The cellular phone that you bought for $29 from Circuit City really costs a lot more than that to manufacture and sell. You pay the total cost for it, but not directly. There's a subsidy involved, although not everyone calls it that. When you sign up for a year's worth of service, the cellular phone company sends a check for $200 to Circuit City. That covers the remaining cost of the phone. The cell phone company considers it a marketing cost or customer acquisition cost, a normal expense of doing business. If you terminate your service after one year, the cell phone company breaks even. If you continue your cell phone subscription for many years, the cell phone company makes big profits from you. Those profits cover the acquisition costs for other customers. The long-term subscribers are subsidizing those who churn after a year.
The picture is very much the same for satellite receivers. In order to get a low-price DirecTV or Echostar receiver, you must sign up for a year's worth of service. For cable boxes, once the piracy issues and interoperability issues are resolved, it will probably be the same story. Buy the advanced digital box from Circuit City for (say) $150, sign up for a year of advanced digital services from the cable company, and the cable company sends a check for $200 to Circuit City or to the box manufacturer. This could be attractive to a cable operator because the $200 is treated as an expense, rather than a capital cost. Ask your CPA for details.TV set subsidies
Everyone agrees that digital TVs will be expensive in the early years. Broadcasters have to deploy digital transmitters, but they aren't sure if there will be any viewers. So maybe a broadcast network has an incentive to subsidize the rollout of digital TVs. Instead of buying a Sony TV, you buy a Fox/Sony TV. The TV carries the Fox brand.
But what's in it for Fox? Why should they subsidize the cost of a TV if you can use a Fox TV to watch CBS programs? And how does Fox derive any additional revenues to offset the cost of the subsidy?
The FCC has given broadcasters the option to broadcast a combination of free and pay programming. Digital compression makes this possible. Maybe you get the subsidy if you sign up for a year of Fox pay programming.
But maybe that isn't enough. What's it worth to Fox to prevent you from watching CBS programs? It's probably worth a lot, but probably not legal. The All Channel Receiver Act, which was enacted in 1962, probably makes it illegal to sell a TV set that can receive Fox channels, but not CBS channels.
But it probably is legal to sell a TV set that can receive and descramble Fox pay programming, but cannot descramble CBS pay programming. The All Channel Receiver Act probably applies only to free broadcast programming.
So we can expect to see branded TV sets, with a TV network's brand, that are intended as a bottleneck, a gatekeeper. Is this all a figment of my brilliant marketing imagination? Afraid not. The idea was proposed in one of the standards meetings I attended during the week of the Western Cable Show.
So, you say, let the broadcasters use branded TV sets to compete with each other, but anything that speeds up the deployment of digital TV sets is good for the cable industry. Not necessarily. I agree that so long as the cable industry continues to use set-top boxes, it can escape the bottleneck control of a branded TV set.
But there are many voices today for the elimination of the set-top box, for incorporating the set-top box functions into the digital TV set. Standards groups are defining the "digital cable-ready TV set." In some versions, it has a slot to plug in a security card. It has an F-connector for the cable, a receiver to receive a standardized out-of-band data channel, and a transmitter for a standardized upstream channel. But it has no way for a digital set-top box to connect to the TV.
So I foresee the risk that a cable subscriber will buy a "digital cable-ready TV set" that is subsidized by a broadcast network, and will take it home and find that it can descramble Fox pay programming, but it can't descramble HBO programming. Would I buy such a TV set? It depends on how big the subsidy is.