have bought eight million digital TV sets and high-end DVRs ready to accept cablecards, but only 250,000 households have been able to obtain the cards from their cable companies, according to Jenny Pareti of the Consumer Electronics Association, an industry lobbying group.

The National Cable & Telecommunications Association, the cable industry’s lobbying group, says few customers have requested the cards because they still require a set-top box from the cable company. But the association says it expects demand for cablecards to jump come July.

In addition, set-top box makers have been on the fence. Motorola and Scientific Atlantic control 80% of the market for set-top boxes, and while both say they plan to make set-top boxes available for sale in stores, their biggest priority is maintaining their sales to cable companies — at least for now.

The real beneficiaries of the FCC’s rule change could be TiVo and other DVR makers. Matthew Zinn, general counsel at TiVo, the largest maker of stand-alone DVRs, called the mass-market introduction of cable cards a watershed moment. “The delay has been frustrating, not just to TiVo, but to a lot of other consumer-electronics manufacturers,” Mr. Zinn says.

“The stand-alone DVR market has not exactly taken the public by storm,” says Mr. Olgeirson of SNL Kagan. He cites the numbers: At the end of 2006, 17 million households had DVRs, nearly 15 million of them rented from a cable or satellite-television provider. “TiVo has struggled with its stand-alone subscribers,” he says. “Even after they really reduced their selling price, consumers still chose the integrated boxes from their pay-television provider.”

Cable companies for years have fiercely opposed cablecards, arguing that they add complexity and costs but no benefits, while a better technology is just on the horizon. FCC’s requirement didn’t put an to the grumbling, but it left the cable industry with no choice but to comply with the rule.

The cable industry’s “time, money and resources would have been better spent on something like downloadable security that would allow a real competitive marketplace to develop,” says Kyle McSlarrow, chief executive of the cable-industry association, referring to next-generation technology to let cable companies set up a subscriber’s channels remotely. Mr. McSlarrow complains that cablecards, unlike downloadable technology, aren’t interactive so consumers won’t be able to use interactive program guides or order movies and other programming using the remote control.

The FCC’s Mr. Martin says that after cable operators wouldn’t commit to a deadline for introducing the interactive technology, the FCC ran out of patience and set July 1 as a firm date for using cablecards — as Congress had required more than a decade ago.

Chris Murray, an analyst at Consumers Union, says he is optimistic that the market for stand-alone DVRs will quickly accelerate. “In the early adopter phase, it will be the higher end, more discerning customer, but markets move from early adopter to mass market pretty quickly these days,” he says.

DVR manufacturers are betting on that. Digeo Inc. of Kirkland, Wash., announced in January that it is planning in the third quarter to roll out its boxes to the retail market for the first time. Chief Executive Mike Fidler says around 400,000 cable subscribers already rent Digeo boxes through their cable companies, and he is looking forward to selling directly to consumers. “There is a need to stimulate innovation and to open the market up to competition,” Mr. Fidler says.