Sleeper Ruling on “Remote DVR” Service: Television Killer?
The U.S. Supreme Court today refused to disturb a ruling of New York’s Second Circuit Court of Appeals in the case of Cable News Network vs. CSC Holdings. Hardly noticed outside of the inner circles of broadcasting, the case has potential to open the door for massive disruption of broadcast revenues. The problem was aptly described back in January by screenwriter John August:
The issue is deceptively straightforward: Cablevision wants to offer its customers a “remote storage digital video recorder.â€
At first blush, this seems pretty unobjectionable. Under current U.S. law, it’s legal for a consumer to record television programs for later viewing. This is considered time-shifting, and was first made possible by the VCR. Conventional DVRs are high-tech cousins to VCRs, with a hard drive replacing the videotape. In the U.S., many cable and satellite companies provide boxes that include DVR functionality, generally for an additionally monthly fee.
Cablevision wants to offer DVR as a service instead of a device. Rather than recording 30 Rock on the box attached to your TV, the show will be recorded at Cablevision’s headquarters. Then, when you want to watch it, Cablevision will send the show to your television. If it works right, it should feel just like a normal DVR. Only without the cost of the DVR.
If Cablevision offers this service, I think it will be very successful. Less hardware means less things to break, and the service could presumably send a show to any TV in the house. (Some conventional DVRs can do that, but it’s often a hassle.) Plus, storage scales very well. Cablevision could offer a user much more recording space than a conventional DVR.
In fact, Cablevision could offer unlimited storage. And that’s where it gets dangerous.
Say Mary Jones sets her Cablevision RS-DVR to record 30 Rock. So does Bob Smith. Cablevision only needs to record it once. They can send the bits to Mary or Bob whenever one of them asks for it. 1
Given that Cablevision has more than four million customers, it’s a fair bet that at least one of their customers would be interested in any given show, so it makes sense for Cablevision to record and catalog every channel it distributes, 24/7/365.
Conventional DVRs only record what you ask them to record, with some modifiers, such as “new episodes of The Simpsons,†or “movies with Steven Seagal.†So for Cablevision’s service to work like a conventional DVR, it should only offer you programs you specifically chose to record. No fair waking up Friday and asking for last night’s The Office.
But wait. Cablevision is already recording every show. Why don’t they just offer a “Record Everything†option?
Once they offer you the choice to record everything, you suddenly have the ability to watch any show broadcast since you signed on to the service. This is transformative, a Wayback Machine for television.
It would also destroy television as we know it.
. . . .
Cablevision’s RS-DVR is back-door video-on-demand. They’re trying to offer the networks’ output to their customers on their own temrs, without paying any additional fees.
But it’s worse than that.
A service like Cablevision’s makes reruns absurd. Why would anyone watch a rerun of Desperate Housewives when it’s always been available for free on the RS-DVR? And it’s not just television shows that are affected. In a Cablevision universe, a feature film loses all its television value the first time it’s shown. Why would HBO want to show Slumdog Millionaire more than once, considering everyone who could ever want to see it would have it available for free in perpetuity via Cablevision?
For that matter, why buy a DVD, or spend $9.99 to buy a movie through iTunes when that same film is sitting on your (virtual) DVR?
Without reruns and ancillary markets (like DVDs and iTunes), there are no residuals, so that’s obviously a concern for writers.
But it’s worse than that.
Without reruns and ancillary markets, there are no feature films and no scripted television. Outside of lower-cost reality programming, it is simply not profitable to make a movie or TV show that can only be shown theatrically, or once on television. Very, very few movies are profitable in their theatrical release. Most make their money on video and television, which would largely be irrelevant with services like Cablevision’s. A movie studio could decide to never permit their films be shown on any station carried by Cablevision. For television, that’s not an option.
August optimistically predicted that the Supreme Court would grant review of the case, which would put it on the Court’s calendar for this fall, and potentially lead to a ruling more protective of copyright holders.
Today, however, the Court denied review, as reported here, here, and here.
Thus, cable operators now appear to have an open door to introduce the “infinite TiVO” service described by August.
Cablevision, of course, is pleased, although its spokesman (as quoted in the Los Angeles Times) tried his best not to crow too loudly:
“This is a tremendous victory and it opens up the possibility of offering a DVR experience to all of our digital cable customers,” Cablevision Chief Operating Officer Tom Rutledge said in a statement. “At the same time, we are mindful of the potential implications for ad-skipping and the concerns this has raised in the programming community. We believe there are ways to take this victory and work with programmers to give our consumers what they want — full DVR functionality through existing digital set-top boxes — and at the same time deliver real benefits to advertisers.”
This statement, of course, completely ignores the residual-killing potential of this ruling. Since the Supreme Court has apparently decided to sit this out, nothing short of Congressional action could affect the situation now.
P.S.: August, in a later post, responded to criticisms of his analysis of the DVR scenario here.
If Cablevision provides this infinite TiVO service to customers that it will definitely not be for free. It’s far too valuable a spigot to not charge for access to the content. If Cablevision charges, there’s a income stream to tap into.
Despite all the mounting evidence to the contrary, residuals were not guaranteed in either the Bill of Rights or the Ten Commandments. They were invented mere decades ago when technology permitted dramatic content to be reused in ways not anticipated when the content was created. Technology has trumped residuals. Find a way to get paid from the revenue stream the technology creates.
Will it be as rich and as deep as the residuals you’ve come to know and love? Probably not, but with everything being available, everybody in every show has the opportunity to share.
It occurs to me that television and movies recorded on a main server and then ordered up by individual subscribers would make it much easier to track and quantify than if individuals were recording material on their own DVRs. That could solve the problem of residual and royalty payments, but would still do nothing for the advertisers.
As for the advertisers, it could easily be made impossible for the viewers to skip past spots. Heh.
Fred, with all respect, your comment is uncharacteristically ill-reasoned. I know that isn’t you at your best, and I hope you’ll take another look at the problem.
First of all, this isn’t about residuals, at least not directly. It’s about the program owners’ (the studios) ability to be paid anything for the use of their product in this way. The scenario that John August describes marks the end of licensable, revenue-creating video-on-demand or consumer purchases (DVDs, downloads, etc.).
If the studios’ only revenue opportunity is from the first airing of a program, and thereafter Cablevision can replay it indefinitely without owing anything further to the studios, then the studios are no longer going to have a viable financial model for their programs, because the first airing doesn’t come close to paying for those programs. So they’ll stop making them. Residuals will go away in the process, of course, but so will all other economic benefits from the production of these programs.
Second, while Cablevision may indeed create a revenue stream from this service, there cannot, by definition, be any occasion for the studios to “tap into” that stream. The courts have just said that what Cablevision wants to do is legal, without any further permission (or licensing) needed from the studios. The studios have no legal claim to “tap into” Cablevision’s revenue stream from offering the remote DVR service. Unless Congress changes things by amending the copyright statutes, Cablevision (and in short order the other cable operators) can just keep all the money.
Now, cable channel operators such as USA or A&E or ABC Family could simply refuse to license their channels to Cablevision as long as Cablevision offers the remote DVR service, unless that service has severe restrictions put on it that protect the integrity of the programming and preserve its value. Or, moving farther upstream, Warner Brothers might refuse to license its Harry Potter movies to ABC Family Channel unless ABCFC blacks out Cablevision while the movie is being shown. This will create a field day for lawyers, greatly increase the transaction costs in every aspect of television distribution and cable programming, and leave customers quite unhappy.
But even those kinds of measures are not enough, because product carried on over-the-air channels will still appear on cable systems under the “must carry” rules. Thus, everything appearing on ABC, CBS, NBC, Fox, the CW, and any relevant local stations (including syndicated programming) will become subject to the “infinite TiVO” problem . . . and the courts have said that there’s nothing that the television networks or the program owners can do about it.
The media coverage of this ruling is focusing on the ad-skipping aspect of DVRs, as though this is something new. It’s not. That problem has not changed by virtue of this ruling, except to the extent that remote DVR service may make the use of DVRs more widespread if it lowers the end-user cost significantly. Cablevision’s spinmeisters have pulled off a tremendous coup by focusing everyone’s attention on ad-skipping. The real problem is the potential end of generating revenue from the programs themselves, as cable customers have unlimited on-demand access to everything and therefore never need to pay for it again.
I anticipate that the studios will take their problem to Washington, but I don’t expect any fast or ready solutions to emerge there.
VG
This is another example of why all residuals need to move to percentage of distributors gross vs flat fees. Micro-residuals I guess you’d call them.
The cable people have something called “Project Canoe” that is intended to make embedded advertising in Video on Demand time relevant to when shown (and thus more valuable). I would think that would apply here as well.
Re “Record everything” –Umm, how many TVs would you have to own to show that was a relevant thing you could have done for yourself? If the idea is to not take away rights/capability people already have, then I don’t have the capability to record all channels simultaneously and probably no consumer does. I can record 4 channels simultaneously (we have two HD DVR with two tuners each) but that’s still a far cry from “record everything” capability.
Re VoiceGuy’s point above –it is worth remembering that many of the ads seen in shows shown on Cable or Satellite are ads that the Cable or Satellite provider has sold themselves. Are they going to blow off their own leg for a $15.95/month (current Comcast) DVR fee? I don’t think so.
So it seems like Residual Armageddon For Actors may have nothing whatsoever to do with any SAG or AFTRA contract after all. SAG political factions screaming and scrambling over crumbs, while cable distribution companies say “BFD.”
As I’ve said before, we need to think pro-activle and come up with an entirely new way to get paid for our work. Residuals as we know then were proactive 32 years ago. Technology has advanced to the point where “residuals” may no longer be a relevant system for earings. We need to look into something very new, and not just a variation of the old residual ideals….perhaps like licensing for a set period of time…..we need to think outside of the box, but the lines of that box are not well defined any more.
I anticipate that the studios will take their problem to Washington, but I don’t expect any fast or ready solutions to emerge there.
This may already be covered in the coming IP treaty (Anti-Counterfeiting Trade Agreement). We don’t know because Obama’s keeping it secret in the interest of “National Security.” I take this as an indication that the studios have a great deal of influence in Washington.
Doc,
You’ve nailed it.
There’s a recent book, “Selling Sounds Selling Sounds: The Commercial Revolution in American Music†by Scott Suisman, which examines the growth of music as a consumer good over the last 120 years. In the book, a telling parallel to the current Cablevision situation can be found in the crisis that music publishers faced when the rise of mechanical reproduction and exhibition of music (piano players, then phonographs, then radio) destroyed the sheet music business that was their economic foundation. They went to Washington and got the laws changed to make sure they were compensated from the new forms of delivery. The “mechanical license†made sure the composers were paid for every copy made of their song, and later the “performance right†guaranteed they would be paid every time the song was played in public. Neither of these concepts existed 120 years ago, because there was nothing to attach them to, and no economic transactions to share in.
That changed, and its changing again.
But VG, you’ve just got some of that “must carry†stuff wrong.
“Must carry†only applies if the television station WANTS it to apply. They are free to negotiate terms with the cable system if they so desire, and if they do not reach an agreement, they can prevent the cable system from showing the station. A cable system cannot carry a station against the station’s wishes. If your local cable system stops carrying ABC because they won’t pay a license, you can bet the “Gray’s Anatomy†fans are going to demand they make a deal. You’ve seen the crawls when it’s negotiation time…â€Attention Cablevision customers: As of July 1, your reception of ABC programming will end . . .†They work. They’ll work again, especially if there is a Dish Network or DirectTV alternative that has a license.
All that is necessary to protect the financial interest of the networks is for them to elect “retransmission consent,†which means the cable system must get permission to show the content, and that permission can come with a price tag. The content providers have leverage here, and will undoubtedly use it.
If money is going to change hands, and it will, there’s a place for performers to make sure they get a part of it. There’s going to be a crowd with their hands out, so performers had better be smart, fast, and aggressive to guarantee their share.
Fred –
Is it your belief that stations can operate on a show-by-show basis for must carry/retransmission consent? (That’s not a rhetorical question — I don’t know the answer.) If not, then the station is in a pickle. It wants the cable system to carry everything that doesn’t pose a problem, namely, local news, sporting events, game shows, etc.
What strikes me the most about this situation is the towering transaction costs that will suddenly arise if all these show-by-show negotiations/blackouts/etc. must be put into place. I’m not saying it’s impossible to do, but man, what a nightmare.
Right now, the time would be right for one or more program providers to indicate that they’re going to cut Cablevision off unless they are satisfied that the company won’t misbehave with this remote DVR system. The program providers will have to tread carefully to avoid some kind of antitrust exposure if they all seem to be acting in concert. The Colgate doctrine still exists in some form, however, I believe, and the companies can point to legitimate concerns about their intellectual property (even though the courts have dismissed those concerns as far as being grounds for injunctive relief).
I’ll have to chat with my friends in the television licensing groups — if they’re willing to talk about it — to see what they’re thinking.
VG
VG,
It’s my understanding that retransmission consent is an across-the-board thing; you either license everything, or you license nothing. I could be wrong about that, but I’ve never heard of a cafeteria approach being used. There’s no reason it couldn’t be, but I see the content providers wanting to deal on an all-or-nothing basis just to make sure there is access for everything they’ve got; from “American Idol” to “Sunrise Farm Report.”
The administration of a show-by-show license wouldn’t really be that large. You just need to throw one switch at the service provider’s end and the signal is off. They already do it with selective blackouts for local sports events.
I’m not sure what kind of control a provider could put over on-demand access beyond setting the license fee. Once that’s set, I don’t see much of a remedy for “misbehavior,” whatever you think that might be.
And how do affilliates that are NOT “owned and operated” by their networks fit into all that? Who controls retransmission rights at that point? The network or the local station?
Geo,
The networks are the content providers of the network shows. They get to claim retransmission consent on their content. Locally produced content, such as news, would be controlled by the local station, but, as far as I can tell, if either the network or the local invokes retransmission consent, nothing gets shown on the cable system unless consent is worked out. If the network asserted retransmission consent, the local channel would be blacked out. (This appears theoretical at this point, as no one I know has ever tested this on a local station example.)