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Alphabet Takes On the Cable Industry

By Andrew Tonner – Feb 6, 2016 at 5:43PM

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As it ramps up its lobbying efforts, Alphabet threatens a long-standing revenue stream for cable giants such as Comcast, Time Warner Cable, DISH Network, and AT&T.

Source: Alphabet.

With the bulk of the industry's largest providers consistently ranked among the most detested companies in the U.S., it's fair to say Americans hate the cable companies only slightly less than the banks. 

If that's the case, Americans might have one unlikely white knight – tech giant Alphabet (GOOG -1.39%) (GOOGL -1.40%) -- to praise for attempting to dismantle one of the industry's more insidious practices: renting set-top boxes. As a recent campaign with the FCC shows, Alphabet is taking on the cable industry. And the FCC chairman is proposing action.

Alphabet lobbies the FCC
Dating back to last year, Alphabet has quietly been waging a war with cable industry powers including Comcast (CMCSA -1.94%), Time Warner Cable (NYSE: TWC), DISH Network (DISH -3.00%), and DirecTV parent AT&T (T -1.42%).

The goal?

Alphabet wants to break the cable companies' long-standing practice of renting out their own set-top boxes to consumers as part of their regular service provider contracts. U.S. cable subscribers pay, on average, $231 in cable box rental fees each year. Those fees bring in an estimated $19.5 billion in annual revenue for Comcast, Time Warner Cable, DISH Network, and AT&T's DirecTV subsidiary. However, Alphabet maintains that a better model exists, and it intends to do something about it.

In a filing with the FCC last October, Alphabet urged the commission to put this practice under greater scrutiny, and it appears Alphabet has spurred the regulators into action. According to an emailed statement Bloomberg reported on, FCC Chairman Tom Wheeler said he plans to propose a new regulation to create an independent market for set-top boxes in the United States. According to an additional statement from the FCC, "Ninety-nine percent of pay-TV subscribers are chained to their set-top boxes because cable and satellite operators have locked up the market. ... Lack of competition has meant few choices and high prices for consumers."

Wheeler said he plans to appeal to his fellow FCC commissioners at their Feb. 18 meeting to begin a formal review process. So while this move could hinder the results for cable operators, there's also little question that consumers and Alphabet itself both stand to gain from this regulatory push.

Cable loses, Alphabet wins
For investors in names such as Comcast, Time Warner, DISH, and AT&T, the creation of what would be, in effect, an independent market for set-top boxes would threaten to erode what's been a guaranteed revenue stream. So it should come as no surprise that the cable industry vigorously opposes such regulation.

The National Cable & Telecommunications Association, a cable industry lobbying group, has ramped up its efforts to present the move as risky. The NCTA claims such regulatory shifts could allow technology companies such as Alphabet to rearrange or drop channels from contractually bound service packages. And while the likes of Alphabet could indeed do that, it doesn't seem that any potential third-party would curry much favor with consumers by intentionally altering their cable packages. So even though cable giants such as Comcast, Time Warner Cable, DISH Network, and AT&T exert meaningful influence on Capitol Hill, this strikes me as a flimsy argument. Whether the FCC agrees remains to be seen.

Source: Alphabet.

Tech companies such as Alphabet, meanwhile, do stand to benefit from breaking the cable industry's stranglehold on set-top boxes. An independent market for set-top boxes could allow third-party manufacturers to push through tech-laden user inferfaces that provide more prominent placement for online services, such as Alphabet's search, browser, YouTube, maps, and many other products. Alphabet already produces the popular Chromecast dongle, and the company moved deeper into in-home connectivity hardware with the launch of its OnHub wireless router last year.So you can see why tech companies such as Alphabet, Apple, Samsung, and more might take an interest in this market, especially given their recent interests in the budding smart-home space.

This early in the game, though, we have more questions than answers. We know that Alphabet could benefit from a change in regulations, but consumers could, too. Keep an eye out for interesting developments as this story unfolds.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Andrew Tonner owns shares of AAPL. The Motley Fool owns shares of and recommends GOOG, GOOGL, and AAPL. 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.

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Stocks Mentioned

Alphabet Inc. Stock Quote
Alphabet Inc.
$98.74 (-1.40%) $-1.40
Alphabet Inc. Stock Quote
Alphabet Inc.
$99.17 (-1.39%) $-1.40
AT&T Inc. Stock Quote
AT&T Inc.
$16.01 (-1.42%) $0.23
DISH Network Corporation Stock Quote
DISH Network Corporation
$15.20 (-3.00%) $0.47
Comcast Corporation Stock Quote
Comcast Corporation
$31.84 (-1.94%) $0.63
Apple Inc. Stock Quote
Apple Inc.
$150.43 (-1.51%) $-2.31

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