AT&T and Comcast Violate the First Rule of Regulation During a Pending Acquisition

              One would think AT&T and Comcast would be on their best behavior while the FCC considers the merits of multi-billion dollar acquisitions of DirecTV and Time Warner Cable.
Why come across to the court of public opinion as greedy, small-minded and mean-spirited?  Why provide opponents with evidence of just how uncompetitive the marketplace is?

            What was AT&T CEO Randall Stephenson thinking when he threatened to reduce capital expenditure on next generation networks on grounds that the FCC might impose greater regulation?  See AT&T to “pause” 100-city fiber buildout because of net neutrality rules; available at: http://arstechnica.com/business/2014/11/att-to-pause-100-city-fiber-buildout-because-of-net-neutrality-rules/.  He probably was attempting to blame “regulatory uncertainty” as grounds for reducing investment in plant.  To my mind, he comes across as showing the absence of competitive necessity to build out the AT&T network as quickly as possible.  The company can try to leverage investment as a reward to the FCC and the public for retaining possibly inadequate and ineffectual regulation.  Such a generous and noble consolation prize.

            Comcast goes one step further in violating the rule requiring a low profile.  The company has doubled its broadcast signal carriage fee in many markets.  This comes across as both sneaky and not cost-based. It’s sneaky, because the company recently created and now doubled a new line item that consumers might infer as required by government, or as some kind of legitimate cost-pass through, somehow not covered by the overall cost of doing business.  It’s not cost-based, because retransmission consent costs have not doubled in the last year and the company charges the same amount regardless of the number of local signals it carries.  In simple terms Comcast has raised rates at time when it probably should not do so, unless it has such a low opinion of our ability to decode the impact of a 100% increase in its “Broadcast TV Fee.”

            The fact that AT&T can threaten to ration or cut capital expenditure and Comcast can raise rates may mean that both companies see no need in playing nice during the pendency of it 90+ billion dollar acquisitions.  Fine, but don’t tell us how hard you have to work to stay competitive and how your mergers are essential for your continuing ability to serve.

7+ Examples Where Consumers Don’t Call the Shots

            There are plenty of examples where the marketplace’s invisible hand does not seem to favor consumers.  As much as I want to believe unconditionally in the power of the marketplace, there are too many powerful examples where consumers lack sovereignty.  Here are 7+ examples in the information, communications and entertainment marketplace:

1)         Take it or Leave It Contracts that Include Binding Arbitration Clauses 

            Perhaps you can show me a wireless contract that does not require subscribers to give up their day in court if a carrier cheats them.  There are too many instances where a wireless carrier imposes an unjustified charge, or demands payments for one.  Where is the marketplace punishment when this occurs?  There is none, because consumers cannot vote with their feet and migrate to an alternative service provider that allows subscribers a judicial forum.  Every major carrier in the U.S. has received a sizeable fine from the FCC for unlawful and bogus charges, but I don’t want to rely on a regulatory remedy that could evaporate, or apply only if the politics are right.

2)         The Supreme Court’s Aversion to Class Action Law Suits

                I support tort reform that seeks to eliminate frivolous law suits, but another powerful remedy has evaporated when telecom ventures cheat.  Class action law suits make it possible to remedy a problem that collectively add up to millions of dollars, are not worth the bother for any one victim to sue—assuming they still have that option.

            For example, Verizon collected a cool $52 million in unauthorized data access charges in $1.99 increments.  An individual subscriber could not recover the overcharges given the cost of litigation, or even arbitration.  Verizon continued the practice for over four years, before the FCC made the company stop.

3)         Walled Gardens

            I appreciate that most of us are content to treat the millions of wireless apps as more than enough options.  However, compare what Apple allows versus what the complete and unwalled Internet has to offer.  With the rising importance of wireless data access, some content and app creators already have opted to concentrate on App Store availability in lieu of plain old web access.  A lot of time, money and effort goes in creating different versions of the same content accessible by handsets using different operating systems.

4)         Internet Access From a 7 Inch Screen

            Consumers readily accept an inferior web experience for the opportunity to access it via a mobile device.  Okay, the market has functioned and allocated resources accordingly.  In some places in the world, wireless constitutes the first and only medium that offers an affordable and available option.  Still I lament that consumers may have access to fewer and fewer options via 20 inch, fixed screens.

5)         Throttling

            I find it hard to understand why a wireless carrier would deliberately degrade service to a “power user.”  Why not send them a fruit basket and new service options?  Carriers want the option of upselling, but also to punish users, even ones who have acquired so-called unlimited service.

6)         Tiering When Extra Usage Costs Little

            Unmetered, All You Can Eat (“AYCE”) service is economically inefficient when it stimulates “excessive” consumption and triggers cross-subsidies from low volume users to high volume users.  This can occur when everyone pays the same price, or there are negative consequences resulting from excess use, e.g., the need to build more electric power plants.

            Internet access may have different characteristics, particularly if carriers can provide additional units of service without significant additional cost.  Absent congestion, a broadband service provider incurs little cost if it allows subscribers to binge watch Netflix.  That’s why fixed, wireline broadband consumers have AYCE access, or sizeable monthly data allowances in the 100s of Gigabyte range.

            It probably makes economic sense for wired broadband carriers to tier service based on bit transmission speed, but perhaps not on the basis of download volumes.

7)         Video Access Constraints

            Yes the marketplace has made significant accommodations of consumers’ impatience with access constraints.  Video on demand and television everywhere provides alternatives to “appointment television.”   However do not fool yourself into thinking the consumer can demand unlimited access, anytime, anywhere, via any device and in any presentation format.  There are legitimate copyright and content windowing constraints, and there are plenty of questionable ones.

            Why can’t cable subscribers select content on an a la carte basis?  It surely is technically feasible and while the savings depend on the 10-15 channels most consumers would choose, the absence of this options is telling.  ESPN and other very high cost networks understand that they and their cable partners can generate far more revenues by forcing every subscriber to pay for a bundle of channels than by charging even higher rates (above the $6-$7 a month for ESPN) from the smaller base of voluntary subscribers.

            Why can’t consumers access ESPN, HBO and other premium content sources without also subscribing to cable or satellite television?  This access pre-condition constitutes what antirust experts call a tying arrangement. HBO has begun to experiment with alternatives, but until direct access becomes an option, legacy ventures can close ranks and add to consumers’ costs.

            Speaking of costs, how can both content and broadband access providers treat the monthly consumer subscription as just one revenue center?  Does one’s broadband subscription contract contain language allowing the carrier to degrade service to particular upstream content sources unless they agree to pay a surcharge?  Put differently does a broadband carrier have a duty to provide adequate service to its subscribers even if it fails to receive surcharge payments?

            Comcast officials recently claimed that Netflix deliberately caused their content downloads to degrade as a way to improve the odds that the FCC would reject the merger with Time Warner, or impose more burdensome conditions.  I know that Comcast on occasion has intentionally degraded its service, but why would Netflix, particularly given low consumers’ pain thresholds for inferior video?

            Lastly, why do subscribers have to pay the full monthly rate when compensation disputes temporarily block access to “must see” channels?  Where’s my refund?

             

Telecom Policy Lessons From Recent Aviation Mergers

         During this sabbatical year, I have had more opportunities for air travel. While I still marvel at the opportunity to be somewhere on the other side of the globe in a day, I cannot believe how even doubly diminished expectations are not achieved.

            Acquiring companies United, Delta and American swore how buying out a competitor would promote competition and help airlines become more financially stable so they could compete better.  Right, so they can spend up to $35,000 per business class seat and concentrate on the high margin customer even as they install cheaper, smaller and more numerous seats in economy.

            Rather than become more robust competitors it has become easier for the airlines to siphon consumer surplus by raising rates.  The survivors have less incentives to concentrate on consumer service, what with all the new opportunities to extract higher revenues, particularly from ancillary services like charging $300 for a change in an itinerary.

            Even former mavericks have come to realize that they have more to gain by joining the consensus than by offering a better value proposition.  Both Southwestern and Jet Blue have implemented some of the new fees the other carriers charge and neither typically offer the lowest fare anymore.  The smaller group of airlines can engage in consciously parallel pricing—some might call it price fixing—and get away with it, because no one wants to buck the trend of ever rising prices.

            If these mergers were supposed to make the airlines better competitors, why aren’t prices dropping, particularly in light of a 30-40% drop in fuel prices?  Most international flights from the U.S. have sizeable fuel surcharges, a term creating the impression that this billing item might drop, or evaporate if fuel prices decline.  This has not happened.  Why part with as much as $615 per trip if no other carrier reduces the surcharge?

            Fundamental economics suggests that if incumbent gouge and get too greedy, they create ever larger incentives for market entry.  Okay, where is the market entry?  It cannot happen when incumbents control all available takeoff and landing slots.  Even with low interest rates, what bank would loan millions to a startup airline boldly willing to jump high barriers to market entry?

 

            Of course the incumbents have every incentive to exploit their survivorship and to incur the lobbying and campaign investments necessary to sustain the status quo and their upper hand in the marketplace.  Congress is not about to force a reallocation of landing slots to market entrants any more than they would enact a law earmarking radio spectrum for competitive bidding only by non-incumbents. 

 

            It has become easier from incumbent airlines to pursue a strategy of reducing the value proposition of flight and to unbundle elements so that the sum of the line charges well exceeds the former single fare.  While much of this affects the economy class traveler United Airlines CEO Jeff Smisek even bragged how replacing whole cashews with pieces in business class would save the airline money without any fallout.  This miserly airline does not offer a free glass of wine in coach, even though US Airways does having previously tried to charge for water.

            Tweaks to frequent flier programs and a variety of line items, like that one sees on their cable television and wireless bills, make incumbents not much different than so-called low cost carriers.  These carriers do not look and act much different than carriers like Ryanair or Spirit. 

            So the thought has crossed my mind many times of late whether Comcast and AT&T have anything to offer other than higher stock prices from their proposed $100+ billion acquisitions.

Ted Cruz’s Bumper Sticker Reference to Network Neutrality as Obamacare for the Internet

            It’s quite understandable for a politician to summarize complex issues and to distill them into pithy bumper sticker slogans.  So it comes as no surprise that Senator Ted Cruz (or his staff) would come up with the glib analogy between Obamacare and network neutrality.

            Yet again our elected officials fail us with media-ready quips.  From my unsponsored vantage point, I can agree that the President should avoid overstep and respect the role of independent regulatory agencies such as the FCC.  But I surely can take umbrage at Senator Cruz’s sloganeering.

           The network neutrality debate suffers from politicization and more broadly much of the FCC’s work product has become politicized, and interpreted as partisan.  Similarly, anyone who writes about FCC subjects ends up being assigned to one, mutually exclusive camp, or the other.

             I reject such cubby holing.  Should you read my considerable work on network neutrality, you would see someone striving to find the truth and a proper way forward.  My work does not fit into any single camp.

            Robust and sustainable broadband competition does not exist in the United States for first and last mile access despite the blessing of having two wireline options (DSL and cable modem).  Data caps, latency, questions about congestion, equipment costs etc. preclude treating wireless as a functional equivalent to wireline at least for the time being.

            On the other hand, I do not support converting Internet Service Providers into utilities, or thinking that Title II reclassification will solve all ills.

            I do not think the Internet should be completely neutral either.  If I want to view "must see" television, e.g., a Penn State football game, or a Netflix movie, I want my ISP and every other carrier involved in carrying "mission critical" bits to handle them with priority, "Most Favored Nation” treatment.  

            On the other hand (I am an academic!), I don't want Comcast deliberately messing with a competitor’s traffic to extort additional payment.  Netflix should have the option for securing "better than best efforts" routing, but I don't want Comcast to have the ability to penalize small ventures that do not have the traffic volume to cause congestion, or have the funds to pay a surcharge that Comcast does not deserve.

            So I am no one’s true believer.  For this I am ignored and/or defriended by parties on both side.

            Whatever became of reasonable disagreements and civility?

Lessons in Telecom Portion Control

            Greetings from Leuven, Belgium where I am spending two weeks of my sabbatical at the Interdisciplinary Centre for Law and ICT.  See https://www.law.kuleuven.be/icri/en/about.

While one can learn many things in Flanders, I will limit this post to the concept of portion control. 

            You won’t see many wide bodies in Belgium thanks to portion control.  But you won’t see many triple digit monthly wireless bills either.  Simply put, there is little tolerance for excess: most folks bring their own device and opt for pre-paid plans.  Many carriers and resellers in Belgium offer 200 voice minutes, unlimited texting (no portion control there!) and 1 Gigabyte of data for 20 Euros per month, which converts to about $25 USD.  Plus or minus, this rate stands at about half what we typically pay in the U.S. 

            Why? How?  Portion control!  Few consumers have an appetite for unmetered, all you can eat plans.  I did not see many students at KU Leuven immersed in their wireless devices, or engaged in multi-tasking. Even their beer comes in humble 25 and 33 centiliter bottles (8-11.2 ounces).

            So if you can live with, or embrace portion control, you can halve your wireless budget.

            Of course there is a rebuttal to this rosy scenario, particularly for high volume, “power users” who may or may not like buffets, especially ones on cruise ships and Las Vegas. For these folks, the U.S. offers the lowest price, whether measured on a per minute, per text or per megabyte basis.  

            Perhaps there is something constraining and anathema to the U.S. credo in portion control.  Why tolerate a limit?  Why drive with 4 cylinders when 6 will do the job better? My dear wife introduced portion control in my life and I know I’m better off as a result.

            Just keep me away from a cruise ship and Vegas.

Terminating ISP Monopolies and the Similar Harm to Edge Providers and End Users

            It appears that FCC Chairman Tom Wheeler wants an Open Internet order that differentiates access into 2 categories: 1) edge provider downstream access and 2) end user upstream access to content.  This frame has some appeal, particularly when one looks at Internet access as a two-sided market.  However the real world does not create a bright line dichotomy or separation of these two functions.

            Edge providers and end users can face the same potential for harm if an Internet Service Provider (“ISP”) discriminates in ways that constrain, degrade, block or otherwise meddle with a downstream traffic flow.  Both sides of the market suffer if an ISP exercises its market power: 1) the edge provider sells fewer ads, subscriptions, or product; and 2) the end user encounters a reduction in utility and value for his or her monthly broadband access subscription.

            I do not understand the possible FCC emphasis on upstream edge providers.  Perhaps the drafters seek to structure an order that resonates with the D.C. Circuit Court of Appeals examination of potential discrimination to edge providers.  But the court also endorsed the FCC’s view that retail ISPs providing the last mile delivery can operate as terminating monopolies.  Applying an emphasis on this market power in the last mile delivery, both edge providers and end users suffer when retail ISPs engage in some types of discrimination.

            It makes little sense to differentiate between edge providers and end users if both groups have similar grievances with the intermediary.

Out of Pocket Costs for Over The Top Applications Like Standalone HBO

            When one accesses HBO via cable television and other multichannel video programming distributors (MVPDs”), the subscription price covers both content and conduit.  With HBO’s announcement that it will offer standalone access, without proof of an MVPD subscription, consumers now will see a price point for only the content.  Curiously this unbundled price may exceed the current rate of about $15 a month offered by MVPDs that includes carriage.

            How can this be?  Are MVPDs underpricing, or ignoring carriage costs?    Does a $15+ standalone price ignore the cost savings when consumers and not HBO bear the cost of carriage?  Is broadband carriage of an additional bitstream so insignificant in cost that it’s not worth metering or charging?

            These questions do not have easy answers, in part because outsiders, including researchers like me, have no access to cost information.  We know that bandwidth intensive applications, such as streaming video, can have a significant cost, particularly at busy hours when a carrier might have to invest in more bandwidth and switching facilities to accommodate demand.  However, we also know that unless and until Internet Service Providers (“ISPs”) reduce their unlimited or 250+ GigaByte monthly allowances, subscribers incur zero cost when they have to bear the cost of carriage for delivery of HBO.

            So the cost of broadband carriage will have no significant impact on consumer decision making about bundled or unbundled HBO access unless and until using an Over The Top (“OTT”) application for unbundled access to content only triggers additional charges.  Put another way, if consumers can “binge watch” HBO, Netflix and other content sources without exceeding their monthly data allowance, then having to bear the cost of carriage is insignificant.

            Who bears the cost of carriage has become a significant matter in recent weeks for content providers, like Netflix, content distributors, like Level3, last mile ISPs like Comcast and consumers.  Most wireless consumers on metered data plans, have no more than a few GigaBytes available per month. Device shifting HBO from the television set, or even the PC with wired broadband access, to mobile tablets and smartphone would likely trigger a higher data charges, or migration to an “unlimited” data access tier.

            The possibility exists that MVPDs like Comcast can punish HBO and its standalone subscribers by reducing wireline data allowance.  Rather than meddle with HBO traffic, by throttling or degrading service, all Comcast has to do is raise subscribers’ incremental cost of video streaming and other OTT applications from zero.

           

Presentation on Sports Telecommunications Issues

      In the last few days there have been several significant developments in the IPTV and sports/entertainment marketplace.  The FCC may treat Over the Top video programmers as multichannel video programming distributors (“MVPDs”) if they offer a stream of content rather than on demand access. If the Commission pursues this initiative ventures like Aereo may achieve legitimacy and the opportunity for a true marketplace test. 

      As an MVPD, Aereo would qualify for a compulsory copyright license, but have to negotiate for the legal right to transmit broadcast television station signals.  This is pretty much the same deal that cable television operators secured in 1984.  Previously community antenna television systems won court cases affirming their right to receive and retransmit broadcast television.  Cable operators agree to pay for the privilege to secure legitimacy, and so will Aereo and ventures like it.

 

      In addition to the HBO initiative to offer its content without requiring an MVPD subscription, the FCC recently eliminate its sports black out rules that prevented MVPD carriage of games that had not sold out 72 hours before broadcast.

 

     You might have interest in a slide presentation on sports telecommunications issues I will present at the Ole Miss Law School; see  http://www.personal.psu.edu/rmf5/Ole%20Miss%20Telecom%20and%20Sports%20Oct.%202014.ppt.

 

HBO and Extreme Disintermediation

      HBO announced today its intention to offer access to its content via the Internet without proof of a cable or satellite television subscription.  See http://time.com/3510434/hbo-online-streaming/.  This decision could trigger more “disintermediation” of cable and satellite television i.e., reduced or eliminated subscriptions as consumers eliminate the intermediaries.

     Until now premium sources of content largely closed ranks with multichannel video programming distributors (“MVPDs”) presumably because they perceived higher returns by jointly sharing a portion of subscription revenues.  By offering direct access, HBO seeks to serve the growing numbers of cord shavers, who have cut down on MVPD programming tiers and monthly subscription rates, cord cutters, who have abandoned their MVPD subscriptions entirely and cord nevers who have solely relied on broadband options.

     MVPDs may soon have reassess the value proposition they offer subscribers, particularly the tiering of content represented by dozens of networks.  Consumers have grown weary of paying hundreds of dollars annually for channels they never watch.  Using the Netflix $9 price point and the average $6.04 monthly rate paid by MVPDs for ESPN, an a la carte option to select and pay for specific content sources may work.  It will take many selected channels to total the bundled tier now costing $50-75 monthly.

     MVPDs have asserted that a bundled option offers greater value and lower prices.  Maybe not.

2.5 Blunders in an Otherwise Flawless Comcast Charm Offensive

       Comcast has executed a near perfect strategy to convince the Justice Department, FCC and public that the merger with Time Warner has great benefits.  The game plan shows mostly great finesse, coming for a company much reviled by subscribers and the general public alike.  Hat’s off to Comcast’s extension of its program to sell cheap computers and offer $10 a month broadband subscriptions to people qualifying for subsidized school lunches.

       However, the company has not achieved perfection.  Set out below are 2.5 mistakes that the company could have easily avoided.

 

1)          A Temporary Improvement in Customer Service and Tactics

            For years Comcast has deliberately scrimped on customer service both in terms of truck rolls and interaction with subscribers via telephone or online.  The company appears to have trained staff to eschew accommodations that result in less money.  Comcast seems to think that it wins when subscribers settle for less than they thought they should have received by way of a refund.  The company has generated ample ill will by what comes across as greed.

            In light of Comcast’s incredibly poor ranking, even a minor improvement would come across as both significant and well intentioned.  Apparently the company has done nothing even when it should display its best behavior.  Recording of worst case treatment have particularly significant impact right now and what has Comcast done?  All I’ve seen are press releases much like the scripts I get from United Airlines when they screw up and have no intention explaining why, or resolving to do better.  See United Airline Form Letter Response to Complaint

 

            Comcast cannot afford to make saccharine and disingenuous “apologies” when their customer service reps execute a strategy designed to deny responsibility and refuse to make necessary financial accommodations.

2)         Not Carrying Narrow Niche Networks Even in a Costly and Obscure Tier

 
            Comcast comes across as imperial and arrogant in its response to the RFD Network’s complaints about non-carriage.  The company should have given RFD what I call The Tennis Channel Treatment: carrying the channel on a more expensive tier with fewer subscribers than the cheaper and more highly viewed tier where Comcast places its Golf Channel.

              Clearly Comcast has bandwidth available to carry RFD and ample funds to pay the few cents per subscriber the network would qualify to receive.  Instead a company official, who should know better, accused RFD of driving “a wedge between Comcast and rural viewers as a means to promote your own business interests is unfair and grossly inaccurate.” See http://www.nytimes.com/2014/08/24/business/media/rural-tv-chief-takes-2-by-4-to-cable-merger.html?_r=0.

 

            RFD surely is a niche market play, but much like many of the niche channels Comcast carries.  RFD probably has more clout than many niche networks in view of its targeted rural audience.  Comcast’s decision to cut carriage in New Mexico and Colorado provides a snapshot of how the company can make or break a network.  Consumers have every reason to fear Comcast’s power as gatekeeper.

.5         Comcast’s "Vigorous" Support for Network Neutrality

 

            I give Comcast a half demerit for its new found support for network neutrality.  Wasn’t this the company that successfully sued the FCC on its creation of network neutrality rules?  Well that was then and now embracing neutrality—for a fixed time period no doubt—comes across as noble.  I think it comes across as an expedient strategy to win support for its merger, but this blog surely can’t match full page ads in major newspapers.

Impact of the Aereo Supreme Court Decision on Broadcasters, Cloud Content Storage

 
              Broadcast stocks rose as much as double digits on the day the Supreme Court released its Aereo decision.  The decision underscores the value in broadcasters’ copyrighted content, but also the importance—and staying power—of income streams accruing to broadcasters.  Any venture seeking commercially to exploit broadcaster content will not readily find a way to avoid having to secure retransmission/copyright consent.

              Because new ventures cannot easily cut out local broadcasters, perhaps network content creators might consider ways to deal directly with new distributors.  Regardless of the technology delivering content to end users, a payment likely will flow upstream.  Accordingly it appears even more unlikely that local broadcasters will participate in an incentive auction to part with all or a portion of their 6MHz channels.  Why abandon recurring and growing compensation for a one time infusion of cash?  Bad news for the FCC and others keen on extracting large swaths of additional spectrum for wireless broadband service.

              The Aereo decision also suggests that one cannot underestimate the power of broadcasters to establish themselves, even now, as benefactors of the public interest, localism, “free” content and candidates for elective office.  In the 1970s Congress amended the Copyright Act to mandate community antenna television (“CATV”) operator payments to broadcasters in exchange for a compulsory copyright license for retransmission, now deemed a public performance.  At that time, candidates for elective office heavily relied on television and radio to get their message out.  The National Association of Broadcasters ("NAB") was considered one of the most effective lobbying organizations on Capitol Hill.  NAB framed the cable issue as one of "siphoning," market fragmentation, a threat to localism and outright thievery. 

        While CATV actually helped expand market penetration into fringe, hinterland locations, it also "imported" signals and jeopardized local broadcasters' shared monopoly.  As Justice Scalia noted in dissent, incumbents have a history of forecasting disaster, e.g., the demise of “free television.”

        In short order (at least for Congress) local broadcasters got relief, including the right to force cable operators to block channels containing duplicative networks and syndicated content, such as Jeopardy and Wheel of Fortune.  Perhaps amending the Copyright Act was the most expedient legislative option to devise a mechanism whereby broadcasters received compensation and consumers, including first time, rural residents, continued to have the opportunity to view content.

        Reliance on 1976 Copyright Act amendments may have an adverse impact on new technologies and entrepreneurial business plans.  Any venture offering cloud-based storage of content now has to consider whether it may incur secondary liability for the direct infringement of their customers.  My free advice: make sure copyrighted content travels a round trip from the content source/distributor to the consumer and then back upstream to the cloud for storage.  In this bandwidth doubling routing, the cloud locker operator has a better legal argument for associating with consumers’ copyright fair use, or non-infringing use.

Summary of the Supreme Court Aereo Decision

            The Supreme Court has ruled that the Aereo operates much like a cable television service whose retransmission of copyrighted material constitutes a public performance requiring broadcaster consent. [1] The decision effectively shuts down Aereo and appears to nullify the lower court decision in Cartoon Network LP, LLLP v. CSC Holdings, Inc., 536 F. 3d 121 (2008) that considered subscriber ordered copying of content a private act that does not violate copyright law.

            Writing for the majority Justice Breyer distilled the case into two questions: “First, in operating in the manner described above, does Aereo “perform” at all? And second, if so, does Aereo do so ‘publicly.’” [2]  The majority decision answers both question in the affirmative.  Aereo performs, because its broadcast signal retransmission and copying function parallels the functions of a cable television venture and satisfies the definition of performance enacted by Congress in the 1976 amendment of the Copyright Act. [3] 

            Referring to the legislative history of the 1976 amendment, Justice Breyer reports that Congress consciously sought to reverse two Supreme Court decisions that considered the cable television retransmission function not a public performance. In Fortnightly Corp. v. United Artists Television, Inc., 392 U. S. 390 (1968), the Court held that a community antenna television (“CATV”) system did not publicly perform copyrighted broadcast television content  when it simply distributed it to subscribers without alteration in much the same way that individuals could have done using their own antennas. In Teleprompter Corp. v. Columbia Broadcasting System, Inc., 415 U. S. 394 (1974), the Court considered the copyright liability of a CATV provider that delivered broadcast television programming from distant sources that subscribers could not receive if they had erected a rooftop antenna.  The Court had reasoned that cable operators functioned like a private viewer and not a broadcaster, or performer. [4] Justice Breyer reasoned that because Congress expressly created language deeming content transmission a public performance, the Court had to treat the Aereo delivery service as the functional equivalent of a transmission and public performance, notwithstanding the fact that subscribers initiate the transmission and copying functions performed by the company:

This history makes clear that Aereo is not simply an equipment provider. Rather, Aereo, and not just its subscribers, “perform[s]” (or “transmit[s]”). Aereo’s activities are substantially similar to those of the CATV companies that Congress amended the Act to reach. [5] 

            The majority decision rejects as insignificant a difference in the manner by which copyrighted content reaches subscribers. [6] Cable retransmission occurs simultaneously and continuously without authorization, or direction from subscribers while Aereo requires subscribers to initiate the service and determine whether to direct equipment to make copies.    Writing in dissent, Justice Scalia considers this difference significant, because the transmission and copying function does not occur unless and until a subscriber directs Aereo equipment to activate. [7] Justice Scalia analogized the coordination between Aereo and its subscribers to that which occurs when a copy center issues an equipment activation and library card for customers who make copies on their own volition using the copy center’s equipment. [8]

            On the issue of whether Aereo publicly performs copyrighted material, the Court majority determined that the company did despite having installed a dedicated antenna for the exclusive use of one subscriber.  Even if the Court were to accept the view that Aereo initiated a new performance in its reception and retransmission function, the majority still considered the performance public. [9]  Justice Breyer reasoned that Congress intended on protecting broadcasters’ copyrights even if technological innovations involved subscriber interaction with equipment and content streams did not flow instantaneously and constantly to subscribers:

[W]hy should any of these technological differences matter? They concern the behind-the-scenes way in which Aereo delivers television programming to its viewers’ screens. They do not render Aereo’s commercial objective any different from that of cable companies. Nor do they significantly alter the viewing experience of Aereo’s subscribers. Why would a subscriber who wishes to watch a television show care much whether images and sounds are delivered to his screen via a large multisubscriber antenna or one small dedicated antenna, whether they arrive instantaneously or after a few seconds’ delay, or whether they are transmitted directly or after a personal copy is made? And why, if Aereo is right, could not modern CATV systems simply continue the same commercial and consumer-oriented activities, free of copyright restrictions, provided they substitute such new technologies for old? Congress would as much have intended to protect a copyright holder from the unlicensed activities of Aereo as from those of cable companies. [10] 

            The majority opinion interprets the Transmit Clause contained in the 1976 Copyright Act amendments[11] as applicable regardless whether there are multiple, geographically diverse, discrete, time-delayed or subscriber-initiated transmissions from Aereo equipment.[12] While sensitive to the possibility that its decision at least temporarily block technological and entrepreneurial innovations, the Court suggests that Congress can and will act, just as it did in response to the onset of cable television. The Court also recognizes that fair use may allow some innovations to flourish and also seeks to exempt the decision from related questions about Internet-based, “cloud” storage of content.

---

[1]           American Broadcasting Cos., Inc. v. Aereo, Inc., ___ U.S. ___ (June 25, 2014) (slip op.); available at: http://www.supremecourt.gov/opinions/13pdf/13-461_l537.pdf [hereinafter cited as Aereo Revesal].

 

[2]           Id. at 4.

 

[3]              17 U.S.C. §101 et seq. (2012).

 

[4]           “Although the Court recognized that a viewer might not be able to afford amplifying equipment that would provide access to those distant signals, it nonetheless found that the CATV provider was more like a viewer than a broadcaster.” Aereo Reversal at 6.

 

[5]           Id. at 8.  “Aereo’s equipment may serve a ‘viewer function’; it may enhance the viewer’s ability to receive a broadcaster’s programs. It may even emulate equipment a viewer could use at home. But the same was true of the equipment that was before the Court, and ultimately before Congress, in Fortnightly and Teleprompter.” Id. at 9. 

 

[6]              “Given Aereo’s overwhelming likeness to the cable companies targeted by the 1976 amendments, this sole technological difference between Aereo and traditional cable companies does not make a critical difference here.” Id. at 10. 

[7]           “Rather, it assigns each subscriber antenna that—like a library card—can be used to obtain whatever broadcasts are freely available. Some of those broadcasts are copyrighted; others are in the public domain. The key point is that subscribers call all the shots: Aereo’s automated system does not relay any program, copyrighted or not, until a subscriber selects the program and tells Aereo to relay it.” Justice Scalia Dissent at 6.

 

[8]            “A comparison between copy shops and video-on-demand services illustrates the point. A copy shop rents out photocopiers on a per-use basis. One customer might copy his 10-year-old’s drawings—a perfectly lawful thing to do—while another might duplicate a famous artist’s copyrighted photographs—a use clearly prohibited by §106(1). Either way, the customer chooses the content and activates the copying function; the photocopier does nothing except in response to the customer’s commands. Because the shop plays no role in selecting the content, it cannot be held directly liable when a customer makes an infringing copy.” Id. at 4. “Aereo does not “perform” for the sole and simple reason that it does not make the choice of content. And because Aereo does not perform, it cannot be held directly liable for infringing the Networks’ public-performance right.” Id. at 6.

 

[9]           “When an Aereo subscriber selects a program to watch, Aereo streams the program over the Internet to that subscriber. Aereo thereby “communicate[s]” to the subscriber, by means of a “device or process,” the work’s images and sounds. §101.And those images and sounds are contemporaneously visible and audible on the subscriber’s computer (or other Internet-connected device). So under our assumed definition, Aereo transmits a performance whenever its subscribers watch a program.” Aereo Reversal at 12.

[10]            Id. at 12.

 

[11]            17 U.S.C. §101.

 

[12]          “Therefore, in light of the purpose and text of the Clause, we conclude that when an entity communicates the same contemporaneously perceptible images and sounds to

multiple people, it transmits a performance to them regardless of the number of discrete communications it makes.” Aereo Reversal at 14. “So whether Aereo transmits from the same or separate copies, it performs the same work; it shows the same images and makes audible the same sounds. Therefore, when Aereo streams the same television program to multiple subscribers, it ‘transmit[s] . . . a performance’ to all of them.” Id.

Leo Google

           Of late it appears that the FCC must be running a sale on merger authorizations given the glut of questionable attempts.  With so much occurring in the incumbent world to retrench, buy market share and close ranks one can easily fail to see a major, forward looking initiative by Google.

            Folks the prospect of overlapping and globally ubiquitous wireless broadband is REALLY BIG! See http://spectrum.ieee.org/tech-talk/aerospace/satellites/google-aims-for-billion-dollar-satellite-fleet-to-spread-internet-access; https://gigaom.com/2013/06/24/googles-other-plan-to-connect-the-unconnected-satellites/.  Google has the deep pockets to follow through and many factors now favor non-terrestrial options rather than handicap them.

            Google can combine low earth orbiting satellites, blimps, drones and whatnot to cobble together a near complete footprint, not just one serving equatorial locations. Innovators, such as Iridium, Globalstar and Thuraya have proved the concept even if they led on a bleeding edge of innovation.  Motorola showed that it could manufacture satellites on an assembly line, “off the rack” basis instead of designer, one-off birds.  Inter-satellite linking works instead of each satellite having to make a downward transmission.  Handsets have shrunk as has the cost of low earth orbiting (“LEO”) satellite networks.

 

            More important perhaps we now have a better sense of how far terrestrial broadband can penetrate the hinterland, the cost of securing rural backhaul and challenges even for 4G and 5G networks to handle full motion video and peak demand.

            By way of full disclosure, before accepting a professorial position at Penn State I worked for Motorola on the Iridium project.  I preached the LEO gospel at the International Telecommunication Union and the FCC.  Ample spectrum now exists to support mobile satellites and the relative close proximity to earth makes LEOs a low latency inter-modal alternative to terrestrial options.

 

            If Leo Google enters the marketplace, it could disrupt many of the mergers aiming to buy out the competition and “stabilize” the marlketplace.

The Costs and Benefits of Bundled Information, Communications and Entertainment (“ICE”) Services

            Companies such as Comcast and AT&T use the benefits of bundling as one of the rationales supporting their proposed megamergers.  Have you considered the alleged benefits and offset them with applicable costs?  Didn’t think so.

            It seems that consumers like the bundling concept, perhaps because they perceive savings, or even freebies when they surely do not exist.  Consider the bundling of wireless handsets with service.  Ask most consumers and they blithely report how they got a “free” handset.  Not exactly.

            They get to use a handset on an installment sales basis: during their compulsory two year service commitment, with hefty early termination penalties, consumers not only reimburse carriers for the “free” handset, but pay well beyond the actual cost of the device.  The bundled handset plus service rate substantially exceeds the carrying cost of the handset and the cost of providing the wireless service.  Each and every wireless carrier mandated bundling until TMobile offered a cheaper “bring you own handset” plan after it could not enjoy the fat and happy life of selling out to AT&T.

            The triple play and quadruple play offered now and in the future combines desirable and less desirable services just as cable television program tiering blends desired networks and channels you might never watch. The triple play bundles voice, Internet access and video.  Packaging voice regularly triggers a double payment if you have both wireless and wireline service. With wireless packages now offering “free and unlimited” voice and text, you do not need a cable or wireline telephone option, but that gets bundled in with the video and data that you want.

            Bundling may save you money, but you really should price out the individual and desired service elements and compare their total cost with that of a bundled option.  At the very least claims of technological convergence, corporate synergies and efficiencies are overstated.  Most ventures would rather you not subscribe only to “naked” broadband and cobble together the voice (VoIP), video (IPTV) and data services you want.

Incumbents Closing Ranks and the Urge to Merge

            Another day, another $50+ billion dollar merger announcement.

            AT&T must have billions of dollars burning a hole in its figurative pockets.  Perhaps stung by its inability to buy wireless carrier market share, the company has shifted strategy from horizontal to vertical integration.  AT&T should have an easier time securing approval from the FCC and the Department of Justice with an acquisition that combines two types of content distributors as opposed to two types of ventures operating in identical markets.

            So what does AT&T get for its 50+ billion acquisition? It secures marketing access to 20+ million additional customers, who make sizeable recurring monthly payments.  AT&T also has the privilege of selling rather than reselling direct broadcast satellite video content which presumably already competes with the company’s U-Verse wired bundle.

            AT&T also get the privilege of buying into a technology that has significant, and arguably increasing risks.  First on average one out of every three satellite launches fail to place the bird in proper orbit. A single DBS satellite costs more than $100 million, but in this age of scale and deep pockets that looks like chump change.  Once activated satellites last for about 10 years and the risk for collisions with space junk increases.

            I marvel at satellite technology, but have to report that geostationary orbiting satellites 22,300 miles above the earth, suffer comparative disadvantages (e.g., signal delay) when providing data services as compared to terrestrial options.  Also DBS video market share has started to decline, because increasingly nomadic and impatient consumers expect video access anytime, anywhere, via any device and in any presentation format.  The cable/satellite model of “appointment television” has begun to lose its control over access.  See my discussion of “cord nevers”: http://telefrieden.blogspot.com/2014/05/revenge-of-cord-nevers.html.

            AT&T gets to pitch a bundle of video, data and voice services via networks it owns and operates.  AT&T appears to consider this strategy an insurance policy of sorts against market forces that may penalize ventures that cannot bundle all desired services.  The company also may think that joining forces with another incumbent, offering an existing, but increasingly risky technology, somehow achieves greater market resiliency for both ventures.

            The acquisition comes across as the opposite of “if it you can’t beat ’em join ’em.”  AT&T is not acquiring a maverick, start up with leading edge technology and a new business plan—just the opposite.  If you can’t beat ‘em, join ranks and hope that your combination—like others out there—will continue to lock content access to incumbent technologies. 

             Interested in watching NFL football on your smartphone, or tablet using cutting edge IPTV/OTT technology?  You’re going to have to ask AT&T for permission.