FCC Chairman Tom Wheeler's set-top cable box proposal may not come to fruition, but it may result in a good compromise. In June, AT&T (NYSE:T) submitted a proposal to the FCC providing a solution to the lack of consumer choice when it comes to the hardware cable subscribers use to watch TV.
It proposes an industry standard for an app that could run on third-party hardware like an Apple (NASDAQ:AAPL) TV or Roku box. Pay-TV providers would retain control over the content delivery, but would allow customers to choose their own hardware instead of requiring them to rent a set-top box. Google, the Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary, has said AT&T's proposal is a "constructive effort" in its fight to open the set-top box to all hardware makers.
Some cable companies are already ready to go
Last fall, Time Warner Cable (UNKNOWN:TWC.DL) experimented with letting subscribers use a Roku as their main set-top box instead of Time Warner's hardware. The cable company simply ported its existing TV Everywhere app, which allowed users to stream most networks from within their homes via smartphone and tablets, and made it available on the Roku app store. Most other pay-TV providers have similar apps and policies, and could quickly launch a similar app for Roku, Apple, and Google, among others.
While the technical capabilities are there for all the major pay-TV providers, many will still hesitate to enact any changes. Renting set-top boxes to customers produces an average revenue stream of $231 per household every year. That's exactly the type of problem the FCC is looking to solve by opening up hardware to third parties and allowing customers to own devices outright.
Pay-TV companies ought to be able to increase their service fees in order to offset the lost profits, and if customers want DVR functionality, it's likely they'll still have to have at least one set-top box from their provider.
Some important language from AT&T's proposal
Within AT&T's proposal, it says the app provided by pay-TV operators "would enable the retail device to also use its own user interface to obtain combined search results from MVPD content." In other words, it will let Apple and Google search live TV for results, and display them right alongside results from other third-party video apps.
That's very important for Apple and Google. Apple just unveiled more powerful search capabilities for Siri on Apple TV at WWDC. It showcased speech technology enabling the user to say the name of a television channel (that has a stand-alone app like ESPN or CNBC) and the device will automatically open up the right app and start streaming the channel. It could also work with specific TV shows or broadcasts. Apple will effectively be able to provide the television service it's been reportedly working on without having to make expensive content deals.
Google, for its part, will be able to do the same thing, but its use of digital advertising for monetization will be curtailed by AT&T's proposal. Since the content will stream through the pay-TV provider's app instead of a Google app, Google won't be able to capitalize on real viewer data. However, it should be able to use search data to get a pretty good idea of what users are watching and what they're interested in. It can use that to advertise to those users on its web properties.
There's a lot for the consumer tech companies to like about this proposal from AT&T. Considering it comes from the biggest pay-TV provider in the U.S., it stands a good chance of serious consideration by Tom Wheeler and the FCC.
Should it go through, Alphabet stands to benefit from a high potential to access viewer data, but not as much as in its original proposal to the FCC. Apple could be one of the biggest beneficiaries, as it opens a huge market to Apple TV sales, at a time when the company is struggling with stagnating growth with other devices. Apple will have to compete with smaller device makers selling cheaper products, but that's never stopped it before.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.