On Friday, October 12, 2012, the Federal Communications Commission (“FCC”) released a Report and Order (“R&O”) amending its rules to allow (but not require) all-digital cable systems to encrypt basic cable service provided that they comply with certain consumer protection measures. These measures include (1) offering certain subscribers free descrambling/decrypting equipment for a limited period of time and (2) giving consumers notice of their right to obtain free equipment as well as notice in advance of the expiration of the free equipment period. In addition, in order to address the potential impact that basic tier encryption could have on a small number of subscribers that use third-party devices that are not CableCARD compatible (e.g., Boxee), the FCC is requiring the six largest incumbent cable operators (i.e., Comcast, Time Warner Cable, Cox, Charter, Cablevision, and Bright House) to honor a commitment they made to address the compatibility issue through additional equipment offers and/or software upgrades. The rules allowing basic tier encryption will become effective thirty (30) days after they are published in the Federal Register.

Background. Section 624A of the 1992 Cable Act directed the FCC to adopt regulations to assure compatibility between consumer electronics equipment and cable systems. In 1994, the FCC adopted Section 76.630(a) of its rules, which prohibits cable operators from scrambling or encrypting signals carried on the basic tier of service. At the time the FCC adopted Section 76.630(a), all cable systems were analog. Today however, many cable systems are being converted to an “all-digital” format – a development that led the FCC, in January 2010, to grant a basic tier encryption waiver for Cablevision’s New York City all-digital system, subject to the condition that current basic-only subscribers be offered two set-top boxes or CableCARDs without charge for two years.

In October 2011, citing reports from Cablevision regarding the benefits provided by the encryption of basic service (including the ability to use remote activation and deactivation of service in place of more costly truck rolls) and the near total absence of consumer complaints, the FCC issued a Notice of Proposed Rulemaking (“NPRM”) proposing to allow all-digital cable systems to encrypt the basic tier so long as certain categories of consumers were offered free set top boxes or CableCARDs for a specified period of time. The proposal was supported by most cable operators and, initially, by certain public interest groups and franchising authorities. However, the proposed rule change drew opposition from within the consumer electronics industry and, in particular, certain companies such as Boxee whose customers use IP-enabled devices that are not CableCARD compatible and are intended to work with unencrypted basic service. Some of the public interest and municipal groups that had originally supported the FCC’s proposal shifted their position to urge that the revised rules address the concerns of these equipment companies.

Revised Rule As Adopted By FCC. In the R&O, the FCC concluded that, on balance, revising its rules to allow all-digital cable systems to encrypt the basic service tier would serve the public interest. In particular, the FCC noted that virtually all subscribers to all-digital systems have at least one device capable of receiving the encrypted signals and that encryption would allow cable operators to activate and deactivate service changes without a truck roll, reducing both costs to the operator and inconvenience to the consumer. The FCC also noted that encryption would assist industry efforts in fighting signal theft (thus further reducing costs) and would give cable operators a measure of regulatory parity vis-à-vis satellite companies that are not subject to a prohibition on encryption.

All-digital System Definition: As proposed in the NPRM, the FCC has limited the option of encrypting basic tier service to “all-digital systems” – a term that the FCC defines as encompassing systems in which “no television signals are provided using the NTSC system.” The R&O clarifies that the term all-digital system does not include “hybrid” digital/analog systems, but does cover systems that offer unencrypted analog “barker channels.” The R&O also confirms that the rule allowing basic tier encryption is permissible and that cable operators are free to continue to offer unencrypted basic service if they choose.

Free Equipment Offer Requirements. The FCC generally followed the NPRM in requiring all-digital systems that elect to encrypt basic service to make free equipment available to subscribers, as follows:

  • the cable operator must offer to provide those subscribers who subscribe only to the basic tier with the equipment needed to descramble or decrypt the basic tier (i.e., the subscriber’s choice of a CableCARD or set-top box) on two television sets free of charge for two years from the date on which encryption commences.
  • in the case of basic-only subscribers who receive Medicaid, the “free equipment” period will last five years.
  • in the case of existing subscribers who take more than the basic service tier, but who have additional devices on which they only receive the unencrypted basic tier, the cable operator must offer decrypting equipment free of charge for one television set for one year from the date of encryption.

The offer of free equipment applies only to subscribers who were customers of the cable system on the date the system encrypted basic service; new customers can be charged for any equipment they need to receive encrypted basic. The free equipment offer must be communicated to subscribers at least thirty (30) days before the system commences encrypting the basic tier and must remain open for at least 120 days after the date of encryption. [Note: while the R&O and the model notice provision state that the free equipment offer must stay open for at least 120 days, the revised rule states that the offer must be open for 180 days; we have confirmed with the FCC that the correct period is 120 days].

Notice Requirements. The new rules require operators to give notice to subscribers both before commencing encryption and again during the period leading up to expiration of the free equipment period. The pre-encryption notice must be given at least 30 days in advance and must provide information about the free equipment offer in conformity with specific language spelled out in the rules. The notice that the subscriber’s free equipment period is ending must be given at least 30 days, but no more than 60 days, before the expiration date. Again, the FCC has mandated the specific text of the required notice. The prescribed wording of these notices is appended at the end of this advisory. While this language must be used in giving notice to consumers, the R&O indicates that a cable operator may supplement the mandated notice with additional information as the operator sees fit.

Special Conditions Applicable to Top Six Incumbent Cable Operators. As noted above, certain parties have expressed concern that allowing encryption of the basic tier will harm consumers who own third-party provided IP-enabled devices that lack the ability to decrypt cable signals and that the free equipment offer would not address these concerns. Specifically, companies such as Boxee complained that existing set-top boxes are not compatible with IP-enabled devices because they do not output signals in a manner that the IP-enabled devices can access. The FCC acknowledged that this was a valid concern, but concluded that the number of impacted consumers likely would be quite small. Nonetheless, the FCC accepted an offer by NCTA’s six largest members to mitigate any harm to the users of these IP-enabled devices by committing to either (1) provide them with a converter box with “standard home networking capability” that can provide IP-enabled clear QAM devices access to basic service channels or (2) enable IP-enabled clear QAM devices to access encrypted basic service tier channels without any additional hardware through the use of commercially available software upgrades. Although the FCC did not incorporate the terms of this commitment into its rules, the R&O indicates that the six top incumbent operators must honor the commitment for a period of three years as a condition to being able to encrypt basic service. At the end of the three year period, the Media Bureau will decide whether the condition should be extended or allowed to sunset. The FCC indicated that it was not requiring other, smaller operators to make a similar commitment at this time; rather, the FCC stated that it anticipated that the large operators’ demand for the required equipment would lead to the inclusion of similar functionality in equipment used by smaller operators. The FCC cautioned that it would revisit the issue if the equipment market does not develop as expected or if small operators do not make their service compatible with third-party IP-enabled devices.

Other issues. The FCC clarified that cable operators encrypting the basic tier must provide the “free equipment” required by the rules without any “hidden” fees, such as “digital access fees” or “outlet fees.” The FCC also confirmed that the free equipment and subscriber notice requirements do not apply with respect to a cable system’s “institutional subscribers” and that the rules do not limit or preempt existing, renegotiated, or future franchise agreements that impose particular equipment requirements for institutional subscribers. The FCC stated that it expects cable operators will work closely with local franchising authorities and institutions to ensure that any disruption experienced as a result of encryption is minimized. Finally, the ordering clause in the R&O includes a somewhat unusual “non-severability” clause indicating that if any of the new rules or their application to any person or circumstance are held to be unlawful or invalid, the remaining rule changes will no longer be effective. Commissioners McDowell and Pai, while concurring in the adoption of the R&O, both issued separate statements expressing concern that this provision is overbroad and unnecessary and could lead to confusion and inconvenience if the invalidation of even a small part of the rules forced operators to cease encrypting after they had gone to the expense of installing the encryption technology and distributing free equipment to subscribers.

TEXT OF NOTICES REQUIRED BY FCC BASIC TIER ENCRYPTION RULES

  1. NOTICE OF AVAILABILITY OF FREE EQUIPMENT. At least thirty (30) days prior to the date that an all-digital cable system begins encrypting the basic tier, the system operator must give existing subscribers the following notice regarding the availability of free equipment:

On (DATE), (NAME OF CABLE OPERATOR) will start encrypting (INSERT NAME OF CABLE BASIC SERVICE TIER OFFERING) on your cable system. If you have a set-top box, digital transport adapter (DTA), or a retail CableCARD device connected to each of your TVs, you will be unaffected by this change. However, if you are currently receiving (INSERT NAME OF CABLE BASIC SERVICE TIER OFFERING) on any TV without equipment supplied by (NAME OF CABLE OPERATOR), you will lose the ability to view any channels on that TV.

If you are affected, you should contact (NAME OF CABLE OPERATOR) to arrange for the equipment you need to continue receiving your services. In such case, you are entitled to receive equipment at no additional charge or service fee for a limited period of time. The number and type of devices you are entitled to receive and for how long will vary depending on your situation. If you are a (INSERT NAME OF CABLE BASIC SERVICE TIER OFFERING) customer and receive the service on your TV without (NAME OF CABLE OPERATOR)-supplied equipment, you are entitled to up to two devices for two years (five years if you also receive Medicaid). If you subscribe to a higher level of service and receive (INSERT NAME OF CABLE BASIC SERVICE TIER OFFERING) on a secondary TV without (NAME OF CABLE OPERATOR)-supplied equipment, you are entitled to one device for one year.

You can learn more about this equipment offer and eligibility at (WEBPAGE ADDRESS) or by calling (PHONE NUMBER). To qualify for any equipment at no additional charge or service fee, you must request the equipment between (DATE THAT IS 30 DAYS BEFORE ENCRYPTION) and (DATE THAT IS 120 DAYS AFTER ENCRYPTION) and satisfy all other eligibility requirements.

  1. NOTICE OF EXPIRATION OF FREE EQUIPMENT PERIOD. At least thirty (30) days, but not more than sixty (60) days, before a subscriber’s free device period ends, the cable system operator must give the subscriber the following notice advising them of the end of the free equipment period:

You currently receive equipment necessary to descramble or decrypt the basic service tier signals (either a set-top box or CableCARD) free of charge. Effective with the (MONTH/YEAR) billing cycle, (NAME OF CABLE OPERATOR) will begin charging you for the equipment you received to access (INSERT NAME OF CABLE BASIC SERVICE TIER OFFERING) when (NAME OF CABLE OPERATOR) started encrypting those channels on your cable system. The monthly charge for the (TYPE OF DEVICE) will be (AMOUNT OF CHARGE). The name and address of your local franchising authority is [NAME AND ADDRESS OF LOCAL FRANCHISING AUTHORITY].