The end of an era

By Jason Stutman | Saturday, February 20, 2016
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Earlier this week, the Federal Communications Commission (FCC) voted to begin crafting a new set of rules poised to put yet another dent in the already struggling cable industry.

According to the FCC mandate, cable companies would have to share all necessary information with third-party manufacturers of cable boxes — effectively ending the industry’s long-standing monopoly over set-top hardware.

According to FCC Chairman Tom Wheeler, the average American household spends over $230 a year renting these boxes from cable providers. The lawmakers argue that the new rules will open the market to competition and increase consumer choice as a result.

Of course, what’s good for consumers isn’t going to be good for the cable oligopoly in the slightest. According to Reuters, companies like Comcast and Time Warner make an astonishing $19.5 billion a year from rented cable boxes.

Needless to say, that’s a lot of revenue suddenly up for grabs.
Not too surprisingly, the new FCC plan has been spearheaded by young tech companies like Alphabet Inc. (NASDAQ: GOOG), while being starkly opposed by aging television providers such as AT&T Inc., DirecTV, and the National Cable & Telecommunications Association (NCTA), which represents firms such as Comcast.New Kids on the Box

Cable companies argue that the new rules will allow rivals to unfairly profit by selling ads and viewer data from shows. While they might have a point, the lobbying power of a tech giant like Alphabet has so far proven too much to overcome.

On top of suddenly putting nearly $20 billion of revenue at risk, the new rules being proposed signal a significant turning point in how regulators are influencing, or at the very least speeding up, the fate of cable companies in the U.S.

As a senior research analyst at MoffettNathanson puts it:

The commission’s proposal is very consciously aimed at turning traditional pay-TV providers into dumb pipes, and forcing them to compete on a pure commodity basis for the delivery of content.

The new rules closely reflect the thinking behind the FFC’s recent net neutrality decision. Cable providers are no longer being treated by regulators as television companies, but rather as utilities that provide Internet service.
Before you start celebrating what this will mean for your cable bill, though, the benefit might not be as direct as the FCC has implied. According to NCTA president Michael Powell, the new rules could take between four to seven years to fully implement, with costs ultimately falling onto consumers.The Real Monetary Benefit

Opponents to the plan also contend that the proposal disrupts the natural, IP-based migration by operators who are already seeking to replace set-tops with apps. As Powell argued in a recent statement: “The problem with the FCC chairman’s proposal is that it perpetuates cable boxes at the center of the video universe.”

Putting all these arguments aside, the investor takeaway here is pretty straightforward: third party set-top providers are going to benefit from these rules while established cable providers will take a hit, whether it be through lowered revenue or increased prices.

Likely the biggest beneficiary, of course, is none other than TiVo Inc. (NASDAQ: TIVO), a company that would have dramatically increased access to the set-top box market if the FCC gets its way.

Today, there are approximately 1 million consumers using TiVo-owned boxes, each of which pays around $7 a month (compared ~$15 a month for cable-provided boxes).

For every consumer that switches over from cable-owned set-tops, TiVo would be able to replace the current ~$2 a month it’s getting from domestic mid-tier operators with $7 a month. For Tier 1 operators (where TiVo doesn’t have relationships), the benefit would be full upside.

For perspective as to how big the opportunity really is for TiVo, consider that the top four MSOs (multiple-system operators) alone currently rent out set-top boxes to over 75 million subscribers, or 75 times the size of TiVo’s current customer base. Not to mention, TiVo is one of the only companies currently positioned to fill the void.

Of course, alternative streaming providers such as Apple, Amazon, Netflix, etc. are expected to see some tertiary benefits as well should the FCC move forward with its set-top box plans. Comcast, for instance, has long refused to support Netflix’s app on its own set-top box, while third-party OEMs like TiVo and Roku treat apps tantamount to conventional pay-TV bundles.

In other words, by allowing consumers to opt for better set-top boxes, the cable oligopoly doesn’t just have $20 billion in annual rentals to lose, but a large pay-TV subscriber base as well. If you happen to have Comcast or Time Warner in your brokerage account, now might be a good time to reconsider those holdings.

Until next time,

JS Sig

Jason Stutman

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