Aereo scores big court win and looks for distribution partners

Earlier today, the New York Times reported that Aereo, the Internet TV service that uses banks of tiny micro-antennas to give subscribers access to broadcast TV stations over the Internet, has scored an important Federal court victory. Shortly after the Aereo service launched in New York City, a group of broadcast stations and networks filed suit against the company, charging that it was retransmitting their content without permission. Aereo defended itself by referring to a U.S. Supreme Court decision that said that a similar system implemented by cable service Cablevision for providing DVR service to its customers didn't require permission from broadcasters, broadcast networks or cable networks.

U.S. District Court Judge Alison Nathan denied a request for an emergency injunction made by broadcasters to stop Aereo's service, saying that it was unlikely that they would prevail when the full case is heard by the court. The broadcasters then appealed to the Court of Appeals for the Second Circuit, which ruled 2-to-1 today that Aereo's video streams don't constitute a "public performance," because for the duration of a usage session, one antenna is dedicated to a single subscriber, and therefore, the broadcasters are unlikely to win their case.

The broadcasters are likely to request an "en banc" hearing from the Court of Appeals, where the entire Court of Appeals would hear the case. (Update, April 17, 2013: The broadcasters filed an appeal with Court of Appeals for an en banc review on April 15th.) No matter which side prevails, however, the case is likely to be appealed to the U.S. Supreme Court. At this point, the Court of Appeals' decision is only binding in the states that comprise the Second Circuit (Connecticut, New York and Vermont.) Judges in the Ninth Circuit have heard similar cases and have been considerably more sympathetic to the broadcasters' arguments; conflicting rulings in two districts would be another reason for the Supreme Court to take the case.

In other Aereo news, the Wall Street Journal reports that the company is in talks with several pay-TV companies and Internet service providers; the article names Dish Network and AT&T as two companies that Aereo has had discussions with. The discussions center on Aereo providing a low-cost, Internet-based video service that its partners would offer to customers who don't want or can't afford hundreds of channels. Most "basic cable" bundles include many cable networks; the Aereo package would presumably offer broadcast channels only, with a smattering of cable channels that are more interested in distribution than in carriage fees.

In addition, the Wall Street Journal writes that pay-TV companies could offload all of their broadcast channels to Aereo and supply subscribers with set-top boxes that get those channels from Aereo. That would eliminate the need for Aereo's partners to pay for retransmission rights from broadcasters. If the courts ultimately rule that Aereo also doesn't have to pay for them, that could cut off a great deal of income for broadcasters and broadcast networks.

The stakes are so high that if broadcasters lose in court, they're certain to lobby the U.S. Congress to change the law so that the same rules that cover cable, satellite and IPTV video services also cover Aereo and similar services. However, such a change would most likely also require the broadcasters (and possibly cable networks as well) to deal with Aereo and others on the same basis as cable, satellite and IPTV companies. Right now, content providers are free to ignore requests by Aereo and others to distribute their content, or they can set prices that would make services like Aereo uneconomical. Whether content suppliers are willing to pay that price in order to rein in Aereo remains to be seen.

Broadcasters and Cable Operators: Hypocrites on the Hill

Broadcasters and cable operators are facing off today in hearings at the U.S. Congress over compensation for broadcast retransmission rights and the ability of broadcasters to withhold their programming from cable, satellite and IPTV service providers. The broadcasters are being represented by Fox/News Corp. and Univision, and the cable operators by Cablevision and Time Warner Cable.

Today's hearings were triggered by the standoff between Fox and Cablevision that led to Fox's television stations and most of its cable channels being unavailable to Cablevision subscribers for almost two weeks. The broadcasters, led by Chase Carey of News Corporation, want the government to keep out of the negotiations and impose no requirements for binding arbitration. The cable operators want broadcasters to be required to make their programming available so long as negotiations are continuing, and want binding arbitration at a minimum, if not outright controls on the prices that broadcasters can charge for retransmission rights.

Let's take the broadcasters' side first. They don't want any government interference in or controls on their negotiations. However, their right to set prices for and control retransmission of their programming was established by the U.S. Government in the 1996 Telecommunications Act. Prior to that, they had no choice but to provide their programming to any cable operator who wanted it and was willing to pay the U.S. Copyright Office for the right to use it. If the government hadn't "interfered", broadcasters wouldn't have the rights that it doesn't want the government to interfere with.

In addition, other than a modest fee for a license issued by the U.S. Government, broadcasters don't pay a penny for the bandwidth that they use. If they had to pay the true market value for the bandwidth they use, broadcasters might have a stronger argument, but they're getting the bandwidth that makes their businesses possible for free.

Now, consider the cable operators. The rates that consumers pay for cable service have been going up steadily for years, faster than the rate of inflation, even before the current round of retransmission negotiations. Cable operators have managed to rid themselves of most local controls over their pricing, and they steadfastly refuse to implement a la carte pricing, which would allow consumers to pay for only the channels that they want to watch. The result is that cable (as well as satellite and IPTV) subscribers are forced to pay for dozens of channels that they never watch and wouldn't miss if they weren't available.

Broadcasters want the U.S. Government to subsidize their bandwidth and give them the right to charge for their programming, but they don't want government interference in their negotiations with cable operators. Cable operators plead poverty but have been raising rates for years, and refuse to give their customers the right to pay for only the channels that they want to watch. Both sides are hypocrites.

Unintended consequences of the Cablevision/Fox standoff

The Cablevision/Fox retransmission rights standoff is now more than a week old. Neither the New York Yankees nor the Philadelphia Phillies made it into the World Series, so there's going to be much less demand for Fox in those cities come Wednesday. However, Dish Networks is the next service provider to be threatened with losing Fox's over-the-air stations, and its subscribers in Texas and the San Francisco Bay Area would lose access to the World Series if Fox pulls the plug on November 1st.

I wrote previously about the likelihood that these retransmission battles would result in binding arbitration being imposed, either by the FCC or the U.S. Congress. There might be a different outcome, however. You may recall ivi tv, the Seattle company that's retransmitting over-the-air signals from stations in New York City and Seattle to subscribers across the U.S. over the Internet. Ivi has been sued by just about every broadcast network and programming supplier, but the company is relying on a statute that's been on the books for decades that requires broadcasters to make their signal available to any cable operator, in return for fees paid by cable operators to the U.S. Copyright Office. These fees are then distributed to the broadcasters. In most cases, these statutory license fees are a tiny fraction of what broadcasters are asking for, and getting, from service providers for their retransmission rights.

If enough political pressure is applied, the Congress could repeal the statute that gives broadcasters the right to deny permission for retransmission and the right to ask for compensation. In that case, the law would fall back to the statutory license procedure that's still on the books. It would put local broadcasters that have been relying on retransmission fees for an ever-increasing portion of their income in a world of hurt.

The service providers would love to go back to statutory licenses, even if the license fee was raised substantially. Broadcasters will fight the change with every breath in their bodies. Both sides need to be very careful, because they could end up losing control of the negotiating process.

Is binding arbitration coming in cable retransmission deals?

As of today, Fox's local television stations and cable channels have been unavailable to Cablevision subscribers for five days. Dish Network's retransmission deal with Fox runs out at the end of October, and the Fox channels may go dark on Dish as well. Cablevision has offered to enter into binding arbitration, but Fox appears to be afraid that it won't get what it wants from arbitration.

It's looking more and more like the U.S. Congress or Federal Communications Commission may step in and impose rules for retransmission negotiations. One line of thought is that broadcasters would be prohibited from withdrawing their over-the-air programming from cable, satellite and IPTV service providers while negotiations are underway. Cable networks would be exempt from this rule, but the problem is that service providers could simply stretch out negotiations indefinitely.

Here's where I think this will go: Broadcasters will be required to supply their programming to service providers for a limited time after the expiration of a retransmission contract (perhaps 30 to 60 days) to allow the parties to negotiate a new deal themselves. After that, binding arbitration would be imposed. This would only apply to over-the-air programming--Fox would be free to pull down its cable networks as soon as its contracts expire, as would NBC Universal or Disney.

Any such rules would be tied up in court challenges, potentially for years, but as retransmission standoffs escalate and more service provider customers lose access to channels they want to watch, there's simply going to be too much pressure on the U.S. Government to ignore. 

A la carte and the law of unintended consequences

If you live in the New York metropolitan area, you were a pawn in a high-stakes game of "chicken" between Cablevision and Disney, with the Academy Awards telecast as the prize. The issue was how much Cablevision would pay Disney to retransmit ABC's broadcast stations. After the Academy Awards had been going on for 15 minutes, Cablevision and Disney finally came to an agreement.

Now, the cable and satellite companies want the FCC to outlaw broadcasters from withholding their programming and force both parties to accept arbitration. Broadcasters, who have no small amount of political clout and influence at the FCC, argue that consumers have multiple ways of getting their programming, including over-the-air at no cost. If they can't withhold their programming, they'll have almost no bargaining power with service providers.

The service providers are using these retransmission fees as a reason for raising their rates to consumers, which is causing a customer backlash. Even worse, viewers are once again viewing service providers as unreliable. The cable industry has worked for more than a decade to overcome its reputation for unreliability and poor customer service. Now that most of the major service providers seem to have their acts together, program suppliers are pulling channels at a moment's notice. Planning to watch the Academy Awards tonight? Better get that antenna out. Want to make sure you see the Super Bowl? Good luck if the network that carries it is in negotiations with your service provider.

One likely outcome, and one that neither the service providers nor the program suppliers want, is to force the service providers to make channels available a la carte. In an a la carte world, the service providers would pay the program suppliers only for the channels that its customers subscribe to, and in direct proportion to how many subscribe to each channel. Presumably, the program suppliers would set a wholesale price per subscriber, and service providers could mark that price up or down.

Service providers hate a la carte because it will almost certainly decrease their revenues. Customers will be able to trade off fixed packages and a la carte selections, and go with the cheapest option. Tiered pricing plans will be wrecked, since customers will be able to build their own packages.

Program suppliers are scared to death of a la carte for several reasons: First, they'll no long be able to charge service providers for all of their subscribers; they'll only be able to charge for the customers who actually subscribe to their channels. That will result in dramatic revenue drops for many, if not most, channels. Second, advertising-supported channels will no longer be able to represent all the subscribers to a service provider as "potential" viewers; they will only be able to list the actual number of subscribers in a given period. Which would you rather tell advertisers: We've got coverage in 60 million households in the U.S., or 2.5 million households have actually subscribed to watch our channel?

The final, and perhaps scariest, outcome of a la carte for program suppliers is that the service providers may cut back on their channel lineups to just the most popular and profitable channels. Unpopular channels that have been carried so that service providers can support a wide variety of interests may be dropped.

As brinksmanship between service providers and program suppliers becomes a way of life, consumers will increasingly look for alternative sources of programming. If they can't control how much service providers are willing to pay for channels, and are thus constantly at risk of missing shows they want to watch, they'll demand the right to select and pay for channels themselves. If the service providers and program suppliers don't agree, they'll find other ways to get the programs or other things to do with their time. This game-playing has to stop.

A Huge Win for Cablevision (and for consumers)

Earlier today, the U.S. Court of Appeals for the Second District reversed a previous ruling that Cablevision's network PVR service infringed the rights of content owners. In 2006, Cablevision announced its network PVR service, called RS-DVR, which was based on technology from Arroyo Video Solutions, a company that was subsequently acquired by Cisco. The big advantage of a centralized PVR system is that conventional set-top boxes can provide video recording capabilities; in-home PVRs, with their cost and complexity, aren't needed. Network PVRs are the standard in China, India and other countries where subscriber income precludes the cost of in-home PVRs.

Almost immediately after Cablevision's announcement, a flock of content companies, including CBS, Viacom, News Corp., Time Warner, Disney and NBC Universal, filed suit to stop deployment of RS-DVR. In the initial court case, the media companies prevailed and won an injunction that precluded Cablevision from offering RS-DVR. Today's decision by a three-judge panel overturned the lower court's ruling and lifted the injunction. These articles provide more details about the ruling itself.

This is not the last word in the case, of course. The media companies can request that the entire U.S. Court of Appeals for the Second District rehear the case. No matter how that turns out, the losing side can appeal the case to the U.S. Supreme Court, which can (but isn't obligated to) hear the appeal. However, we're a giant step closer to legal network PVR service in the United States, which will likely mean lower costs for consumers.