Cable operators say they are willing to compromise in the dispute over third-party cable boxes, but are holding out on letting customers make recordings on such boxes.

The proposal comes after a meeting with the Federal Communications Commission, which recently threatened to introduce tighter regulation. The FCC says in principle cable companies should let customers use their own boxes to process cable TV feeds, opening up competition for better interfaces and apps, particularly for navigating content from live TV, on demand services and Internet video.

The industry has now responded with a formal filing to the FCC’s consultation process, sent on behalf of industry body the National Cable & Telecommunications Association, along with specific companies including AT&T/DirecTV and Comcast.

The letter says the industry is willing in principle to agree to new rules that would use HTML 5 based apps to make it possible for third-party boxes to access and display the video streams. That would also make it possible for some ‘Smart’ TVs to show cable TV directly without the need for any box. According to the letter, the rules could apply to any cable company with more than a million customers.

The industry proposal falls short of the FCC’s proposals in two significant ways however. Firstly, it would simply mean delivering the feed through the same interface as on the cable operator’s own box. The FCC wants the industry to make the programming itself available, meaning third-party box-makers could design their own interfaces and navigation.

Secondly, the industry says the rules should only apply to viewing content and shouldn’t force companies to make it possible to record content on third-party boxes. The FCC’s proposals say that’s a key part of opening up to competition.

In response, the FCC has welcomed the fact that the industry has agreed the general principle of competition is achievable but says “there is a lot more work to do.”

It certainly appears the cable industry is making a negotiating ploy in the hope of forcing the FCC to compromise rather than get bogged down in another legal debate about the extent of its rulemaking powers.

In a fortunate (and perhaps not coincidental) piece of timing for the cable companies, the latest government funding bill was approved this week and the money allocated to the FCC came with the specific condition that it not make any changes to set top box rules until it completes an impact study.