A tale of two video markets: Welcome to the post-Aereo world

July 2

The Supreme Court’s Aereo decision is the latest example of a tottering complex of rules of regulations designed to accommodate traditional broadcast from an rushing onslaught of disruptive video services such as Netflix, YouTube and Vimeo. (Win McNamee/Getty Images)

For video consumers, as for the residents of Napoleonic Paris and London in Charles Dickens’s classic novel, it is the best of times and the worst of times.

Those who rely on traditional broadcast, cable and satellite television are living in a world where fewer content providers own and control the bulk of the programming, using their leverage to force operators to take ever-larger bundles of channels at higher prices that are passed on to consumers. As much as 60 percent of the average cable bill, for example, goes directly to mega-producers such as Disney, Fox and CBS.  The average cable viewer pays nearly $6 just for ESPN, whether they watch it or not.

Trapped by bloated channel packages and limited flexibility, consumers are voting with their feet. Pay TV networks have lost millions of viewers in the last few years, bringing into serious question how much longer its mature model of content aggregation and distribution can last.

Where are consumers going? The Internet, of course. And why not? For those who have cut the cord (or, for a growing segment of younger consumers, never had a cord in the first place), the world is much brighter and the focus far sharper. Much of the network programming they want is available on demand from the programmers’ own Web sites, or from virtual bundlers including Hulu, Amazon, Apple and Netflix, either for free or at a fraction of the cost of a standard cable subscription, offered through customizable a la carte, subscription, and ad-supported options.

But beyond content traditionally available from cable, satellite or broadcast, a vast new world of video has opened up, built on increasingly better and cheaper video production equipment, cloud computing, bootstrapped funding sites including Kickstarter, and new aggregators such as YouTube and Vimeo. On YouTube alone, users upload 100 hours of original programming every minute, and not all of it about cats.

Popular channels on these sites support tens of millions of subscribers, and maintain a level of interactivity unheard of in the stagnant world of traditional media. Producers ask the viewers what shows they want to see next, and promptly produce them. Fans share the programming they like on large-scale social networks including Twitter, Reddit, and Facebook.

Two events last week brought into sharp relief the stark differences between these two worlds, along with the principal cause of discontent in the struggling broadcast model: a tottering complex of laws, court decisions and regulations cobbled together over the past 30 years attempting, with decreasing success, to accommodate the original broadcast model of free, over-the-air TV against a rushing onslaught of disruptive technologies. (Back to that in a moment.)

The first was a Senate Judiciary Committee hearing on the proposed merger of AT&T and DirecTV, at which I testified alongside the chief executives of the two companies and other witnesses. The second, two days later, was the Supreme Court’s decision in a case that has almost certainly ended the life of start-up Aereo, which for the past two years had offered its customers a way to record and stream free over-the-air television programming to Internet-connected devices.

My testimony focused on disruption in the video marketplace. I noted that AT&T’s U-Verse video service is a loss leader the company offers largely to supplement its broadband Internet business (the company has fewer than 150,000 customers who subscribe only to video), while DirecTV offers no native Internet service, and is unlikely to given the limits of satellite technology. AT&T needs DirecTV’s customer base to improve its bargaining position with increasingly powerful content providers, and DirecTV needs U-Verse’s broadband network to remain competitive with cable and other networks.

Both companies need each other, more to the point, to offer customers the kind of flexibility available today from largely unregulated Internet video services. Cord-cutters are demanding the ability to watch whatever content they want wherever they are and whatever device they happen to have handy. Together, the two companies could do that. Separately, they cannot.

That’s where the Aereo case fits in. Aereo’s service was an attempt to bridge the gap between the broadcast world and the Internet, accelerating the availability of over-the-air content to Internet users. Aereo, of course, wasn’t paying any fees to the broadcasters, nor was it working with them.  But it had designed its service to fit carefully within several legal exceptions to copyright worked out by the courts and Congress.

The 1984 Betamax case, for example, established that consumers have the right to record over-the-air programming and watch it later, first via VCR and now via DVR. Some lower courts had extended that right to remote DVRs maintained for consumers by a cable company, holding that as long as the consumer was directing the recording and playback, the location of the device didn’t matter.

But the Supreme Court drew the line with Aereo. In a confusing opinion suggesting an uneasy coalition among the four justices who signed on, Justice Stephen Breyer brushed aside both the facts and the law, concluding repeatedly that Aereo’s service simply looked and walked too much like traditional cable TV to avoid having to follow the same rules for acquiring and licensing content.

Aereo’s service allocates an individual antenna and hard drive to each customer, who control them over the Internet.  But “[v]iewed in terms of Congress’ regulatory objectives, why should any of these technological differences matter?” Breyer asked. “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.”

So, unlike earlier “technological differences” that have evaded prohibition, including VCRs, DVRs, the Internet, and cable television itself, the court held that the Aereo service cannot avoid the constraints of a cable operator simply by adhering to the letter of the (admittedly hazy) laws made to accommodate previous innovations.

Which brings us back to the existential challenge for the traditional video industry. To keep up with consumers’ rapid embrace of disruptive innovations digital and otherwise, cable, satellite and broadband video providers must now traverse an impossible maze of laws and regulations designed in isolation to address earlier imbalances between content producers and content distributors. These restrictions go by strange names, including “must carry,” “retransmission consent,” “compulsory license,” “network nonduplication,” and “financial syndication.”

(For a history of these and other compromises, see this excellent overview from the Mercatus Center’s Adam Thierer and Brent Skorup.)

As I noted when the Aereo case was first argued, untangling this mess is not an appropriate job for the courts, especially since much of it was created by Congress and the FCC. (Both the majority and the dissent in the Aereo case agree, at least on that point.) And while several bills have been introduced over the last several years hoping to quiet the chaos, the prospects for significant video regulation reform are slim.

For one thing, Congress doesn’t even seem aware of the shiny alternate universe to which cord-cutters have largely relocated. In a revealing exchange during the Senate Judiciary hearing, for example, Sen. Al Franken (D-Minn.), who began his career on television, lamented the decline of independent network programming with Christopher Keyser, President of the Writer’s Guild, a trade association that represents film and TV writers.

How’s that again? While independent programming may have declined on the networks, nothing short of an independent video miracle is taking place online, where unaffiliated programmers, including individuals, are writing, producing, and starring in an unimaginable range of original content. Much of it is scripted by writers who are or could be members of Keyser’s organization. (“The Fault in Our Stars” author John Green, for example, produces multiple YouTube channels with millions of subscribers.)  Have either Sen. Franken or Keyser even seen original programming from Netflix, Amazon, and others?  Have they never visited the Web sites for Funny or DieVSauceMachinima?

The traditional model for television is an American success story of innovation.  But if it’s going to survive the continued disruption of the digital revolution, Congress is going to have to wake up to the real source of competition coming from the Internet and the technologies it supports. We need to unshackle video incumbents from the bonds Washington has lovingly tightened over decades, always with the best of aims, but whose unintended consequences now far exceed any benefits to consumers. As Dickens would never have said, “Viva la revolución!”

Larry Downes is co-author with Paul Nunes of “Big Bang Disruption:  Strategy in the Age of Devastating Innovation” (Portfolio 2014).  He is a project director at the Georgetown Center for Business and Public Policy.

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