Broadcasters warn of the end of free TV as we know it if the start-up company is allowed to offer digital streams of TV-station signals and cloud-based DVR to mobile devices from broadcasters without having to pay them retransmission-consent fees. If ABC and the other networks win, Aereo and its allies warn of a lightning strike to cloud computing.
As much as either outcome may send shudders through Hollywood or Silicon Valley, the reality is that ABC Television Stations v. Aereo is a case about a specific clause of the Copyright Act, a legal interpretation of the notion of public vs. private performance. But the result is anybody’s guess. “Copyright cases have a way of being unpredictable,” says Blair Levin, a former FCC official and fellow at the Aspen Institute.
But the impact of a Supreme Court decision often turns out to be much different than the dire expectations that precede it. A little more than 30 years ago, as studios were challenging the VCR, MPAA chief Jack Valenti compared the technology to an offshore tidal wave, ready to upend the business. Instead, the opposite happened: The Supreme Court’s ruling in favor of Sony in the landmark 1984 Betamax decision was followed by an explosion in the homevideo market, generating a lucrative new revenue stream for the very studios that fought “time-shifting” of viewing habits.
The tech side has cried wolf on a number of occasions as well. The high court ruled against file-sharing company Grokster in 2005, but warnings that legal uncertainty would stifle future innovation don’t seem to have stopped the march of technology into new and varied formats for listening to music and watching movies.
Nevertheless, the justices’ decision on Aereo will have an impact. Barry Diller, a key investor in the company, is on record as saying that if his side loses, it’s likely the startup venture will end.
Ultimately, though, the decision could create an environment quite different than the one either party is predicting.
IF AEREO WINS
Picture this: All football games, including the Super Bowl, are available only via pay TV. So are the Academy Awards, the Olympics — even the next presidential inauguration.
That was a scenario dangled by Fox last year, as Aereo was collecting court victories, and broadcasters were expressing alarm that their $2 billion-plus gravy train of retransmission revenue was under threat. If Aereo lasts, 21st Century Fox chief operating officer Chase Carey warned at the time, Fox would respond by becoming a subscription cable network. “We’re not going to sit idly by and let people steal our content,” he said.
The threat made headlines, but also was pretty quickly dismissed by the pro-Aereo side as a bit hollow. Their argument is that Washington wouldn’t sit idly by and let it happen (as much as the FCC needs the spectrum). Nor would Fox affiliates.
Some Wall Street analysts have suggested that, short of morphing into cable networks, broadcasters could migrate high-profile event programming to pay-TV platforms as a way to make up for any loss in retransmission revenue, leaving free TV a land of cheap reality shows and perhaps a hodgepodge of newsmagazines and talkshows. In urging the Supreme Court to take the Aereo case, the National Football League and Major League Baseball told the justices that the future of games on free TV was at stake.
But professional sports — not just baseball and football — have been migrating to cable for some time, and Aereo isn’t to blame. In Los Angeles, where the company has yet to enter the marketplace, once-free Dodgers and Lakers telecasts are now available only through Time Warner Cable-owned regional sports networks, with subscribers footing the bill regardless of whether they watch games or not.
The networks would have to think long and hard about risking the 30-second-spot windfall they get for a mass-audience event like the Super Bowl by placing it behind a paywall. But college sports has already taken the plunge: ESPN has aired the past four BCS Football Championship games (which regularly draw better ratings than the World Series). And in 2016, under an agreement between joint rights holders Turner and CBS, the NCAA men’s basketball championship will be telecast only on cable.
Some cable and satellite firms have hinted at launching their own Aereo-like services, but that’s easier said than done. There’s the question of contracts: Many retransmission and carriage agreements have years left on them. There’s also a hardware concern, says Brian Wieser, senior research analyst at Pivotal Research Group, noting that multichannel video programming distributors would face hurdles in inventing and deploying an alternative, particularly if that means reworking a set-top box.
Moreover, broadcaster protestations aren’t necessarily what they seem. One industry attorney, who asked not to be identified, says that such concerns are more about leverage in negotiations. The networks are in a much better position in retransmission talks when there is no option for MVPDs other than to have stations go dark. If cable and satellite providers can say that they’ll switch to Aereo-like broadcast streaming as an alternate signal source, it would likely put downward pressure on retrans fees.
But Aereo founder Chet Kanojia bristles at the notion his $8-per-month service is undercutting the retransmission revenue stream. “Aereo is not disrupting anything,” he maintains. “It is consumer habits and broadband that are disrupting everything.”
Aereo, he suggests, is capitalizing on consumer frustration over rapidly rising cable rates, and on the trend of cord-cutting, along with the continued demand for broadcast channels. Providing those stations solves “half the problem” for former-MVPD subscribers, he says.
So what replaces the “other half” — HBO, or any other cable channel? Amazon or Netflix, Kanojia says. Much of what else is found on cable, from home and gardening to musicvideos to reality shows, can be found online in clips or some other kind of substitute, he maintains.
As for sports, he says: “The only guy you cannot help is the guy who really needs ESPN. That’s a third of the country. Two-thirds of the country is subsidizing.”
A risk for Aereo is that a Supreme Court victory will give tech giants like Apple, Amazon and Hulu ideas. What’s to stop them from adding their own Aereo-like services?
Like TiVo, which introduced the DVR to America’s living rooms only to see cable set-top boxes with similar functionality proliferate, Aereo, too, might well face deep-pocketed competitors.
“When I think of true disrupters, I think, ‘Is the offering sufficient enough to have a true impact on the market?’ ” says Jason Krikorian, co-founder of Sling Media and now general partner at venture capital firm DCM. “It is not a gimme with Aereo.”
CBS’ Leslie Moonves, in a recent CNBC interview, even suggested that the broadcaster might form its own Aereo with the other networks. “Lots of solutions. No fear on my part,” he said.
What, me worry? That’s quite a contrast to some of the other rhetoric coming from the free TV side.
IF ABC (AND BROADCASTERS) WIN
Cablevision has a word for what will happen if the justices issue too sweeping a ruling in favor of broadcasters: “Catastrophic,” as the company argued in its brief to the Supreme Court.
In fact, the high court’s docket is chock-full of warnings that a pro-broadcast decision could threaten the innovation of the cloud. To see why, you have to go back to the Sony Betamax decision. The Supreme Court held in 1984 that recording TV with a VCR for later viewing is a fair use, and does not infringe on copyright. The legality of “time-shifting” paved the way 15 years later for the introduction of the DVR. Studios and networks watched time-shifted viewing flourish, but they put their foot down in 2006, suing Cablevision over the introduction of a DVR that stored recordings not on a home machine but on company servers.
The result has been a long, hard-fought legal slog over when private consumer technology crosses the line into becoming a public performance. The Copyright Act of 1976 spells this out in two conceptual ways. The direct: a play, a movie screening, a concert. And the indirect: designed to cover transmission of performances “by means of any device or process.” The act made clear that a performance could be considered public whether the members of the public capable of receiving it did so “in the same place or in separate places, and at the same time or at different times.”
That’s a mouthful, but the inclusion of this language undoubtedly has helped Hollywood win some important legal victories over the years. But in 2008, the 2nd Circuit Court of Appeals found that Cablevision’s remote DVR was legal, much to the dismay of studios and networks. It held that because its service was designed to transmit a copy of a TV show made by a single subscriber, it was not a public performance.
To Cablevision, that made perfect sense. The focus was placed on potential audience: VOD is public because it is offered to anyone who wants to receive it; the remote DVR is private because the content stored by Cablevision is available only to the person who originally did the recording.
The Supreme Court refused to hear the networks’ appeal.
The Cablevision decision may have nudged along the development of cloud storage services of copyrighted material. A Harvard study cited by the MVPD calculated that the ruling led to an additional $728 million-$1.3 billion in investment in cloud computing firms in the following 2½ years — and it was the impetus for the creation of Aereo.
Aereo contends that its system is, essentially, a remote DVR. A subscriber cannot actually watch a channel simultaneously with its broadcast, but has to wait at least several seconds. When the viewer selects a station, it tunes a dime-sized antenna assigned to that user and a remote hard drive starts recording the feed before it is transmitted to the individual’s device.
What worries groups like the Consumer Electronics Assn. and CTIA — the Wireless Assn. is that if the Supreme Court, in shutting down Aereo, also overturns the Cablevision decision, cloud computing could be jeopardized, especially if the court defines a public performance as separate transmissions of a copyrighted work over the same technological system.
But would the Supreme Court suddenly render all sorts of storage services, like Apple and Google music lockers, illegal? “If they do rule for broadcasters, it is not going to be a broad decision that would shut down cloud computing,” maintains Jonathan Steinsapir, a partner at Kinsella, Weitzman, Iser, Kump & Aldisert who specializes in intellectual property and copyright litigation.
Broadcasters, too, along with the U.S. solicitor general, believe the alarmist rhetoric is just that. In contrast with copyrighted content stored and later transmitted on Aereo, such content on iTunes, Google Play and the like already has been legally obtained.
Aereo, on the other hand, the solicitor general has argued, “provides a means by which consumers can gain access to copyrighted content in the first instance — the same service that cable companies have traditionally provided.”
Pratik Shah, who heads Akin Gump’s Supreme Court practice in Washington, says the brief in favor of broadcasters from the solicitor general, who reps the U.S. government’s position in the matter, is significant. With conflicting narratives of what might happen, Shah says the high court gives weight to what the government thinks, and could rely on the solicitor general’s reassurance to issue a narrow decision holding that Aereo is unlawful, but adding that the ruling would not logically preclude the development of cloud computing. “The court could very explicitly put that in their opinion,” Shah notes.
Curiously, Cablevision disagrees with broadcasters’ legal rationale for shutting down Aereo — but still thinks Aereo should be shut down. It argues that Aereo is no different from a cable system or video-on-demand provider. Taken as a whole, it is still “retransmitting television programming to the public.”
A recent push to classify online video services as MVPDs could gain some momentum under another scenario: if the justices decide Aereo can remain in service, but must pay to retransmit content, just as cable and satellite firms do. (Whether the company would be willing to do that is another question.)
Marci Ryvicker, senior analyst at Wells Fargo Securities, said in a research report that there could be wide-ranging implications if such a decision ignites a drive to classify over-the-top video providers like Aereo as MVPDs. That in and of itself would have a big impact on the video marketplace, and would come as lawmakers are in the early stages of looking at an overhaul of communications regulations.
And like so many Supreme Court copyright decisions, it wouldn’t mean the end of the world as we know it, but rather would help accelerate a trend that’s already started.