[Federal Register Volume 70, Number 119 (Wednesday, June 22, 2005)]
[Rules and Regulations]
[Pages 36040-36053]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-12229]


-----------------------------------------------------------------------

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 76

[CS Docket No. 97-80; FCC 05-76]


Commercial Availability of Navigation Devices

AGENCY: Federal Communications Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: In this document, the Commission maintains the requirement 
that cable operators separate security and non-security functions in 
devices they provide on a leased or sale basis, but extends the 
deadline. The Commission also establishes reporting requirements 
regarding the feasibility of a software-based security solution, cable 
operator support of CableCARDs, and the status of negotiations on a 
bidirectional digital cable compatibility standard. These actions are 
taken pursuant to the Communications Act, which directs the Commission 
to adopt regulations to assure the commercial availability of 
navigation devices equipment used by consumers to access services from 
multichannel video programming distributors.

DATES: Effective Dates: 47 CFR 76.1204(a)(1) is effective July 22, 
2005.
    Compliance Dates: The requirement that the cable industry file a 
report on the feasibility of deploying downloadable security is 
effective upon the earlier of December 1, 2005 or receipt of approval 
from the Office of Management and Budget (OMB). The requirement that 
the National Cable and Telecommunications Association and the Consumer 
Electronics Association file joint status reports and hold joint status 
meetings with the Commission regarding progress in bidirectional 
negotiations and a software-based conditional access agreement every 60 
days is effective upon the earlier of August 1, 2005 or OMB approval. 
The requirement that the six largest cable operators file status 
reports of CableCARD deployment and support every 90 days is effective 
upon the earlier of August 1, 2005 or OMB approval. The Commission will 
publish a future notice in the Federal Register announcing the 
compliance dates for the reporting requirements that are subject to OMB 
approval.

ADDRESSES: All filings must be addressed to the Commission's Secretary, 
Office of the Secretary, Federal Communications Commission, 445 12th 
Street, SW., Room TW-A325, Washington, DC 20554. In addition to filing 
comments with the Office of the Secretary, a copy of any comments on 
the Paperwork Reduction Act information collection requirements 
contained herein should be submitted to Cathy Williams Federal 
Communications Commission, Room 1-C804, 445 12th Street, SW., 
Washington, DC 20554, or via the Internet to [email protected].

FOR FURTHER INFORMATION CONTACT: For additional information on this 
proceeding, contact Natalie Roisman, [email protected], or Steven 
Broeckaert, [email protected], of the Media Bureau, Policy 
Division, (202) 418-2120. For additional information concerning the 
Paperwork Reduction Act information collection requirements contained 
in this document, contact Cathy Williams at 202-418-2918 or via the 
Internet at [email protected].

SUPPLEMENTARY INFORMATION: This is a summary of the Federal 
Communications Commission's Second Report and Order (2nd R&O) FCC 05-
76, adopted on March 17, 2005 and released on March 17, 2005. The full 
text of this document is available for public inspection and copying 
during regular business hours in the FCC Reference Center, Federal

[[Page 36041]]

Communications Commission, 445 12th Street, SW., CY-A257, Washington, 
DC 20554. These documents will also be available via ECFS (http://www.fcc.gov/cgb/ecfs/). (Documents will be available electronically in 
ASCII, Word 97, and/or Adobe Acrobat.) The complete text may be 
purchased from the Commission's copy contractor, 445 12th Street, SW., 
Room CY-B402, Washington, DC 20554. To request this document in 
accessible formats (computer diskettes, large print, audio recording, 
and Braille), send an e-mail to [email protected] or call the Commission's 
Consumer and Governmental Affairs Bureau at (202) 418-0530 (voice), 
(202) 418-0432 (TTY).

Paperwork Reduction Act of 1995 Analysis

    This 2nd R&O contains modified information collection requirements. 
The Commission, as part of its continuing effort to reduce paperwork 
burdens, invites the general public and the OMB to comment on the new 
information collection requirements contained in this 2nd R&O, as 
required by the Paperwork Reduction Act of 1995, Public Law 104-13. 
Written comments on the modified information collection requirements 
must be submitted by the public, the Office of Management and Budget 
(OMB), and other interested parties on or before August 22, 2005. In 
addition, we note that, pursuant to the Small Business Paperwork Relief 
Act of 2002, Public Law 107-198, see 44 U.S.C. 3506(c)(4), we 
previously sought specific comment on how the Commission might 
``further reduce the information collection burden for small business 
concerns with fewer than 25 employees.''

Summary of the Order

I. Introduction

    1. Section 629 of the Communications Act directs the Commission to 
adopt regulations to assure the commercial availability of navigation 
devices equipment used by consumers to access services from 
multichannel video programming distributors (MVPDs). Pursuant to this 
directive, the Commission issued the Report and Order, 63 FR 38089, 
July 15, 1998, in the above-captioned proceeding establishing, inter 
alia, a January 1, 2005 deadline for MVPDs to cease deploying new 
navigation devices that perform both conditional access functions and 
other functions in a single integrated device. The Commission adopted 
the requirement to separate the conditional access function from the 
basic navigation device (the ``host device'') in order to permit 
manufacturers, retailers, and other vendors unaffiliated with MVPDs to 
commercially market host devices while allowing MVPDs to retain control 
over their system security. In the 2003 Extension Order, 68 FR 35818, 
June 17, 2003, the Commission extended the deadline concerning the 
prohibition on integrated devices until July 1, 2006.
    2. In this document, the Commission reports its reassessment of the 
state of the navigation device market, as required by the Extension 
Order. Given the equipment ordering and manufacturing cycles involved, 
it is necessary at this point to provide guidance as to the 
Commission's expectations with respect to the 2006 date. The cable and 
consumer electronics industries have made, and continue to make, 
significant progress in the development of technical standards in this 
area. As a result, the commercial market for navigation devices used in 
conjunction with the distribution of digital video programming has 
expanded and consumers now have increased choice among navigation 
devices.
    3. Nevertheless, the Commission is not persuaded that the current 
level of competition in the navigation device market is sufficient to 
assure the commercial availability of navigation devices to consumers 
from sources other than multichannel video programming distributors 
(MVPDs). The Commission continues to believe that common reliance by 
cable operators on the same security technology and conditional access 
interface that consumer electronics manufacturers must employ in 
developing competitive navigation devices will help attain the goals of 
section 629 of the Act. Thus, in this document, the Commission 
maintains the requirement that cable operators separate security and 
non-security functions in the devices they provide on a leased or sale 
basis.
    4. The Commission recognizes, however, that the development of set-
top boxes and other devices utilizing downloadable security is likely 
to facilitate a competitive navigation device market, aid in the 
interoperability of a variety of digital devices, and thereby further 
the DTV transition. The Commission also recognizes that software-
oriented conditional access solutions currently under development may 
allow common reliance by cable operators and consumer electronics 
manufacturers on an identical security function without the potentially 
costly physical separation of the conditional access element. Cable 
operators therefore are afforded a limited extension of the integration 
ban to determine whether it is possible to develop and deploy a 
downloadable security function that will permit them to comply with the 
Commission's rules without incurring the costs associated with the 
physical separation approach. The Commission extends the deadline for 
phase-out of integrated set-top boxes until July 1, 2007 and requires 
the cable industry to report no later than December 1, 2005 regarding 
the feasibility of a downloadable security solution. In addition, NCTA 
and CEA shall file joint status reports and hold joint status meetings 
with the Commission on or before August 1, 2005 and every 60 days 
thereafter on progress in bi-directional talks and a software-based 
conditional access agreement. In this document, the Commission also 
finds that, to the extent a downloadable security or similar software-
oriented solution provides for common reliance on an identical security 
technology and conditional access interface without physical separation 
of the security element, such technology complies with 47 CFR 
76.1204(a)(1).
    5. This additional time, in addition to allowing for the testing 
necessary to determine whether a software conditional access regime 
will produce the desired result, will also provide for progress in 
bidirectional negotiations, which have been disappointing to date. In 
the meantime, the Commission is concerned about anecdotal evidence 
relating to the cable industry's current level of support for 
unidirectional CableCARDs and expect that performance to improve over 
the coming months to meet consumer expectations as they purchase 
CableCARD-enabled devices. To this end, the Commission directs the six 
largest cable operators to file on or before August 1, 2005, and every 
90 days thereafter, status reports on CableCARD deployment and support, 
including efforts to develop and deploy a multistream CableCARD for 
widespread use in digital devices available commercially.

II. Discussion

A. Comments

    6. In conducting a full assessment of the navigation device market, 
the Commission considered not only those comments filed in response to 
the Extension Order, but also pertinent comments filed in response to 
the 2000 Further NPRM, 65 FR 58255, September 28, 2000. In the Further 
NPRM, the Commission sought comment on the

[[Page 36042]]

existence of any obstacles or barriers preventing or deterring the 
development of a retail market for navigation devices, and whether 
sufficient incentives existed to permit development of such a retail 
market. The Further NPRM also sought comment on the effect that 
provision of integrated equipment by cable operators has had on 
achieving a competitive market for commercially available navigation 
devices. The Extension Order sought more specific comment on whether 
any further changes in the phase-out date for integrated devices are 
warranted. In response, the cable industry argues that circumstances 
have changed dramatically since the prohibition on integrated devices 
was adopted in 1998, that the rationales for the ban no longer exist, 
and that the Commission accordingly should eliminate the rule. 
Alternatively, the cable industry and its equipment suppliers argue 
that the Commission should further extend the phase-out date for 
integrated devices. Recently, Microsoft, reversing an earlier stance 
that the Commission retain the July 1, 2006 deadline, filed jointly 
with Comcast and Time Warner requesting the Commission to defer the 
phase-out date for integrated devices ``for some period ranging from 6 
to 18 months,'' to, in part, ``allow approximately one year for the 
development of a new agreement for FCC consideration related to the 
retail availability of fully-functional digital cable products.'' 
Consumer electronics manufacturers and retailers, as well as consumer 
groups, support the retention of the July 1, 2006 deadline and contend 
that nothing has changed since the adoption of the Extension Order to 
justify eliminating or further postponing the deadline.
    7. Retail Initiative. In the Further NPRM, the Commission sought 
comment regarding whether to continue to permit MVPD or retail 
distribution of integrated boxes if integrated boxes also are 
commercially available. In response, NCTA asserted that the goals of 
section 629 of the Communications Act could be met by a plan that would 
allow integrated digital set-top boxes to be made available through 
independent retail outlets. AT&T contended that increased competition 
in the MVPD market naturally spurred cable operators to pursue retail 
distribution of their digital equipment and services. However, Motorola 
and Scientific Atlanta stated that they had attempted to negotiate 
deals with retailers to purchase and market set-top boxes, but received 
little to no retailer interest. CERC, representing retailers, argued 
that, whether sold at retail or in any other manner, integrated devices 
would continue to allow MVPDs to place obstacles or conditions on 
competitive entry. Accordingly, CERC disputed NCTA's contention that 
the cable operators' plan to sell integrated boxes in retail stores 
would alleviate the Commission's concerns and meet the intent of the 
statute. The record establishes that the retail initiative for 
integrated set-top boxes has not been successful. Notwithstanding the 
results of the initiative, NCTA now asserts that the cable industry's 
2001 retail initiative for integrated boxes changed the factual basis 
underlying the ban, and that cable's willingness to allow retail sale 
of set-top boxes demonstrates the industry's commitment to retail 
availability. CEA and CERC (collectively, the ``CE parties'') argue 
that, contrary to NCTA's assertion, the cable industry's retail 
initiative actually underscores the need for MSO reliance on PODs. 
According to the CE parties, the aim of cable's retail initiative was 
to avoid POD reliance by setting rules for cable operators who might 
furnish non-POD-reliant products to retailers, and thus the initiative 
would have provided less, not more, reason for cable operators to plan 
products and services that rely on a common security interface for 
competitive products. The CE parties further assert that it is 
difficult to ascribe any real-world effect to the retail initiative 
because commercial ties between retailers and cable operators have been 
forged on an ad hoc basis. This is consistent with NCTA's description 
of the results of the retail initiative. Additionally, the CE parties 
state that there is no record of cable operators declaring that the 
commercialization of integrated security techniques is open to 
competitive manufacturers and retailers on the same or similar basis as 
it is to cable operators and their suppliers. Thus, according to the CE 
parties, it is a ``stretch'' to argue that the retail initiative 
signified any change that would justify elimination of the prohibition 
on the sale or lease of integrated devices.
    8. One-Way Plug and Play. In the Extension Order, the Commission 
noted the then-ongoing notice and comment cycle relating to the one-way 
FNPRM and the evolving nature of technical specifications relating to 
navigation devices. Since the Commission issued the Extension Order, 
the unidirectional plug and play rules have been adopted and become 
effective. In October 2003, CableLabs released the DFAST license, which 
provides manufacturers with the intellectual property necessary to 
build plug and play devices that will accommodate a POD. The cable and 
consumer electronics industries finalized the joint test suite for 
unidirectional digital cable products and posted testing-related 
documents on the CableLabs Web site. NCTA has created a set of common 
consumer education materials to inform cable customers of the 
capabilities of unidirectional digital cable products, and cable system 
representatives have conferred with NCTA and CableLabs to develop 
consistent answers for customer support. The cable and consumer 
electronics industries also developed a whitepaper to serve as common 
guide for operational issues, produced inserts for inclusion with 
packaging materials of new unidirectional digital cable products, and 
completed work on consumer-friendly logos and acronyms for ``digital 
cable ready'' devices.
    9. NCTA contends that the MOU and the Commission's implementing 
rules undermine any remaining rationales for the prohibition on 
integrated devices. NCTA asserts that the Commission's rules 
implementing the MOU should ``eliminate concerns that unless cable 
operators deploy POD-enabled equipment, there can be no assurance cable 
operators will make commercially available, POD-enabled devices work on 
their systems.'' According to NCTA, the prohibition on integrated 
devices is not necessary to ensure cable operator reliance on PODs 
because cable operators are required by law to support PODs through 
certain technical requirements, to maintain an adequate supply of PODs, 
and to ensure convenient access to such PODs for their customers. To 
illustrate the impact of the unidirectional plug and play rules, NCTA 
states that adoption of the rules has led to certification, 
verification, or self-verification of more than 140 new DTV models from 
11 different independent manufacturers through the unidirectional 
digital cable product test suite for digital cable ready televisions. 
The CE parties agree that there has been substantial progress in this 
area, but argue that such progress does not alleviate the need for the 
ban because reliance on a common security interface is essential for 
continued progress in the future. Specifically, CE contends that every 
way in which a competitive product must differ from cable operator-
provided products retards competition. Like NCTA, the CE parties state 
that significant time and attention have been devoted by the cable and 
consumer electronics industries to testing and other one-way 
implementation issues. The CE parties agree with NCTA that the offering 
of the

[[Page 36043]]

DFAST license is a landmark event and accomplishment for the parties. 
However, CEA notes that certain implementation issues not resolved in 
the plug and play agreement, such as down-resolution capabilities, have 
been the subject of substantial discussion and some disagreement 
between the parties.
    10. Two-Way Plug and Play. The Commission noted in the Extension 
Order that the cable and consumer electronic industries were ``in the 
midst of negotiations'' on specifications for bidirectional digital 
cable products. Accordingly, the Commission requested that the parties 
file status reports on the bidirectional negotiations at 90, 180, and 
270-day intervals following release of the Extension Order. The first 
status report was filed jointly by NCTA and CEA on July 24, 2003. In 
that report, NCTA and CEA stated that the parties have been meeting at 
least monthly and that the meetings typically are attended by multiple 
representatives of each major manufacturer and MSO. The initial 
discussions involved organizing work into the areas of consumer 
experience, resource sharing and implementation, operational issues and 
consumer information, regulatory issues and agreements, and 
certification and testing. At that time, the parties were nearing 
agreement on specifications for resources in devices for the OpenCable 
Applications Platform (OCAP), the basis for interactive functionality 
in two-way devices, and had agreed on issues surrounding the need for 
bidirectional devices to support new digital control channels. The OCAP 
test suite and environment was far along in development by CableLabs 
and the parties were cooperating regarding the harmonization of the 
broadcast Digital Applications Software Environment (DASE) and OCAP 
standards necessary to enable manufacture of devices that can receive 
interactive content from both digital cable and over-the-air digital 
broadcasting. Finally, discussions regarding the advanced multistream 
POD (also known as the ``multistream CableCARD'') were proceeding, with 
proposed interface specifications to be completed by August 2003 and an 
expectation of SCTE standardization thereafter.
    11. On October 23, 2003, NCTA and CEA filed separate status reports 
regarding the bidirectional negotiations. NCTA stated that the parties 
had been engaged in negotiations regarding implementation of the 
unidirectional MOU and the Commission's rules, which diverted attention 
from the bidirectional issues. NCTA stated that the multistream POD 
specification had been completed and published and that the OCAP test 
suite and environment continued to be far along in development by 
CableLabs. CEA stated in its second status report that attention had 
been focused on implementation of the one-way MOU, but that it expected 
that as talks resumed, the parties would give attention to other 
potentially affected parties in the navigation device market.
    12. NCTA and CEA also filed their third status reports separately 
on January 21, 2004. NCTA stated that the cable and consumer 
electronics industries were now prepared to engage fully in discussions 
to reach agreement on two-way digital cable ready devices and that the 
cable and consumer electronics industries were reaching out to consult 
with third parties. CEA stated that bidirectional negotiations had 
advanced through the first half of 2003, but that ultimately the 
parties had focused their attention on testing issues related to 
unidirectional devices. CEA said that the parties were now moving 
forward expeditiously to complete the bidirectional negotiations, 
including consultations with interested or concerned third parties. 
According to CEA, the necessary objectives in the bidirectional 
negotiations include establishing minimum technical requirements for 
bidirectional operation, creating a level playing field for competition 
between competitively-sourced and cable operator-sourced devices, and 
avoiding creation of any disadvantage for the operation of device 
features or functions on home or external networks different from or 
competitive with programs or services provided by a cable network. At 
that time, CEA stated that the discussions were proceeding earnestly, 
but that it was necessary to consult with many parties.
    13. As of October 19, 2004, there have been over 30 meetings 
between the cable and consumer electronics industries to narrow topics 
and reconcile differences in approaches. In addition, other potentially 
affected parties have participated in large group discussions. NCTA 
asserts that because significant progress has been made in the 
bidirectional negotiations, to the extent the prohibition on integrated 
devices was maintained in order to ``hold cable's feet to the fire,'' 
it is no longer necessary. Moreover, NCTA argues that the prohibition 
is likely to impede the two-way talks because it will divert attention 
and resources away from the negotiations to tasks necessary to comply 
with the prohibition. However, as further discussed below, 
manufacturers believe that retention of the ban is critical to the 
development and deployment of two-way devices.
    14. Incentives For Cable Operator Support and Development of PODs. 
The CE parties claim that the common security interface and its 
components must be regarded by the cable industry as essential in order 
for the POD and POD-Host interface to be developed with commensurate 
scope, scale, creativity, and investment. CE argues that POD design 
will not remain static, and that as new PODs need to be offered to deal 
with multiple streams and different connection formats, every 
innovation will require design, development, and testing. The CE 
parties contend that if this work is not done by companies also relying 
on PODs, it will not receive the necessary resources or priority. As an 
example, TiVo cites the development of the multistream POD, for which a 
specification was developed in 2003. TiVo claims that cable operators 
have had no business reason to hasten the development of the 
multistream POD because they do not need to use multistream PODs in 
their own products. TiVo also asserts that if cable operators are not 
required to use the CableCARD themselves, they will have no economic 
incentive to ensure that CableCARD devices will work on their systems. 
In fact, TiVo suggests that there may be a disincentive for cable 
operators to make CableCARDs work properly in order to steer customers 
away from the CableCARD toward a cable operator-provided set-top box. 
Thomson and Mitsubishi argue that the necessary level of commercial and 
user confidence in CableCARD-reliant products depends on the cable 
industry having the same level of commitment to such products as 
consumer electronics manufacturers. However, NCTA argues that cable 
operators have every incentive, including retention of their customers, 
to make commercially-available, POD-enabled products work.
    15. Innovation in Competitive Navigation Device Products. According 
to TiVo, it will be nearly impossible for consumer electronics 
companies to overcome their existing disadvantage versus cable with 
respect to competitive navigation device products if cable operators 
are not also required to use CableCARDs in their devices. Specifically, 
the CE parties argue that if cable operators are permitted to introduce 
future programming and service innovations that are not POD-reliant and 
not available in competitive products, manufacturers will be forced to 
continually play ``catch-up'' in order to achieve interactive 
capabilities that cable operator-provided devices already

[[Page 36044]]

enjoy. The CE parties and TiVo argue that every way in which a 
competitive product must differ from cable operator-provided products 
impedes competition. TiVo asserts that knowing that cable operators 
will no longer be able to offer integrated devices would enable TiVo 
and other consumer electronics companies to develop and deploy set-top 
boxes bringing innovative new services to consumers with the confidence 
that such products will have a fair chance to succeed in the 
marketplace. Conversely, NCTA argues that maintaining the prohibition 
on integrated devices would stifle innovation in digital cable services 
and digital cable ready equipment. NCTA argues that CE's interpretation 
of section 629 of the Communications Act and the Commission's rules 
regarding commercial availability would mean that development of all 
cable products and services must await development and deployment of 
identical products and services by consumer electronics manufacturers 
before consumers may obtain the benefit of cable's innovations. NCTA 
contends that such a result would lock the various industry players 
into a scenario where there is no product differentiation and all 
players must simultaneously roll out the same functionality in products 
and services--an outcome that is not consistent with the goals of 
section 629 of the Communications Act or the DTV transition.
    16. Subscriber Choice and Costs. NCTA asserts that the integration 
ban would limit subscriber choice and unnecessarily increase costs to 
cable operators and consumers. According to NCTA, a POD-Host 
combination would cost cable operators an estimated $72 to $93 more 
than an integrated set-top box with identical functionality. This cost 
would translate into an average increase of $2 to $3 per month for each 
combination (i.e., an additional $2 to $3 per television set with a 
set-top box deployed after July 1, 2006). NCTA argues that this cost 
increase will reduce subscriber choice by removing a less expensive, 
integrated set-top box offered for lease by a cable operator as a low-
cost alternative for consumers. NCTA suggests that the additional costs 
may result in a ``dampening of consumer enthusiasm for digital 
services'' and that the significant capital costs required to unbundle 
the boxes will jeopardize capital outlays needed to support new 
services. According to NCTA, retaining the ban also would increase 
costs on new entrants in the cable set-top box market, such as 
Panasonic, which are developing integrated set-top boxes for purchase 
by cable operators. NCTA further argues that the additional equipment 
costs faced by cable will not be faced by the satellite providers, with 
whom cable operators compete. NCTA states that cable operators and 
CableLabs are working to develop a downloadable security solution that 
would bring cost savings to both operator-supplied equipment and 
competitive devices built for retail. NCTA argues that implementation 
of downloadable security would effectively achieve the same result as 
separated security, but without the cost of a CableCARD and associated 
interface. CE agrees that downloadable security would represent an 
improvement over the current integrated security, but claims that a 
downloadable security solution will not be available in 2006.
    17. TiVo asserts that since cable operators already are required to 
support CableCARDs, use of CableCARDs themselves should not present an 
additional operational burden; however, to the extent there is an 
increase in cost, such increase should be short-lived given the 
economic effects of volume resulting from widespread use by cable 
operators. The CE parties argue that advances in technology continue to 
bring CableCARD acquisition costs down, and that costs will be further 
reduced by investment and volume production resulting from cable 
industry reliance on PODs. They claim that the costs described by NCTA 
are for first-generation products and that provision of the old cost 
estimates by NCTA demonstrates that there has been little change in the 
market since 1998. According to the CE parties, NCTA erred in its 
estimates of the cost differential between separate and integrated 
devices by failing to take into account the learning curve and volume 
effects of cable operators not relying on PODs, the beneficial impact 
of competition, the opportunity for newer and less expensive headend 
encryption, potential savings from the ability to physically renew 
descrambler and authentication circuitry, and competitive devices 
available for the newest cable services. Thus, the CE parties contend 
that it should not be taken as established that there will be a net 
increase in consumer costs if the prohibition on integrated devices is 
maintained. CEA and Intel project that, in quantity, CableCARDs 
initially will cost between $15 and $19, with prices further dropping 
after July 1, 2006. The CE parties also suggest that more affordable 
conditional access technologies will be developed and that POD 
technology should not be insulated from cable innovation. For example, 
Sony filed comments in this proceeding to provide information about its 
Passage technology for digital cable system security and the potential 
effect of Passage on the cost and supply of CableCARDs. Passage permits 
cable operators to incorporate conditional access technology 
alternatives into their systems alongside their legacy conditional 
access technology, without interfering with their previously fielded 
legacy set-top boxes or disrupting their existing customer support, 
billing, and other systems.
    18. DTV Transition. NCTA asserts that the prohibition on integrated 
devices may hinder the development of a low-cost digital set-top box 
and therefore delay a prompt transition to digital television. 
Specifically, NCTA asserts that the added costs of a CableCARD slot and 
accompanying CableCARD will adversely impact the development and 
deployment of inexpensive digital set-top boxes that will permit the 
viewing of digital programming on analog television sets. NCTA argues 
that the prohibition of such inexpensive integrated devices will retard 
the transition. Comcast contends that development of a low-cost box 
could be facilitated by the use of downloadable security, which Comcast 
asserts may not be permissible under a separated security requirement. 
The CE parties, however, submit that the successful introduction of 
CableCARD products is even more critical to the DTV transition. They 
argue that in order for consumers to pay the extra expense for a 
digital tuner, consumers must have confidence that the products they 
purchase will attach to the cable network and work as well as equipment 
supplied by cable operators. The CE parties contend that cable industry 
reliance on PODs will provide the necessary confidence. CEA also argues 
that the downloadable security solution advocated by the cable 
operators will not be available by 2006 and, therefore, cannot advance 
the DTV transition in the near term.
    19. DBS Integrated Devices. Digital Broadcast Satellite (DBS) 
providers historically have not been subject to the prohibition on 
integrated devices because the Commission determined in 1998 that, 
unlike cable set-top boxes, DBS set-top boxes already were commercially 
available and portable throughout the continental United States and the 
DBS equipment market was already subject to the type of competition 
that Congress and the Commission have sought to promote. NCTA argues 
that the prohibition on

[[Page 36045]]

integrated devices would place all cable operators at a competitive 
disadvantage to DBS providers, and thus the prohibition must be 
eliminated in order to create a level playing field between cable and 
DBS. The CE parties submit that NCTA's arguments regarding DBS 
illustrate why it is necessary for all navigation devices, including 
those supplied by DBS operators, to rely on CableCARDs if consumer 
electronics manufacturers are to have a fair chance to enter and 
compete in the navigation devices market. DIRECTV supports retention of 
the ban, arguing that MVPD competition still weighs heavily in favor of 
cable and that incumbents continue to exert substantial market power. 
DIRECTV asserts that, as in 1998, DBS equipment remains (i) widely 
available at retail outlets, (ii) from at least three different DBS 
providers, (iii) from a number of different equipment manufacturers, 
and (iv) on a geographically portable basis. DIRECTV states that 
cable's navigation devices do not have these characteristics.

B. Discussion

    20. The Commission is not persuaded to eliminate the prohibition on 
integrated devices. The Commission finds that, although significant 
progress has been made in the retail availability of digital cable 
ready devices, competition in the navigation device market has not 
progressed to the point of supporting an elimination of the integration 
ban. Furthermore, the mere fact that consumers will bear some of the 
costs resulting from the imposition of the integration ban is not a 
sufficient justification to eliminate the ban. Therefore, the 
Commission reaffirms its earlier decision that the integration ban 
properly balances the mandate of section 629 of the Communications Act 
to promote a commercial market for navigation devices with the 
practical necessity of allowing the market time to develop. At the 
heart of a robust retail market for navigation devices is the reliance 
of cable operators on the same security technology and conditional 
access interface that consumer electronics manufacturers must rely on 
in developing competitive navigation devices. The Commission concludes 
that a software-oriented conditional access solution may provide a 
``common reliance'' standard capable of both reducing the costs for 
set-top boxes and adding significantly to the options that equipment 
manufacturers now have in using the CableCARD. In balancing the 
specific statutory requirement to assure commercial availability of 
navigation devices and the general obligation to facilitate and promote 
the DTV transition, the Commission concludes that a further extension 
of the effective date of the prohibition on integrated devices will 
permit the development of the statutorily required competitive market 
for navigation devices, with the potential benefit of reducing costs to 
consumers. On or before December 1, 2005, the cable industry must 
report to the Commission outlining the industry's conclusion regarding 
whether development and deployment of a downloadable security solution 
is feasible. In addition, the Commission determines that to the extent 
a downloadable security or other similar solution provides for common 
reliance, as contemplated herein, the Commission would consider the box 
to have a severable security component. This limited delay should not 
adversely affect innovation in the navigation device and digital cable-
ready equipment market, while providing additional time for the cable, 
consumer electronics and information technology industries to make 
significant progress in the bidirectional negotiations. Furthermore, 
the Commission will entertain requests for waiver of the prohibition on 
integrated devices for limited capacity integrated digital cable boxes. 
Finally, the Commission is concerned about evidence that cable 
operators are not adequately supporting CableCARDs and will require 
periodic reporting to ensure that commercially available CableCARD-
enabled devices continue to interoperate properly with cable systems.
    21. Since section 629 of the Communications Act was adopted, the 
cable industry and equipment suppliers have made enormous efforts in 
the development of technical standards related to digital cable 
compatibility and navigation devices. The Commission noted in the 
Extension Order that the conclusion of the unidirectional MOU and the 
ongoing bidirectional negotiations ``reflect[ed] progress towards the 
development of a retail market for consumer electronics equipment with 
navigation device functionality.'' The Commission also agrees with NCTA 
that the one-way plug and play MOU and related Commission rules 
represented a ``breakthrough in relations between the [cable and 
consumer electronics] industries and the establishment of standards for 
``digital cable ready'' products.'' There is no question that progress 
in implementing the one-way plug and play MOU and related Commission 
rules has been significant. CableCARD-equipped devices are available at 
retail and are being used by consumers. Yet it is clear from the record 
that the market for equipment used in conjunction with the distribution 
of digital cable video programming presently remains a nascent market. 
The cable industry's retail initiative with respect to devices with 
integrated security has been unsuccessful. Irrespective of the reasons 
for this result or the cable industry's willingness to allow retail 
availability of integrated devices, the Commission cannot conclude that 
this initiative satisfies the statutory mandate to assure commercial 
availability. In addition, the bidirectional negotiations have been 
disappointing. Although there has been movement on the part of some 
companies toward individual bidirectional agreements and a recent 
commitment by senior executives from Microsoft, Comcast and Time Warner 
to collectively work with the cable, consumer electronics and 
information technology industries ``to ensure the availability of two-
way cable products during calendar 2006,'' a competitive market for 
two-way navigation devices is, at this point, far from assured. The 
Commission finds, therefore, that the competitive reasons that led the 
Commission to impose the integration ban have not been eliminated by 
developments in the market.
    22. As reflected in the comments, a prohibition on the use of 
integrated devices will have certain cost and service disadvantages if 
implemented using the hardware conditional access technology presently 
available. Using the cost estimates provided by either cable or CE, if 
physical separation of the security element is required, the Commission 
believes it is likely that consumers will face additional costs in the 
short term as a result of the prohibition on integrated navigation 
devices. The Commission does not take lightly the imposition of 
additional costs on consumers, particularly in our efforts to implement 
a consumer-friendly statutory directive to increase competition. 
However, the Commission is inclined to agree with the CE parties and 
other commenters that the cost of the POD and POD-Host interface 
combination likely will decrease over time as volume usage increases. 
In addition, the costs that this requirement will impose should be 
counterbalanced to a significant extent by the benefits likely to flow 
from a more competitive and open supply market. In particular, it seems 
likely that the potential savings to consumers from greater choice 
among navigation devices will offset some of the costs from separating 
the security and non-security functions of either MVPD-supplied devices 
or those that

[[Page 36046]]

might otherwise be made available through retail outlets. In addition, 
except as discussed in paragraph 30, the Commission generally does not 
believe that maintenance of the prohibition on integrated navigation 
devices will delay the DTV transition. The Commission believes that the 
incentive provided by the separate security requirement will spur cable 
operators to meet their obligations and promote the timely development 
of a competitive market in host devices. Thus, there are sufficient 
competitive and consumer benefits to justify the costs of the ban.
    23. The prohibition on integrated devices appears to be one of the 
few reasonable mechanisms for assuring that MVPDs devote both their 
technical and business energies towards the creation of an environment 
in which competitive markets will develop. The alternative could be far 
more intrusive and detailed regulatory oversight, which might constrain 
technological advancement. The Commission believes that common reliance 
by MVPDs and consumer electronic manufacturers on an identical security 
function will align MVPDs' incentives with those of other industry 
participants so that MVPDs will plan the development of their services 
and technical standards to incorporate devices that can be 
independently manufactured, sold, and improved upon. Moreover, if MVPDs 
must take steps to support their own compliant equipment, it seems far 
more likely that they will continue to support and take into account 
the need to support services that will work with independently supplied 
and purchased equipment. The Commission believes that cable operator 
reliance on the same security technology and conditional access 
interface that consumer electronics manufacturers must rely on is 
necessary to facilitate innovation in competitive navigation device 
products and should not substantially impair innovation in cable 
operator-supplied products. It is not the Commission's intent to force 
cable operators to develop and deploy new products and services in 
tandem with consumer electronics manufacturers. Cable operators are 
free to innovate and introduce new products and services without regard 
to whether consumer electronics manufacturers are positioned to deploy 
substantially similar products and services. However, the concept of 
common reliance is intended to assure that cable operator development 
and deployment of new products and services does not interfere with the 
functioning of consumer electronics equipment or the introduction of 
such equipment into the commercial market for navigation devices. The 
Commission's navigation device rules are an important tool for 
promoting competition and bringing more choice to consumers. By 
maintaining the ban, the Commission can help ensure that as the 
navigation devices market continues to mature, consumers will be able 
to experience the benefits of choice in the navigation devices market.
    24. The Commission also recognizes, however, that development of 
set-top boxes and other devices utilizing downloadable security is 
likely to facilitate the development of a competitive navigation device 
market, aid in the interoperability of a variety of digital devices, 
and thereby further the DTV transition. The cable industry currently is 
working on a software-oriented conditional access solution. A software 
downloadable security system would allow cable operators and consumer 
electronics manufacturers to rely on an identical security function, 
but would not require the potentially costly complete separation of the 
physical security element. In this regard, the Commission acknowledges 
that an integration of different functions within various electronic 
devices is one of the reasons why the costs of these devices generally 
continue to decline and that a software-based security function would 
be consistent with this trend. If the ban were to go into effect in 
2006, this would, as a practical matter, impede the development of a 
less expensive and more flexible system for both protecting system 
security and creating a consumer product interface, as resources would 
be diverted from producing a downloadable security system to physical 
separation of the security element from set-top boxes. The Commission 
believes that the potential benefit of a common security technology 
with significantly reduced costs justifies a limited extension of the 
deadline for phase-out of integrated devices. Cable operators will, 
therefore, be afforded additional time to determine whether it is 
possible to develop a downloadable security function that will permit 
them to comply with the Commission's rules without incurring the cable 
operator and consumer costs associated with the separation of hardware. 
Accordingly, the Commission extends the phase-out date until July 1, 
2007, consistent with both the ultimate objective of this proceeding 
and the statutory directive of section 629 of the Communications Act.
    25. The cable industry is required to submit to the Commission by 
December 1, 2005 a report on the feasibility of deploying downloadable 
security and, if feasible, a proposed timeline for deployment. If such 
report finds downloadable security to be feasible and preferable to the 
existing separable security configuration, the report should also state 
that the cable industry will commit to the implementation of this 
system for its own devices and those purchased at retail. If so, the 
report should also state whether a downloadable security function can 
be achieved and implemented by July 1, 2007. If it cannot, the report 
should propose and justify a new timetable by which the cable and 
consumer electronics industries will introduce a downloadable security 
function for their equipment. The report should attach a draft copy of 
all licensing terms to which manufacturers would have to agree to 
include the downloadable security solution in their devices. Following 
submission of the cable industry's report, the public shall have thirty 
days to submit comment on the report, including the draft licensing 
terms. Consumer electronics parties have asked that the Commission 
impose a variety of conditions on the licensing terms now, and that we 
require the technical specifications and standards for any downloadable 
security solution be approved under an open standard. When the 
Commission reviews the cable industry's report on the feasibility of 
downloadable security, and the public's response thereto, as well as if 
and when we are asked to review any further requests to eliminate or 
postpone the ban, the Commission will evaluate issues such as these to 
the extent they relate to the fulfillment of the goals of section 629 
of the Communications Act.
    26. The Commission believes that a twelve-month extension of the 
deadline, until July 1, 2007, will provide adequate time for the cable 
industry to come into compliance with the rule if downloadable security 
is determined not to be a viable option. It is possible that the 
existing standards reflected in the CableLabs ``CableCARD-Host 
Interface License Agreement'' could be used in conjunction with the 
2006 separation requirement deadline, but discussions relating to an 
alternative, consensus formulation of these standards are ongoing, and 
do not at this time provide the basis for manufacturing decisions 
applicable to the 2006 date. Under the circumstances, extending the 
deadline for phase-out of integrated devices in order to assess the 
feasibility of a software-oriented conditional access solution is 
reasonable, as this appears to be the direction in which the digital 
content and communications system industries

[[Page 36047]]

are moving. The Commission believes that it is important for the 
Commission to recognize this movement and, as appropriate, to attempt 
to bring the relevant Commission rules into line.
    27. The Commission finds that such an extension will not 
significantly delay the establishment of a more competitive market for 
navigation devices and may reduce costs associated with the ban. In 
addition, the Commission disagrees with CEA, TiVo and others that this 
limited delay will adversely affect innovation in digital cable ready 
equipment. Consumer equipment manufacturers are assured though today's 
decision that the Commission remains committed to ensuring common 
reliance of cable operators and unaffiliated consumer electronics 
companies on the same security technology and conditional access 
interface. In addition, this limited delay should infuse new life in 
the stalled bidirectional discussions. The Commission is encouraged by 
the recent breakthrough in which top executives at Microsoft, Comcast 
and Time Warner, recognizing the ``importance and urgency in getting 
the [cable, CE and IT] industries to a full implementation of two-way 
cable-ready products available at retail,'' committed to personally 
supervise the efforts to reach a bidirectional deal. The Commission 
expects the consumer electronics and information technology industries 
(and other interested groups) to continue to fully participate with 
cable in these negotiations and in developing a downloadable 
conditional access solution and implementation timetable. To that end, 
NCTA and CEA shall file joint status reports and hold joint status 
meetings with the Commission on or before August 1, 2005 and every 60 
days thereafter on progress in bidirectional talks and a software-based 
conditional access agreement.
    28. NCTA has suggested, however, that under the separated security 
rule, a device with downloadable security could violate the requirement 
that security functions be separated from host devices. NCTA argues 
that the potential for this interpretation weighs in favor of 
eliminating the ban in order to permit innovation and greater 
efficiency in conditional access approaches. 47 CFR 76.1204(a)(1), 
provides that no MVPD subject to the rule ``shall place in service new 
navigation devices for sale, lease, or use that perform both 
conditional access and other functions in a single integrated device.'' 
The Commission's objective in this proceeding has been ``to ensure that 
the goals of section 629 [of the Communications Act] are met without 
fixing into law the current state of technology.'' Accordingly, we 
believe that the rule should be interpreted to require the physical 
separation of conditional access and other navigation functions only in 
the case of hardware-oriented conditional access solutions or other 
approaches that may preclude common reliance on the same security 
technology and conditional access interface. Downloadable security 
comports with the rule's ban on the inclusion of conditional access and 
other functions in a ``single integrated device'' because, by 
definition, the conditional access functionality of a device with 
downloadable security is not activated until it is downloaded to the 
box by the cable operator. Thus, at the time the consumer purchases the 
device, the conditional access and other functions are not 
``integrated.'' The Commission determined in the First Report and 
Order, 63 FR 38089, July 15, 1998, that ``MVPDs may continue to sell or 
lease boxes after [the deadline] provided the boxes have a severable 
security component instead of integrated security.'' See 63 FR 38089, 
July 15, 1998. To the extent a downloadable security or other similar 
solution provides for common reliance, as contemplated herein, the 
Commission would consider the box to have a severable security 
component. Furthermore, this type of set-top box does not implicate the 
concern that prompted the separated security rule in the first 
instance--that is, that commercial availability of navigation device 
equipment would be impeded if MVPDs ``have the advantage of being the 
only entity offering bundled boxes.'' Indeed, to apply the Commission's 
rule to prohibit MVPDs from marketing set-top boxes that include 
downloadable security functionality could slow the development and 
implementation of a downloadable security solution and actually 
frustrate the purpose of promoting commercial availability of set-top 
boxes so clearly established in the Act. The Commission would therefore 
find such boxes compliant with 47 CFR 76.1204(a)(1).
    29. Although the Commission agrees with NCTA that the significant 
efforts by the cable and consumer electronics industries since 1998 
indicate that a competitive environment sufficient to relax the 
prohibition on integrated equipment may develop, that day has not yet 
come. The Commission emphasizes that it is extending the deadline only 
to afford cable operators an opportunity to implement a lower-cost 
solution to comply with the rule. Cable operators are expected to work 
diligently to assess the feasibility of downloadable security and to 
come into compliance with the rule by July 1, 2007, either by 
physically separating the security element in their set-top boxes or by 
incorporating downloadable security. If downloadable security proves 
feasible, but cannot be implemented by July 1, 2007, the Commission 
will consider a further extension of the deadline. As part of the 
Commission's consideration of any further extensions, the Commission 
will consider the extent to which there has been progress towards 
making navigation devices commercially available, as required by 
section 629 of the Communications Act, and whether any further 
extension would promote Congress' objectives. As part of this analysis, 
the Commission would consider whether the cable industry is meeting its 
current obligations to deploy and support CableCARDs; progress toward 
deployment of multistream CableCARDs and towards a bidirectional 
agreement; and whether any downloadable security function developed as 
a result of such extension would provide for common reliance by cable-
deployed and commercially available devices. The Commission is not 
inclined, however, to consider any further extensions requested on the 
basis of the level of competition in the navigation device market. 
Absent common reliance on an identical security function, we do not 
foresee the market developing in a manner consistent with our statutory 
obligation. Nevertheless, the Commission notes that section 629 of the 
Communications Act contains a sunset provision triggered by fully 
competitive markets for video programming and navigation devices. 47 
CFR 76.1208, provides that any interested party may petition the 
Commission for a determination that (1) the market for the distribution 
of video programming is fully competitive; (2) the market for 
navigation devices and associated equipment is fully competitive; and 
(3) elimination of the navigation device rules would promote 
competition and the public interest.
    30. The Commission is also in agreement with NCTA's assertion that 
achieving consumer choice by establishing a competitive market should 
not displace a low-cost set-top box option for MVPD subscribers. It is 
critical to the DTV transition that consumers have access to 
inexpensive digital set-top boxes that will permit the viewing of 
digital programming on analog television sets both during and after the 
transition. The availability of low-cost boxes will further the cable

[[Page 36048]]

industry's migration to all-digital networks, thereby freeing up 
spectrum and increasing service offerings such as high-definition 
television. Accordingly, as cable systems migrate to all-digital 
networks, the Commission will also consider whether low-cost, limited 
capability boxes should be subject to the integration ban or whether 
cable operators should be permitted to offer such low-cost, limited 
capability boxes on an integrated basis. The Commission is inclined to 
believe that provision of such devices by cable operators will not 
endanger the development of the competitive marketplace envisioned in 
section 629 of the Communications Act, particularly because the more 
advanced devices offered by cable operators for primary home use will 
be required to rely on the same CableCARD technology as devices offered 
at retail by consumer electronics manufacturers. In the interim, the 
Commission will entertain requests for waiver of the prohibition on 
integrated devices for limited capability integrated digital cable 
boxes. The Commission not believe that waiver will be warranted for 
devices that contain personal video recording (PVR), high-definition, 
broadband Internet access, multiple tuner, or other similar advanced 
capabilities. Any request for waiver in this regard should include the 
full specifications for any device(s) for which waiver is sought.
    31. Several parties have raised concerns regarding the lack of 
parity in treatment between DBS operators and other MVPDs with respect 
to the prohibition on integrated devices. DBS equipment remains widely 
available at retail outlets from various DBS service providers and a 
number of different equipment manufacturers, on a geographically 
portable basis. Accordingly, the distinctions that led the Commission 
to differentiate between DBS and other MVPDs in 1998 remain valid. The 
Commission recognizes, however, that DBS has become the most 
significant competitor to cable on a national basis and that DBS is not 
immune from some of the same concerns regarding constraints on 
independent innovation and competition that arise in the cable context. 
Avoiding rule based market distortions with respect to DBS as a 
competitor to cable also is an important consideration. The Commission 
does not regard this proceeding, however, as providing a record on 
which the Commission can resolve these issues.
    32. The Commission does not intend to suggest that cable operators 
implementing downloadable security solutions may decrease in any way 
their support of CableCARDs or CableCARD-enabled devices. The MOU and 
the Commission's rules require cable operators to support PODs, and 
consumers have purchased POD-enabled devices in reliance on these 
requirements. The Commission expects the cable industry to dedicate the 
resources necessary to ensure that commercially available CableCARD-
enabled devices continue to interoperate properly with cable systems. 
The Commission notes that some consumer electronics manufacturing 
entities assert that cable industry deployment and support of 
CableCARDs has been disappointing. The Commission takes seriously 
allegations that the cable industry, or individual cable operators, are 
failing to meet their obligations to deploy and support CableCARDs. If 
specific allegations of CableCARD support violations are brought to the 
Commission, we will investigate such allegations and take appropriate 
action if necessary. Further to this end, the Commission directs the 
six largest cable operators, Comcast Corporation, Time Warner Cable, 
Cox Communications, Charter Communications, Adelphia Cable, and 
Cablevision, to file on or before August 1, 2005 and every 90 days 
thereafter, status reports on CableCARD deployment and support. The 
report(s) shall address the following: (1) The general availability of 
CableCARDs; (2) the number of CableCARDs currently in service and how 
those devices are placed in service; (3) whether service appointments 
are required for all CableCARD installations; (4) the average number of 
truck rolls required to install a CableCARD; (5) the monthly price 
charged for a CableCARD and the average cost of installation; (6) 
problems encountered in deploying CableCARDs and how those problems 
have been resolved; and (7) the process in place for resolving existing 
and newly discovered CableCARD implementation problems. In addition, 
parties to this proceeding have described the development and 
deployment of a multistream CableCARD as crucial to the introduction of 
an array of next generation digital products. The report(s) should 
address the effort to develop and deploy a multistream CableCARD. 
Specifically, the report(s) should address the development process and 
include a timetable indicating when a multistream CableCARD will be 
available for widespread use in digital devices available commercially. 
Consumer electronics parties contend that multistream CableCARDs should 
be available later this year. Although the cable industry has not 
offered an alternative date certain, Comcast and Time Warner have 
committed to ``making multi-stream CableCARDs available for 
[unidirectional digital cable products] on an expedited basis.'' Given 
that multistream CableCARDs enable features (for example, recording one 
channel while watching another) that today are available only to cable 
subscribers through set-top boxes provided by their cable operator, we 
expect the timetable provided in the report to be in the near future. 
The reports and timetable proposed therein will of course be available 
for public inspection; we will carefully review the reports along with 
any input we receive from the public to ensure that the cable industry 
is in fact living up to its commitment to ``expedite'' the multistream 
CableCARDs, and that a delayed timetable is not motivated by 
anticompetitive or other improper reasons. The Media Bureau is 
instructed to review each report as to its sufficiency in addressing 
each of the topics discussed in this paragraph. If a report is 
determined to be insufficient in any respect, the Media Bureau will so 
inform the Commission and instruct the reporting party to remedy the 
deficiency on an expedited basis. The Commission will indicate in a 
future proceeding when the CableCARD status reports will terminate.

III. Final Regulatory Flexibility Act Analysis

    33. As required by the Regulatory Flexibility Act of 1980, as 
amended (RFA), an Initial Regulatory Flexibility Analysis (IRFA) was 
incorporated into the Extension Order; see 5 U.S.C. 603. The Commission 
sought written public comment on the proposals in the Extension Order, 
including comment on the IRFA. No comments were received on the IRFA. 
This present Final Regulatory Flexibility Analysis (FRFA) conforms to 
the RFA.

A. Need for, and Objectives of, the Order

    34. Section 629 of the Communications Act requires the Commission 
to develop rules to assure commercial availability of navigation 
devices used in conjunction with services provided by multichannel 
video programming distributors (MVPDs); see 47 U.S.C. 549. The 
statutory objective of section 629 of the Communications Act is to 
assure that navigation devices used by consumers to access a particular 
MVPD's programming are available to consumers from manufacturers, 
retailers, and other vendors not affiliated with that MVPD. To this 
end, the Commission adopted a January 1, 2005 deadline for MVPDs to

[[Page 36049]]

cease deploying new navigation devices that perform both conditional 
access functions and other functions in a single integrated device. 
Requiring MVPDs to separate the conditional access function from the 
basic navigation device (the ``host'' device) was intended to permit 
unaffiliated manufacturers, retailers, and other vendors to 
commercially market host devices while allowing MVPDs to retain control 
over their system security. In the Further NPRM, the Commission 
indicated that it would reassess the need for the 2005 separation 
deadline in light of the evolving marketplace for navigation devices. 
In response, the cable industry and set-top box manufacturers generally 
urged that the 2005 deadline should be eliminated in favor of the 
continued offering of integrated navigation devices for rent to 
consumers. Other equipment manufacturing and retail interests urged 
that the date should be advanced to ensure the timely development of a 
retail market in host devices. After the Further NPRM was issued, the 
cable and consumer electronics industries reached a memorandum of 
understanding (MOU) on a cable compatibility standard for a 
unidirectional digital cable television receiver with host device 
functionality, as well as other unidirectional digital cable products. 
The Commission sought comment on this standard, which would allow 
consumers to directly attach their DTV receivers to cable systems using 
a point of deployment (POD) module and receive one-way cable television 
services without the need for an external navigation device. In light 
of the ongoing notice and comment cycle on the FNPRM and the ongoing 
status of the negotiations between the cable and consumer electronic 
industries on specifications for bidirectional digital cable receivers 
and products, the Commission extended the separation deadline until 
July 1, 2006.
    35. This 2nd R&O concludes that the current level of competition in 
the navigation device market is not sufficient to assure the commercial 
availability of navigation devices. The 2nd R&O thus maintains the 
requirement that cable operators separate security and non-security 
functions in the devices they provide on a lease or sale basis, but 
extends the separation deadline until July 1, 2007. The one-year 
extension is intended to afford cable operators additional time to 
develop a downloadable security solution that will allow common 
reliance by cable operators and consumer electronics manufacturers on 
an identical security function without the potentially costly physical 
separation of the conditional access element.
    36. The 2nd R&O also establishes several reporting deadlines, 
primarily applicable to the cable industry. First, the 2nd R&O requires 
that by December 1, 2005, the cable industry report to the Commission 
on the feasibility of implementing software-based conditional access in 
navigation devices. Second, beginning August 1, 2005 and every 90 days 
thereafter, the National Cable and Telecommunications Association and 
the Consumer Electronics Association must report to the Commission on 
the status of the ongoing negotiations regarding specifications for 
bidirectional digital cable receivers. Finally, beginning August 1, 
2005 and every 60 days thereafter, Comcast Corporation, Time Warner 
Cable, Cox Communications, Charter Communications, Adelphia Cable, and 
Cablevision must file with the Commission reports detailing CableCARD 
deployment and support. These reporting requirements are intended to 
ensure that the one-year extension of the separation deadline does not 
adversely impact competition in the navigation devices market.

B. Summary of Significant Issues Raised by Public Comments in Response 
to the IRFA

    37. There were no comments filed that specifically addressed the 
rules and policies proposed in the IRFA.

C. Description and Estimate of the Number of Small Entities to Which 
Rules Will Apply

    38. The RFA directs the Commission to provide a description of and, 
where feasible, an estimate of the number of small entities that will 
be affected by the rules adopted herein; see 5 U.S.C. 603(b)(3). The 
RFA generally defines the term ``small entity'' as having the same 
meaning as the terms ``small business,'' ``small organization,'' and 
``small governmental jurisdiction''; see 5 U.S.C. 601(6). In addition, 
the term ``small business'' has the same meaning as the term ``small 
business concern'' under the Small Business Act; see 5 U.S.C. 601(3). A 
``small business concern'' is one which: (1) Is independently owned and 
operated; (2) is not dominant in its field of operation; and (3) 
satisfies any additional criteria established by the Small Business 
Administration (SBA); see 5 U.S.C. 632.
    39. The requirements contained in this 2nd R&O are intended to 
require MVPDs to cease deploying integrated navigation devices by July 
1, 2007 and to file status reports related to navigation devices. 
Therefore, MVPDs, which includes Cable and other Program Distributors 
and Satellite Carriers, will be directly and primarily affected by the 
proposed rules. In addition, because we require status reports to be 
submitted by the Consumer Electronics Association on behalf of consumer 
electronics manufacturers, the rules will also directly affect consumer 
electronics manufacturers. Therefore, in this FRFA, we consider the 
impact of the rules on small cable operators, small consumer 
electronics manufacturers, and other small entities. A description of 
such small entities, as well as an estimate of the number of affected 
small entities, is provided in the following paragraphs.
    40. Cable and Other Program Distribution. Cable system operators 
fall within the SBA-recognized definition of Cable and Other Program 
Distribution, which includes all such companies generating $12.5 
million or less in revenue annually. 13 CFR 121.201, NAICS code 517510. 
According to the Census Bureau data for 1997, there were a total of 
1,311 firms that operated for the entire year in the category of Cable 
and Other Program Distribution. Of this total, 1,180 firms had annual 
receipts of under $10 million and an additional 52 firms had receipts 
of $10 million or more, but less than $25 million. The Commission 
therefore estimates that the majority of providers in this category of 
Cable and Other Program Distribution are small businesses.
    41. Cable System Operators (Rate Regulation Standard). The 
Commission has developed, with SBA's approval, its own definition of a 
small cable system operator for the purposes of rate regulation. Under 
the Commission's rules, a ``small cable company'' is one serving 
400,000 or fewer subscribers nationwide. 47 CFR 76.901(e). An estimated 
1,439 cable operators qualified as small cable companies at the end of 
1995. Since then, some of these companies may have grown to serve more 
than 400,000 subscribers, and others may have been involved in 
transactions that caused them to be combined with other cable 
operators. Consequently, we estimate that there are fewer than 1,439 
small entity cable system operators that may be affected by the rules 
in this 2nd R&O.
    42. Cable System Operators (Communications Act Standard). The Act 
also contains a size standard for a ``small cable operator,'' which is 
defined as ``a cable operators that, directly or through an affiliate, 
serves in the aggregate fewer than one percent of all subscribers in 
the United States and is

[[Page 36050]]

not affiliated with any entity or entities whose gross annual revenues 
in the aggregate exceed $250,000,000.'' 47 U.S.C. 543(m)(2). The 
Commission has determined that there are 67.7 million cable subscribers 
in the United States. Therefore, a cable operator serving fewer than 
677,000 subscribers shall be deemed a small operator if its annual 
revenues, when combined with the total annual revenues of all its 
affiliates, do not exceed $250 million in the aggregate. 47 CFR 
76.901(f). Based on available data, we estimate that the number of 
cable operators serving fewer than 677,000 subscribers is approximately 
1,450. The Commission neither requests nor collects information on 
whether cable system operators are affiliated with entities whose gross 
annual revenues exceed $250 million. We are, therefore, unable at this 
time to estimate more accurately the number of cable system operators 
that would qualify as small cable operators under the size standard 
contained in the Act.
    43. Direct Broadcast Satellite (DBS) Service. DBS service is a 
nationally distributed subscription service that delivers video and 
audio programming via satellite to a small parabolic ``dish'' antenna 
at the subscriber's location. Because DBS provides subscription 
services, DBS falls within the SBA-recognized definition of Cable and 
Other Program Distribution. 13 CFR 121.201, NAICS code 517510. This 
definition provides that a small entity is one with $12.5 million or 
less in annual receipts. Currently, only four operators hold licenses 
to provide DBS service, which requires a great investment of capital 
for operation. All four currently offer subscription services. Two of 
these four DBS operators, DirecTV and EchoStar Communications 
Corporation (EchoStar), report annual revenues that are in excess of 
the threshold for a small business. A third operator, Rainbow DBS, is a 
subsidiary of Cablevision's Rainbow Network, which also reports annual 
revenues in excess of $12.5 million, and thus does not qualify as a 
small business. The fourth DBS operator, Dominion Video Satellite, Inc. 
(Dominion), offers religious (Christian) programming and does not 
report its annual receipts. The Commission does not know of any source 
which provides this information and, thus, we have no way of confirming 
whether Dominion qualifies as a small business. Because DBS service 
requires significant capital, we believe it is unlikely that a small 
entity as defined by the SBA would have the financial wherewithal to 
become a DBS licensee. Nevertheless, given the absence of specific data 
on this point, we acknowledge the possibility that there are entrants 
in this field that may not yet have generated $12.5 million in annual 
receipts, and therefore may be categorized as a small business, if 
independently owned and operated.
    44. Fixed-Satellite Service (FSS). The FSS is a radiocommunication 
service between earth stations at a specified fixed point or between 
any fixed point within specified areas and one or more satellites. 47 
CFR 2.1(c). The FSS, which utilizes many earth stations that 
communicate with one or more space stations, may be used to provide 
subscription video service. Therefore, to the extent FSS frequencies 
are used to provide subscription services, FSS falls within the SBA-
recognized definition of Cable and Other Program Distribution, which 
includes all such companies generating $12.5 million or less in revenue 
annually. 13 CFR 121.201, NAICS code 517510. Although a number of 
entities are licensed in the FSS, not all such licensees use FSS 
frequencies to provide subscription services. Two of the DBS licensees 
(EchoStar and DirecTV) have indicated interest in using FSS frequencies 
to broadcast signals to subscribers. It is possible that other entities 
could similarly use FSS frequencies, although we are not aware of any 
entities that might do so.
    45. Private Cable Operators (PCOs) also known as Satellite Master 
Antenna Television (SMATV) Systems. PCOs, also known as SMATV systems 
or private communication operators, are video distribution facilities 
that use closed transmission paths without using any public right-of-
way. PCOs acquire video programming and distribute it via terrestrial 
wiring in urban and suburban multiple dwelling units such as apartments 
or condominiums, and commercial multiple tenant units such as hotels 
and office buildings. The SBA definition of small entities for Cable 
and Other Program Distribution Services includes PCOs and, thus, small 
entity PCOs are defined as all such companies generating $12.5 million 
or less in annual receipts. 13 CFR 121.201, NAICS code 517510. 
Currently, there are approximately 135 members of the Independent 
Multi-Family Communications Council (IMCC), the trade association that 
represents PCOs. Individual PCOs often serve approximately 3,000-4,000 
subscribers, but the larger operations may serve as many as 15,000-
55,000 subscribers. In total, PCOs currently serve approximately 1.1 
million subscribers. Because these operators are not rate regulated, 
they are not required to file financial data with the Commission. 
Furthermore, we are not aware of any privately published financial 
information regarding these operators. Based on the estimated number of 
operators and the estimated number of units served by the largest ten 
PCOs, we believe that a substantial number of PCOs qualify as small 
entities.
    46. Other Program Distribution. The SBA-recognized definition of 
Cable and Other Program Distribution includes other MVPDs, such as HSD, 
MDS/MMDS, ITFS, LMDS, and OVS. This definition provides that a small 
entity is one with $12.5 million or less in annual receipts. 13 CFR 
121.201, NAICS code 517510. As previously noted, according the Census 
Bureau data for 1997, there were a total of 1,311 firms that operated 
for the entire year in the category of Cable and Other Program 
Distribution. Of this total, 1,180 firms had annual receipts of under 
$10 million and an additional 52 firms had receipts of $10 million or 
more, but less than $25 million. The Commission estimates, therefore, 
that the majority of providers in this category of Cable and Other 
Program Distribution are small businesses.
    47. Home Satellite Dish (HSD) Service. Because HSD provides 
subscription services, HSD falls within the SBA-recognized definition 
of Cable and Other Program Distribution, which includes all such 
companies generating $12.5 million or less in revenue annually. HSD or 
the large dish segment of the satellite industry is the original 
satellite-to-home service offered to consumers, and involves the home 
reception of signals transmitted by satellites operating generally in 
the C-band frequency. Unlike DBS, which uses small dishes, HSD antennas 
are between four and eight feet in diameter and can receive a wide 
range of unscrambled (free) programming and scrambled programming 
purchased from program packagers that are licensed to facilitate 
subscribers' receipt of video programming. There are approximately 30 
satellites operating in the C-band, which carry over 500 channels of 
programming combined; approximately 350 channels are available free of 
charge and 150 are scrambled and require a subscription. HSD is 
difficult to quantify in terms of annual revenue. HSD owners have 
access to program channels placed on C-band satellites by programmers 
for receipt and distribution by MVPDs. Commission data shows that, 
between June 2003, and June 2004, HSD subscribership fell from 502,191 
subscribers to 335,766 subscribers, a decline of more than 33 percent. 
The Commission has no

[[Page 36051]]

information regarding the annual revenue of the four C-Band 
distributors.
    48. Wireless Cable Systems. Wireless cable systems use the 
Multipoint Distribution Service (MDS) and Instructional Television 
Fixed Service (ITFS) frequencies in the 2 GHz band to transmit video 
programming and provide broadband services to subscribers. Local 
Multipoint Distribution Service (LMDS) is a fixed broadband point-to-
multipoint microwave service that provides for two-way video 
telecommunications. As previously noted, the SBA definition of small 
entities for Cable and Other Program Distribution, which includes such 
companies generating $12.5 million in annual receipts, appears 
applicable to MDS, ITFS and LMDS. In addition, the Commission has 
defined small MDS and LMDS entities in the context of Commission 
license auctions.
    49. In the 1996 MDS auction, the Commission defined a small 
business as an entity that had annual average gross revenues of less 
than $40 million in the previous three calendar years. 47 CFR 
21.961(b)(1). This definition of a small entity in the context of MDS 
auctions has been approved by the SBA. In the MDS auction, 67 bidders 
won 493 licenses. Of the 67 auction winners, 61 claimed status as a 
small business. At this time, the Commission estimates that of the 61 
small business MDS auction winners, 48 remain small business licensees. 
In addition to the 48 small businesses that hold BTA authorizations, 
there are approximately 392 incumbent MDS licensees that have gross 
revenues that are not more than $40 million and are thus considered 
small entities. MDS licensees and wireless cable operators that did not 
participate in the MDS auction must rely on the SBA definition of small 
entities for Cable and Other Program Distribution. Information 
available to us indicates that there are approximately 850 of these 
licensees and operators that do not generate revenue in excess of $12.5 
million annually. Therefore, we estimate that there are approximately 
850 small MDS providers as defined by the SBA and the Commission's 
auction rules.
    50. While SBA approval for a Commission-defined small business size 
standard applicable to ITFS is pending, educational institutions are 
included in this analysis as small entities. There are currently 2,032 
ITFS licensees, and all but 100 of these licenses are held by 
educational institutions. Thus, the Commission estimates that at least 
1,932 ITFS licensees are small businesses.
    51. In the 1998 and 1999 LMDS auctions, the Commission defined a 
small business as an entity that had annual average gross revenues of 
less than $40 million in the previous three calendar years. Moreover, 
the Commission added an additional classification for a ``very small 
business,'' which was defined as an entity that had annual average 
gross revenues of less than $15 million in the previous three calendar 
years. These definitions of ``small business'' and ``very small 
business'' in the context of the LMDS auctions have been approved by 
the SBA. In the first LMDS auction, 104 bidders won 864 licenses. Of 
the 104 auction winners, 93 claimed status as small or very small 
businesses. In the LMDS re-auction, 40 bidders won 161 licenses. Based 
on this information, we believe that the number of small LMDS licenses 
will include the 93 winning bidders in the first auction and the 40 
winning bidders in the re-auction, for a total of 133 small entity LMDS 
providers as defined by the SBA and the Commission's auction rules.
    52. In sum, there are approximately a total of 2,000 MDS/MMDS/LMDS 
stations currently licensed. Of the approximate total of 2,000 
stations, we estimate that there are 1,595 MDS/MMDS/LMDS providers that 
are small businesses as deemed by the SBA and the Commission's auction 
rules.
    53. Open Video Systems (OVS). The OVS framework provides 
opportunities for the distribution of video programming other than 
through cable systems. Because OVS operators provide subscription 
services, OVS falls within the SBA-recognized definition of Cable and 
Other Program Distribution Services, which provides that a small entity 
is one with $ 12.5 million or less in annual receipts. 13 CFR 121.201, 
NAICS code 517510. The Commission has certified 25 OVS operators with 
some now providing service. Broadband service providers (BSPs) are 
currently the only significant holders of OVS certifications or local 
OVS franchises, even though OVS is one of four statutorily-recognized 
options for local exchange carriers (LECs) to offer video programming 
services. As of June 2003, BSPs served approximately 1.4 million 
subscribers, representing 1.49 percent of all MVPD households. Among 
BSPs, however, those operating under the OVS framework are in the 
minority, with approximately eight percent operating with an OVS 
certification. Serving approximately 460,000 of these subscribers, 
Affiliates of Residential Communications Network, Inc. (RCN) is 
currently the largest BSP and 11th largest MVPD. RCN received approval 
to operate OVS systems in New York City, Boston, Washington, DC and 
other areas. The Commission does not have financial information 
regarding the entities authorized to provide OVS, some of which may not 
yet be operational. We thus believe that at least some of the OVS 
operators may qualify as small entities.
    54. Electronics Equipment Manufacturers. Rules adopted in this 
proceeding could apply to manufacturers of DTV receiving equipment and 
other types of consumer electronics equipment. The SBA has developed 
definitions of small entity for manufacturers of audio and video 
equipment, 13 CFR 121.201, NAICS code 334310, as well as radio and 
television broadcasting and wireless communications equipment, 13 CFR 
121.201, NAICS code 334220. These categories both include all such 
companies employing 750 or fewer employees. The Commission has not 
developed a definition of small entities applicable to manufacturers of 
electronic equipment used by consumers, as compared to industrial use 
by television licensees and related businesses. Therefore, we will 
utilize the SBA definitions applicable to manufacturers of audio and 
visual equipment and radio and television broadcasting and wireless 
communications equipment, since these are the two closest NAICS Codes 
applicable to the consumer electronics equipment manufacturing 
industry. However, these NAICS categories are broad and specific 
figures are not available as to how many of these establishments 
manufacture consumer equipment. According to the SBA's regulations, an 
audio and visual equipment manufacturer must have 750 or fewer 
employees in order to qualify as a small business concern. 13 CFR 
121.201, NAICS code 334220. Census Bureau data indicates that there are 
554 U.S. establishments that manufacture audio and visual equipment, 
and that 542 of these establishments have fewer than 500 employees and 
would be classified as small entities. The remaining 12 establishments 
have 500 or more employees; however, we are unable to determine how 
many of those have fewer than 750 employees and, therefore, also 
qualify as small entities under the SBA definition. Under the SBA's 
regulations, a radio and television broadcasting and wireless 
communications equipment manufacturer must also have 750 or fewer 
employees in order to qualify as a small business concern. Census 
Bureau data indicates that there are 1,215 U.S. establishments that 
manufacture radio and television

[[Page 36052]]

broadcasting and wireless communications equipment, and that 1,150 of 
these establishments have fewer than 500 employees and would be 
classified as small entities. The remaining 65 establishments have 500 
or more employees; however, we are unable to determine how many of 
those have fewer than 750 employees and, therefore, also qualify as 
small entities under the SBA definition. We conclude, therefore, that 
there are no more than 542 small manufacturers of audio and visual 
electronics equipment and no more than 1,150 small manufacturers of 
radio and television broadcasting and wireless communications equipment 
for consumer/household use.

D. Description of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements

    55. This 2nd R&O amends 47 CFR 76.1204 to require MVPDs to cease 
deploying new navigation devices that perform both conditional access 
functions and other functions in a single integrated device by July 1, 
2007. Section 76.1204(a) of the Commission's rules already requires 
MVPDs to cease deploying integrated devices. The 2nd R&O extends the 
deadline from July 1, 2006 to July 1, 2007. To the extent that 
compliance may require the manufacture and purchase of non-integrated 
host devices by MVPDs by July 1, 2007, the present action does not 
impose any new requirements on consumer electronics equipment 
manufacturers or MVPDs, but rather extends the existing compliance date 
by one year. We believe that the resulting impact on small entities is 
favorable to the extent that it provides them with additional time to 
come into compliance with the prohibition on integrated devices.
    56. The 2nd R&O also requires that: (a) By December 1, 2005, the 
cable industry shall file with the Commission a report regarding the 
feasibility of implementing downloadable security in set-top boxes; (b) 
beginning August 1, 2005, and every 60 days thereafter, the National 
Cable and Telecommunica- tions Association and the Consumer Electronics 
Association shall file with the Commission reports on progress in 
bidirectional talks and a software-based conditional access agreement; 
and (c) beginning August 1, 2005, and every 90 days thereafter, Comcast 
Corporation, Time Warner Cable, Cox Communications, Charter 
Communications, Adelphia Cable, and Cablevision shall file with the 
Commission reports detailing CableCARD deployment and support.

E. Steps Taken To Minimize Significant Impact on Small Entities, and 
Significant Alternatives Considered

    57. The RFA requires an agency to describe any significant 
alternatives that it has considered in reaching its proposed approach, 
which may include the following four alternatives (among others): (1) 
The establishment of differing compliance or reporting requirements or 
timetables that take into account the resources available to small 
entities; (2) the clarification, consolidation, or simplification of 
compliance or reporting requirements under the rule for small entities; 
(3) the use of performance, rather than design, standards; and (4) an 
exemption from coverage of the rule, or any part thereof, for small 
entities. See 5 U.S.C. 603(c)(1)-(4).
    58. To the extent that compliance with the amended prohibition 
deadline may require the manufacture and purchase of non-integrated 
host devices by MVPDs by July 1, 2007, the present action does not 
impose any new requirements on consumer electronics equipment 
manufacturers or MVPDs, but rather extends the existing compliance date 
by one year. The Commission believes that the resulting impact on small 
entities is favorable to the extent that it provides them with 
additional time to come into compliance with the prohibition on 
integrated devices. When the original prohibition deadline was adopted, 
the Commission noted, inter alia, that section 629 of the 
Communications Act includes provisions which may lessen compliance 
impact on small entities, including section 629(c) of the 
Communications Act, which specifies that the Commission shall waive its 
implementing regulations when necessary for an MVPD to develop new or 
improved services, and section 629(e) of the Communications Act, which 
requires the Commission to sunset its implementing rules when certain 
conditions are met.
    59. With respect to the reporting requirements imposed on cable 
operators and consumer electronics manufacturers, the Commission 
believes that these reports are a critical complement to the extension 
of the integration ban deadline. The Commission also believes that 
these requirements are unlikely to impose a burden on small entities. 
First, the requirement to submit a report on the feasibility of 
downloadable security applies to the cable industry, but not to 
individual cable operators. The Commission generally does not expect 
small cable operators to be actively involved in the preparation of 
such report. The requirement to submit reports detailing CableCARD 
deployment and support every 90 days, beginning August 1, 2005, applies 
only to specified large cable multiple system operators. Finally, the 
requirement to submit reports regarding progress in the bidirectional 
talks and a software-based conditional access agreement every 60 days, 
beginning August 1, 2005, does not apply to individual cable operators 
or consumer electronics manufacturers. The Commission generally does 
not expect small cable operators or consumer electronics manufacturers 
to be actively involved in the preparation of such reports.

F. Report to Congress

    The Commission will send a copy of the 2nd R&O, including this 
FRFA, in a report to Congress pursuant to the Congressional Review Act. 
See 5 U.S.C. 801(a)(1)(A). In addition, the Commission will send a copy 
of the 2nd R&O, including this FRFA, to the Chief Counsel for Advocacy 
of the SBA.

List of Subjects in 47 CFR Part 76

    Cable television, Multichannel video programming distribution, 
Satellite television.

Federal Communications Commission.
Marlene H. Dortch,
Secretary.

Final Rule

0
For the reasons discussed in the preamble, the Federal Communications 
Commission amends 47 CFR part 76 as follows:

PART 76--MULTICHANNEL VIDEO AND CABLE TELEVISION SERVICE

0
1. The authority citation for part 76 continues to read as follows:

    Authority: 47 U.S.C. 151, 152, 153, 154, 301, 302a, 303, 303a, 
307, 308, 309, 312, 317, 325, 338, 339, 503, 521, 522, 531, 532, 
533, 534, 535, 536, 537, 543, 544, 544a, 545, 548, 549, 552, 554, 
556, 558, 560, 561, 571, 572, and 573.


0
2. Section 76.1204 is amended by revising paragraph (a)(1) to read as 
follows:


Sec.  76.1204  Availability of equipment performing conditional access 
or security functions.

    (a)(1) A multichannel video programming distributor that utilizes 
navigation devices to perform conditional access functions shall make 
available equipment that incorporates only the conditional access 
functions of such devices. Commencing on July 1, 2007, no multichannel 
video

[[Page 36053]]

programming distributor subject to this section shall place in service 
new navigation devices for sale, lease, or use that perform both 
conditional access and other functions in a single integrated device.
* * * * *
[FR Doc. 05-12229 Filed 6-21-05; 8:45 am]
BILLING CODE 6712-01-P