Update, 14 September 2010: Ivi seems to be trying to take advantage of U.S. Copyright law that was written well before the advent of the Internet, while simultaneously avoiding FCC rules that make the company's plans patently illegal. (Keep in mind that I'm not a lawyer, so I'm bringing a layman's knowledge to the situation.) In the Code of Federal Regulations, Title 37, Section 201.17, "cable systems" as defined by this statute are entitled to retransmit ("secondarily transmit") television stations' signals under a statutory (or "compulsory") license. The cable system pays a royalty based on its revenues to the U.S. Copyright Office. This portion of the statute was written in 1978, almost 20 years before the commercialization of the Internet, and it didn't contemplate a technology that would make a national cable service feasible outside of FCC regulations.
The FCC has its own rules on permission and compensation for retransmitting the signals from broadcast television stations. Here's a direct quote from the FCC's Fact Sheet on Cable Carriage of Broadcast Stations:
The Communications Act prohibits cable operators and other multichannel video programming distributors from retransmitting commercial television, low power television and radio broadcast signals without first obtaining the broadcaster's consent. This permission is commonly referred to as "retransmission consent" and may involve some compensation from the cable company to the broadcaster for the use of the signal.If ivi is a cable operator or other multichannel video programming distributor, the FCC's rules require the company to get permission from broadcasters before they retransmit their signals.
Under Title 37, Section 201.17, ivi claims that it's a cable system and has a right to a statutory license to television stations' programming, no matter where they're located. However, ivi claims that it's not subject to regulation by the FCC, and therefore is not a cable system. CFR 37 Section 201.17 says that cable systems are entitled to statutory licenses, even if they're not defined as cable systems by the FCC.
So, what's likely to happen? My suspicion is that there are many high-paid attorneys at the television networks and cable operators working on this right now. One option would be to get the U.S. Congress to amend or repeal Section 201.17, since the FCC's rules supercede it. Another option would be to get the FCC to rule that ivi is a legitimate cable operator, and the fact that it owns no plant doesn't mean that it's free from FCC regulation. A third option would be for programming suppliers (the major networks, movie studios and syndicators) to file suit against ivi, charging the company with interfering with their exclusive distribution contracts with local television stations outside the New York City and Seattle markets. These suppliers could petition for an emergency injunction to shut down ivi's service.
Ivi might have a better case than I anticipated when I first wrote this post, but I still believe that it's only a matter of time before it gets shut down. It may take a year or two for the necessary statutory changes to be put into place, but a preliminary injunction can be put into effect in a matter of weeks, or even days.