Saturday, January 27, 2007

Cable DVRs in Short Supply; Bad Forecasting or the CableCARD Rule?

Looking for an HD DVR from your cable company? Depending on where you live, you may just have to take a number or get in line.

On Wednesday, Channel 9 in Syracuse, NY reported that the local Time Warner Cable was out of stock. What's behind the shortage? According to Channel 9, "The company that makes these DVR's has been overwhelmed by requests for them, and cable companies all across the US are telling customers they'll have to wait for the DVR's." (Yesterday Channel 9 announced that TWC had just received a shipment of 1500 HD DVRs to distribute to customers.)

Forecasting demand is always something of a black art, but this season it's especially difficult because of an FCC rule that forbids cable companies to distribute the current generation of set top boxes after June 30th. (By the way, this rule was issued in 1999, so it's not as though this sneaked up on anybody. The cable industry has managed to get the deadline pushed back until this year--and they're still pushing.)

A little background on the rule: To ensure that customers only watch the channels they pay for, and to guard against copying and piracy, most digital channels are encrypted. The set top box has security features that the cable company controls to be sure that you only have access to the channels you pay for. These security features have given two companies (Scientific-Atlanta and Motorola) a virtual lock on the set top box market in the U.S. The FCC rule that's causing the rucus is called the Integration Ban and says that the security features can no longer be integrated into the box hardware, but have to be made available as a separate module (Currently embodied in CableCARD technology).

Separating security from the navigation, tuning (and now DVR) functions was meant to encourage more open competition, innovation, and customer choice. But in the face of rising demand for HD DVRs, it makes forecasting and inventory management a high-risk gamble.

Michael Powell, who was Chairman of the FCC when the rule was first issued in 1998, dissented from the ruling. One of his reasons is proving prophetic:
"... the ban is likely to skew present business decisions of operators about when they should buy new set-top boxes, how many they should buy and what plans they should make for deploying digital technology. MVPDs (Multichannel Video Program Distributors), particularly smaller systems and other non-exempt operators such as wireless cable operators, will be forced to make these decisions so as to avoid the potential for stranded investment, not on the basis of what might be best for their customers. I see no reason to put these operators in such an untenable position."
If you want to get a flavor of this battle over the FCC Integration Ban, here's the latest consumer electronics industry letter to the FCC (pdf) and the cable industry response (pdf).

Mickeleh's Take
: The transition will be ugly, frustrating, expensive, and (maybe) worth it. What do you think?

More at Techmeme

(Tags: , , , , , , )