The Federal Communications Commission (“FCC”) in October 2010 issued a Third Report and Order and Order on Reconsideration (“Third R&O”) adopting modifications to its set-top box rules to, among other things, ensure that cable subscribers using retail devices have access to switched digital video (“SDV”) services, simplify the CableCARD device certification process and set-top box output requirements, and exempt all one-way set-top boxes without recording functionality from the set-top box integration ban. The FCC recently announced in the Federal Register that these revised rules will become effective August 8, 2011. Other rule changes set forth in the Third R&O – i.e., modifications designed to make CableCARD pricing and billing more transparent, allow customer self-installation of CableCARDs in certain circumstances, and require cable operators to provide customers with multi-stream CableCARDs – contain information collection requirements awaiting approval from the Office of Management and Budget. The FCC will announce the effective date of those changes in the Federal Register at a later date. A summary of the more significant aspects of the Third R&O is set forth below.

Switched Digital Video. Because one-way retail devices are unable to access SDV programming without additional equipment or features, the Third R&O requires cable operators to provide support for the reception of SDV programming by subscribers with retail devices. Although the parties to the proceeding expressed diverging views as to the appropriate method for providing such support (i.e., tuning adapters versus an IP backchannel solution), the FCC did not mandate reliance on a particular technology so as to avoid making SDV deployment unnecessarily costly. However, to satisfy the requirement, retail devices must be able to reliably tune at least as many switched digital channels as the operator’s most sophisticated leased set-top box or four simultaneous channels, whichever is greater. Furthermore, cable operators are prohibited from presenting their customers with misleading information regarding the ability of retail devices to tune switched digital channels.

CableCARD Device Certification. Based on complaints regarding the cost, complexity, and restrictiveness of the CableCARD device certification process, the Third R&O prohibits CableLabs or other qualified testing facilities from refusing to certify one-way set-top boxes for any reason other than a failure to comply with the device conformance checklist referenced in the FCC’s rules. This change is designed to allow set-top box manufacturers to save money while getting their products to market faster.

Interface Requirements. The Third R&O gives cable operators greater flexibility in the home networking interface they include in set-top boxes by requiring them to include an IP-based interface on all two-way high-definition set-top boxes that they acquire for distribution to customers without specifying a physical interface (e.g., Ethernet, Wi-Fi, MoCA, or IP implemented over IEEE 1394) by which this functionality is to be implemented. The IP-based connection must deliver the video in a recordable format (e.g., MPEG-2, MPEG-4, h.264) and pass through closed captioning data in a standard format. The FCC also believes that more advanced functionalities that are currently under development, such as service discovery, video transport, and remote control command pass-through standards for home networking, are necessary to provide a foundation for a retail set-top box market. Thus, cable operators are required to provide those additional functionalities by December 1, 2012.

Blanket Waiver for One-Way Devices. The Third R&O allows all cable operators (not just small systems) to deploy new, one-way integrated set-top boxes (including devices capable of processing a high-definition signal), provided that the devices do not perform recording functions. This waiver of the integration ban will result in substantial cost savings, thus promoting cable operators’ transition to digital networks, which frees up system capacity for broadband and other services. The FCC determined that limiting the waiver to small cable systems would not provide sufficient relief because small cable operators would not be able to achieve the economies of scale necessary to obtain low-cost devices. Furthermore, such a limitation would unfairly penalize subscribers of large systems who would also benefit if their cable operator transitioned to an all-digital network. Cable operators remain obligated to offer CableCARDs to any subscribers who request them and to commonly rely on CableCARDs for any digital video recorder and bidirectional devices that they offer for lease or sale. The FCC declined to eliminate the integration ban entirely, finding that it continues to serve several important purposes, e.g., better support for CableCARD devices and economic incentives to develop better solutions.

CableCARD Billing and Transparency. Departing from its initial proposal to require cable operators to disclose CableCARD fees as a line item on subscriber bills, the FCC instead adopted a compromise proposal pursuant to which cable operators must disclose CableCARD lease fees as a line item on their websites, at the time of installation, in annual written notice to subscribers, and orally upon a subscriber’s request. In addition, the new rules require cable operators to reduce the price of packages that include set-top box rentals by the portion of the package price that is “reasonably allocable” to the device lease fee for customers who use retail devices, and prohibits cable operators from assessing service fees on consumer-owned devices that are not imposed on leased devices.

CableCARD Installations. The Third R&O requires cable operators to allow self-installation of CableCARDs on retail devices for which the manufacturer provides detailed, device-specific installation instructions, including a toll-free number the subscriber may use to reach the manufacturer’s customer support team. To give operators sufficient time to train staff and develop more robust customer support infrastructures and procedures, cable systems that permit self-installation of operator-leased devices have nine months to comply with the new rules, while cable systems that do not permit self-installations have twelve months to comply. Cable operators must also inform subscribers about the self-installation option when they request CableCARDs.

To the extent that professional installation is required, cable operators must make good faith efforts to ensure that all CableCARDs provided to customers are in good working condition and compatible with their customers’ devices, and must allow subscribers to request CableCARDs using the same methods that subscribers can use to request leased set-top boxes. The FCC encourages cable operators and consumer electronics retailers to achieve a retail installation option through private negotiations. Finally, rather than giving local franchising authorities the power to enforce CableCARD rules, the FCC will include a specific reference to CableCARDs and associated equipment to the process for filing complaints on the FCC website to make it easier for consumers to raise their concerns and to ensure consistent enforcement of the CableCARD rules nationwide.

Multi-Stream CableCARDs. The Third R&O requires cable operators to provide multi-stream CableCARDs (“M-Cards”) by default, unless a subscriber expressly requests a single-stream CableCARD. Because M-Cards are capable of decrypting multiple channels, thereby allowing consumers to record one channel while simultaneously watching another channel, they will reduce the equipment fees paid by subscribers by enabling them to use only one CableCARD per device rather than two or more.