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Forum: Is the FCC Paving the Way for Piracy?

The Federal Communications Commission has, at long last,
issued its report and order mandating the retail sale of both analog and digital set-top
cable boxes.

The inclusion of analog set-tops in the FCC order presents
a clear and present danger to signal security because the FCC requires all cable operators
to provide separate security modules -- so-called smart cards -- to their subscribers for
insertion in the retail set-tops that they have purchased from "unaffiliated"

The grave threat to signal security exists because analog
security technology has long been compromised by sellers of pirate decoders. These theft
devices are amazingly effective in thwarting the most sophisticated security measures
employed by cable operators today.

Given the apparent vulnerability of smart-card technology
used in the direct-broadcast satellite industry, we can expect a flood of pirate cards --
easily manufactured in large numbers and undetectable by cable operators -- that will be
sold very cheaply in an enormous black market. Sellers of these pirate cards will operate
on a retail and wholesale level, masking their illegal activities behind the FCC-mandated
retail market for set-top boxes.

How does the FCC propose that cable operators protect their
security in the new retail market? While paying lip service to signal security, the
following measures imposed by the FCC will sacrifice that security in the name of
free-market competition:

Requiring that separate security modules be made
available to subscribers by July 1, 2000;

Prohibiting cable operators from selling or leasing
any integrated set-tops after January 2005;

Giving subscribers the right to attach
"compatible" set-tops to their televisions; and

Giving cable operators a qualifiedright to
prohibit subscribers from using equipment that will compromise signal security or do other
harm to their systems.

No restrictions are placed upon the sale of integrated
set-top boxes by vendors that are unaffiliated with cable operators. There is also an
exception in the order's restrictions for set-tops that operate throughout the continental
United States and that are commercially available from unaffiliated sources, including DBS

While the FCC order states that subscribers' "right to
attach" equipment does not include cable-theft devices, cable operators must publish
and provide to subscribers descriptions of prohibited devices subject to a requirement
that such devices raise "reasonable and legitimate" concerns of theft of
service, and not as a means to unreasonably restrict the use of set-tops obtained from
unaffiliated vendors.

All disputes involving the cable operators' list of
prohibited devices are to be resolved under FCC-petition procedures.

Significantly, the FCC does not require vendors that are
unaffiliated with cable operators to obtain prior approval from operators before selling
decoders to their subscribers -- an omission that arguably conflicts with the statutory
rights of operators under the 1984 Cable Act.

Even more disturbing, the FCC does not require unaffiliated
vendors to obtain FCC approval for their navigation devices. Although such a stipulation
may be assumed to exist under the current rules, the absence of any regulatory
requirements for unaffiliated vendors in the FCC order may give cable pirates the cover
that they need for their operations.

Basically, the FCC has discarded the absolute right of a
cable operator to control subscriber use of set-tops, replacing it with a cumbersome and
costly regulatory process that will pit operators against a plethora of vendors clamoring
for the right to sell their own products, while emasculating the operators' ability to
secure their systems against piracy. In effect, the FCC has tied cable operators to a
tree, smeared them with honey and invited the bears to lunch.

Let there be no doubt that the bears will have a feast.
Some sophisticated pirate vendors are already selling FCC-approved converter/decoders that
can easily be converted into theft devices with the insertion of pirate circuit boards
sold by related companies.

Under the FCC's new regulatory scheme, cable operators will
probably be required to approve these converter/decoders, only to have them easily
modified with pirate chips. In such a scenario, any operator that includes any of these
converter/decoders in its list of prohibited devices will be met with a blizzard of
challenges before the FCC.

Worse yet, a cable operator will not be allowed to list the
vendors from which products are verboten, but just the devices themselves -- an impossible
task, given the great number and variety of such devices. Known pirate vendors will
actually be allowed to sell "theft-ready" converter/decoders with impunity, for
which other pirate vendors will supply the theft components.

Having created this Potemkin village of a retail market,
the FCC has assumed the responsibility of local constable -- a role that it is uniquely
unsuited to play. At the mercy of the bears and with the park ranger asleep, cable signal
security will be a thing of the past unless operators overturn the FCC order as it applies
to analog set-tops or begin taking more effective steps to stop piracy before it is too

To best minimize the adverse impact of the FCC's action,
cable operators and other affected parties ought to:

Prepare updated equipment-authorization policies;

Develop enhanced inventory-control and
security-audit procedures;

Diagnose the extent of the signal-piracy problem in
their systems as soon as possible, so that corrective measures can be taken before the
advent of the set-top retail market; and

Begin the preparation of lists of prohibited
decoders and the vendors selling them.

On a strategic front, the National Cable Television
Association, with the active cooperation of the leading MSOs, should lobby Congress to
strengthen the civil statutory-penalties provision in the 1984 Cable Act and to eliminate
the effect of some recent court decisions that have weakened the act as the industry's
principal weapon against cable piracy.

Geoffrey L. Beauchamp is an attorney with Wisler,
Pearlstine, Talone, Craig, Garrity & Potash LLP in Blue Bell, Pa.