Aereo 2 – Broadcast Networks Zip

Aereo emerges as the victor in a second court challenge aimed at shutting the Web-TV company down.

May/June 2013 issue of Broadband Communities Magazine

By Carl Kandutsch, Attorney

One of the big stories in cable television these days is the ongoing (so far) success of Web-television company Aereo, founded by CEO Chet Kanojia in 2012 and funded in part by Barry Diller. For $12 per month, Aereo users can stream high-definition feeds of more than 20 local broadcast networks, including CBS, NBC, Fox, ABC, and PBS, through an Internet connection. Aereo uses a phalanx of postage-stamp-sized antennas that are leased to Aereo subscribers and pull broadcast signals off the air, just as old-fashioned “rabbit ears” or rooftop antennas attached to individual television sets did. The signals are then sent over the Internet to DVR devices at customers’ premises or to customers’ mobile devices. Currently available in New York City, Aereo plans to expand into at least 22 additional U.S. markets.

However, unlike traditional cable television systems, Aereo doesn’t pay compulsory copyright license fees or retransmission consent fees to the broadcast networks that own the off-air programming content. Aereo thus presents a threat to the broadcast business model. To measure the potential loss in revenue to broadcast networks, consider the fact that analyst SNL Kagan recently predicted that retransmission consent fees will top $6 billion by 2013. Every time a cable or satellite television subscriber “cuts the cord” and switches to Aereo, that revenue stream marginally erodes. The cable or satellite operator loses pay TV subscription revenue, and the broadcasters’ copyright/retransmission cuts are correspondingly reduced.

If Aereo’s content distribution model prevails, the effect could be devastating for broadcast networks. Predictably, the broadcast television industry immediately attacked Aereo in a federal district court in New York last year, claiming copyright infringement based on the startup’s charging a subscription fee for content owned by others. Aereo won the first round, and the broadcasters appealed. Round two went to Aereo as well; on April 1, 2013, the U.S. Court of Appeals for the Second Circuit denied the broadcasters’ motion for a preliminary injunction to shut Aereo down.

The Copyright Act gives a copyright holder the exclusive right, in the case of television programming content, to “perform the copyrighted work publicly.”[i] The legal question in the Aereo case is whether Aereo is “publicly performing” copyrighted material when it rents individual antennas to subscribers, allowing those subscribers to view off-air broadcast programming via the Internet. According to the Copyright Act,

to perform a work “publicly” means (1) to perform or display it at a place open to or at any place where a substantial number of persons outside of a normal circle of a family and its social acquaintances is gathered; or (2) to transmit or otherwise communicate a performance or display of the work to a place specified by clause (1) or to the public, by means of any device or process, whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places and at the same time or at different time.[ii]  

The broadcasters claim that because Aereo provides live television programming to a large audience, it is publicly performing copyrighted work. Aereo argues that because each subscriber is assigned his or her own antenna, which is housed in Aereo’s facility and controlled by means of the individual subscriber’s computer, Aereo is not “publicly” performing anything. The Second Circuit agreed with Aereo – what the company does is akin to an individual viewer’s use of rabbit ears or a rooftop antenna to pick up and display free broadcast signals on a television set. It is a “private” performance:

It is beyond dispute that the transmission of a broadcast TV program received by an individual’s rooftop antenna to the TV in his living room is private, because only that individual can receive the transmission from that antenna, ensuring that the potential audience of that transmission is only one person. Plaintiffs have presented no reason why the result should be any different when that rooftop antenna is rented from Aereo and its signals transmitted over the [I]nternet; it remains the case that only one person can receive that antenna’s transmissions.[iii]

Just the Beginning of the Battle

However, both court rulings have dealt only with motions for preliminary injunction, and the case will continue to wind its way through the courts, including a likely appeal to the U.S. Supreme Court. Nonetheless, the Court of Appeals decision will go a long way toward reassuring Aereo’s potential partners in the cable and satellite distribution world, such as AT&T and Dish Network, that a deal is worth pursuing.[iv] In addition, Aereo has filed a preemptive lawsuit against CBS seeking a judicial declaration that its business does not violate copyright law in new markets outside New York City, including Boston.

The Aereo case deals with “free” off-air broadcast programming, but similar regulatory issues have arisen with regard to the online availability of cable programming. For example, in 2011 a Seattle startup called ivi unsuccessfully challenged the right of broadcasters to collect compulsory copyright license fees for ivi’s online distribution of programming content. Ivi claimed that it did not operate a “cable system” and was therefore not subject to the cable industry’s statutory copyright license scheme. (See “No Online Cable Systems – For Now” in the May-June 2011 issue of Broadband Communities.)

Similarly, the following year, an online video distributor called Sky Angel claimed a right to file a program access complaint at the Federal Communications Commission against a cable network, the Discovery Channel – a right reserved under the law to cable and satellite video distributors that offer “multiple channels of video programming” to subscribers. (See“Still No Online Cable System” in the January-February 2012 issue of Broadband Communities.) The Sky Angel case, still pending, prompted the FCC to issue a Notice of Inquiry on whether it should expand the scope of certain cable television regulations to encompass online video distribution. Together these three legal actions represent the first skirmishes in what could ultimately be a comprehensive restructuring of the legal landscape upon which video programming content is sent from production studios to U.S. living rooms.

In this context, the Aereo case represents but one flank of a broader assault on traditional television distribution models in recent years, an assault made inevitable first by technical innovations – the ability to deliver video signals to end users by means of the public Internet rather than via proprietary cable television networks – and second by corresponding changes in the economics of video content distribution.  

Table d'Hôte or À La Carte

From the economic perspective, pay television rates are quickly reaching a tipping point at which the old model – involving hefty licensing and retransmission consent fees charged by content owners for mandatory bundles of programming that are passed on to consumers in the form of rising basic cable rates – is becoming unsustainable. Content distributors, unable to match subscription rates with programming costs, feel the pressure. For example, DIRECTV raised its basic rate by 4.5 percent in 2012, but the company’s CFO recently predicted that programming costs per subscriber would increase by 8 percent during 2013. Time Warner Cable’s CEO stated in a March 6, 2013, article in The Wall Street Journal that over the past four years, the company’s average revenue per subscriber increased by 16 percent, and its programming costs went up by 32 percent. In other words, the cost of programming for cable operators is rising at approximately twice the rate of basic cable bills. As a result, à la carte cable offerings may finally become a reality in the near future.

According to a March 19, 2013, article in The Washington Post, Verizon and Cablevision are pressing networks to stop the practice of requiring operators to carry unwanted channels and allow à la carte channel menus. For example, subscribers would be able to opt out of super-pricey sports programming packages and sign up for only the channels they want. In fact, Sen. John McCain (R-Ariz.) recently introduced a Senate bill requiring cable operators to offer à la carte programming choices or face losing their statutory copyright licenses.

From a technological perspective, the ability of content distributors to match cable rates with programming costs is restrained by the expanding capability and willingness of consumers to “cut the cord” in favor of online television viewing. Innovative startups such as Aereo are more than happy to welcome the cord cutters with open arms. Although it is difficult to find reliable data on the number of pay-TV subscribers who have terminated cable in favor of an Internet-based viewing platform, the ratings service Nielsen recently reported that as of the fourth quarter 2012, more than 5 million households fit its definition of Zero TV homes – homes that get video entertainment via computer, smart phones and tablets, up from 2 million in 2007. These figures mean that, on average, about 600,000 new Zero TV households were added during each of the past five years, representing a combination of new users electing to receive video programming on Internet/streaming platforms and existing satellite and cable customers cancelling their pay-TV subscriptions. Meanwhile, NPD Group, a leading market research firm, expects the average pay-TV bill to reach $123 by 2015 and $200 by 2020, all during a time when consumers are looking for ways to cut household expenses.

The broadcast networks’ response to the Aereo decision reflects uncertainty masked as bravado. Chase Carey, president and chief operating officer of News Corporation, suggested that in addition to pursuing legal and political (deploying a phalanx of lobbyists to strong-arm Congress) solutions, Fox would consider “converting the broadcast network to a pay channel.” Carey’s remark amounts to an idle threat designed to send a message to compliant politicians in Washington, D.C.: – “Do something to protect us from the Aereos of the world, or we will put an end to free broadcast television.” Carey’s passive-aggressive posture is consistent with prior unsuccessful efforts by the broadcast industry to stifle innovation. For example, television broadcasters fought the emergent cable industry back in the 1970s and took their losing battle against VCRs and DVRs all the way to the U.S. Supreme Court.

However, suppose that News Corp made good on Carey’s threat. Would the FCC allow Fox to retain its spectrum licenses when the broadcaster is no longer in the free television broadcast business? How could the conversion of Fox to a cable channel serve the public interest? Senator McCain’s à la carte bill includes a provision that would require the FCC to auction the spectrum of any broadcaster that moves its must-see programming to cable. If the Aereo decision induced Fox to trade in its broadcast licenses to enter the pay TV market, it might be seen as a positive development. It would free up some spectrum for uses that many people see as more valuable than live sports programming, such as expanded wireless broadband Internet access, especially in underserved areas of the country that still rely on broadcast television.