Weekly Update

Cord fraying may be more disruptive than cord cutting

That rumbling sound you heard this week was one of the two pillars of the network TV business being shaken. The shaking was caused by two body blows to the industry’s economic model, one self-inflicted and one delivered by a court in New York.

The self-inflicted blow came with the eruption of hostilities between Viacom and DirecTV over carriage fees for Viacom’s 17 pay-TV networks that resulted in those channels going dark for DirecTV’s 20 million subscribers and popular Viacom shows disappearing from the web. The court-delivered blow came from a ruling in the copyright infringement lawsuit brought by the broadcast networks against Aereo, the Barry Diller-backed startup that streams broadcast TV channels over the Internet to subscribers in New York. On Wednesday, the judge in the case denied the broadcasters’ request for a preliminary injunction against Aereo, effectively giving a green light for Aereo to continue operating — and adding subscribers — while the case grinds on, certainly for months and perhaps for years.

On one level, the DirecTV-Viacom dispute is merely the latest in a growing list of similar disputes between networks and distributors over carriage fees that have led to popular networks being temporarily dropped from cable or satellite services. But the scope of the blackout, and the number of channels involved, has lifted the dispute out of the realm of the usual, localized conflict into a broader industry split.

At the Allen & Co. retreat for media and technology moguls in Sun Valley, Idaho, this week, Robert Johnson, the founder of BET, one of the now-Viacom owned channels at issue in the dispute, warned that cable operators cannot continue to pass on ever-higher programming fees to subscribers. “In the next two to three years something is going to give,” Johnson said.

The dispute also triggered a rare show of support for DirecTV from a competitor, Cox Communications. “This is a reflection of an unbalanced multichannel video business model that has two major effects: continued significant increases in the cost of programming that are the main driver of rising cable and satellite TV service bills, and wide disparities between what large and small distributors pay for programming, resulting in similar disparities in what respective customers pay for service,” Cox said in a statement.

Viacom also raised the stakes considerably by pulling its shows from the Internet to deny DirecTV subscribers’ streaming access to the dropped channels, prompting complaints from public interest groups to regulators and lawmakers over Viacom’s abusive treatment of Internet video viewers.

Coming at a time when the U.S. Justice Department is conducting a wide-ranging antitrust investigation into TV industry licensing practices, particularly with respect to online video, Viacom’s cavalier over reaction will only strengthen the hand of those urging regulators to force the networks to make their content more widely available on more consumer-friendly terms. If that happens, it would significantly reduce the networks’ leverage with traditional distributors to demand ever-higher fees.

The Aereo case is even more dangerous to the networks. While district court judge Alison Nathan’s ruling this week concerned only the networks’ request for a preliminary injunction, not a final adjudication of the case, her 52-page opinion is devastating for the plaintiffs.

The legal crux of the case is whether Aereo’s streaming service represents an unlicensed transmission of the networks’ copyrighted programs, or is  more analogous to a remote DVR service such as the one introduced by Cablevision that was ultimately found by the courts to be non-infringing.

Significantly, Cablevision’s remote DVR was found non-infringing by the federal Second Circuit Court of Appeals, which has jurisdiction over Judge Nathan’s district court and whose rulings she’s bound to follow. Her carefully reasoned opinion (worth reading in full) amounts to a point-by-point dismissal of the network plaintiff’s’ efforts to distinguish between Cablevision and Aereo on technical and legal grounds.

While the networks quickly vowed to appeal her ruling, their appeal will be heard by the Second Circuit. Given Judge Nathan’s careful hewing to Second Circuit’s own factual conclusions and legal reasoning in her opinion, it’s very hard to imagine the appellate panel overturning her at his stage of the case. Should Aereo ultimately prevail it would open the door for other distributors to follow in its footsteps and begin incorporating access to broadcast channels into their subscription services without the need to sign licensing agreements with the broadcasters or to pay retransmission fees.

Time Warner Cable CEO Glenn Britt was quick to seize on the point, telling reporters in Sun Valley, “what I’ve said is that I don’t know if it’s legal or not. But if it is we should do it too.”

For his part, Diller told Bloomberg Television Aereo will use the respite to begin marketing the service aggressively with an eye to expanding beyond the New York market.

Carriage and retransmission fees account for roughly half the networks’ gross revenue (the rest comes from advertising). But they depend on the networks’ leverage with distributors. If that leverage is lost, either through the networks’ own miscalculations or changes in the legal and regulatory landscape, the pay-TV cord could simply fray from within whether or not it gets cut.





Question of the week

What’s the future of Aereo if it wins its court challenges?