Ali Sternburg

Perennial concerns about piracy might suggest that ‘the sky is falling,’ but the latest economic data from the “Sky is Rising” series reaffirms that an unprecedented amount of creative content is reaching consumers, through a growing number of authorized means.  With today’s release of the third Sky Is Rising report (infographic below), research firm Floor64 updates its previous surveys (1, 2), focusing on the significant growth in the U.S. in four segments of the digital content market: music, video, books, and games.

Internet-enabled access to content continues to drive growth in digital content consumption and availability, even in the wake of an economic downturn.  Data collected in the report reflects growing overall creative output, with more creators able to sell their work through more venues.  As a result, consumers are enjoying a greater and more diverse amount of entertainment, findings that are consistent with recent media accounts and DisCo posts.

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The mainstream media is catching onto the disruption theme we noted in last week’s post on the new HBO and CBS services.

On Friday, we covered announcements from HBO and CBS to offer over-the-top (OTT) video services, independent of cable packages.  Moreover, in addition to HBO and CBS’s recently announced projects, earlier this month ESPN had announced a nine-year deal with the NBA to deliver basketball games via an Internet streaming service, and just this morning Lionsgate and the Tribeca film festival organizer announced their own subscription video-on-demand (SVOD) service.

In all of these packages, the details will matter (and likely vary) greatly, but a review of the headlines shows that journalists have latched on to the potential end of the cable bundle’s reign.

At the New York Times, David Carr writes that the competition and certainty provided by Netflix may have been the catalyst for cable and broadcasting incumbents unpredictably venturing into this new territory:

Netflix pointed a way forward by not only establishing that programming could be reliably delivered over the web, but showing that consumers were more than ready to make the leap. The reaction of the incumbents has been fascinating to behold.

He also used theories about disruptive innovation and competition:

For any legacy business under threat of disruption, the challenge is to get from one room — the one with the tried and true profitable approach — to another, where consumers are headed and innovators are setting up shop.

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TV is finally catching up with the digital age and catering to new generations of consumers — those who rely on services like Netflix, Amazon, and YouTube for most of their video entertainment.  This week may have been a tipping point for online television, with HBO and CBS announcing over-the-top (OTT) services that don’t require a traditional TV subscription.  HBO’s announcement came on Wednesday, with a product launch expected for 2015, and CBS’s CBS All Access was announced and launched yesterday to 14 cities, with more on the way.  These new offerings should help encourage cord cutting and more competition with established broadcasters and cable companies.

The New York Times has a great run-down of the business and competition issues at stake, even pointing out the classic innovator’s dilemma of whether to cannibalize an existing revenue stream when faced with disruptive innovation and competition:

Television executives are eager to woo those viewers, who often are younger and represent their future audiences. But at the same time, these traditional television networks must perform a careful balancing act to not cannibalize the billions of dollars in revenue they generate each year through existing business models.

The Times also mentioned that this week’s announcements mean that “viewers have more options to pay only for the networks or programs they want to watch — and to decide how, when and where to watch them,” and quoted CBS CEO Leslie Moonves saying that their “job is to do the best content we can and let people enjoy it in whatever way they want.”  But they did not point out that this is the classic formula for reducing piracy.  As DisCo has said over and over (often quoting Kevin Spacey or Netflix executives), making content lawfully conveniently available in the format consumers want reduces piracy.  A stand-alone HBO service is likely to increase the amount of subscribers.  As The Oatmeal explained so well, there isn’t currently a lawful way to watch Game of Thrones for cord cutters.  Giving people what they want — piracy demonstrates market demand — should help convert pirates into customers.  Research confirms this, including studies of Spotify and Netflix entering the market in Norway and Spotify’s introduction in the Netherlands.

This week’s news demonstrates great potential in the market for OTT video, evidenced by Netflix’s meteoric rise and Aereo’s ongoing legal battle.  A recent update from Aereo shows that it is “still standing up for innovation, progress, technology and our consumers,” now willing to even accept MVPD regulation in order to lawfully enter the market for online television.  And on the subject of Aereo, the Times also noted that CBS had been planning this service for more than a year — which means the planning started during the Aereo litigation.  As Moonves told the Times, “I am the old broadcasting guy here,” adding, “I continued to poke holes in it for the last year.”  That’s certainly one way of putting it.

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A decades-old statute is being taken advantage of by opportunist litigants to extract statutory damages or settlements from companies.  Sound familiar?

While this could easily describe the phenomenon of copyright trolls or even patent trolls, I’m referring to the Telephone Consumer Protection Act of 1991 (TCPA).  Like copyright and patent statutes, the TCPA also serves a noble purpose: penalizing misleading and abusive telemarketing practices.  Unfortunately, like copyright, the TCPA grants plaintiffs large statutory damages per violation.  The availability of these awards, which require no proof of any actual harm, has incentivized class action litigants to seek out opportunities to allege technical violations of the statute.  In many cases, these claims don’t even address telemarketing activities at all, let alone abusive practices, but a class action can impose such substantial legal costs that opportunistic claims can coerce settlements where the costs of reaching a judge who can throw out abusive claims is high.  As we’ve seen in the copyright context, statutory damages deter investment in new technology; the same thing happens to TCPA defendants, stifling innovation and development in tools for communication.

Some companies are starting to fight back against TCPA misuse.  Several companies whose businesses clearly don’t constitute telemarketing have petitioned the FCC over the last few months in the TCPA docket regarding overbroad interpretations of the TCPA, including TextMe, an app for free messaging and calling; Stage Stores, a clothing retail company; and Santander Consumer USA, an automotive finance company.  Additionally, some of these cases do make it to trial; Twitter and Path joined an amicus brief in August supporting Yahoo in the Third Circuit Dominguez v. Yahoo case.

Guidance from the FCC, courts, or Congress could help relieve the uncertainty over the reach of this 1991 telemarketing statute, and prevent it from being read so broadly as to deprive consumers of innovative new products and services for communicating in the 21st century.

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Despite inexplicable opposition from certain outliers, it’s becoming widely accepted that the Internet enables and democratizes creativity and its dissemination more than ever before.

Earlier this week, Taylor Swift released her new single, Shake It Off, complete with a music video, and announced the release date for her forthcoming pop album, 1989.  She did so in front of an audience, webcast live online.  In Ms. Swift’s own words, “they’re telling me we’re making history because this is the first ever worldwide live stream for ABC and Yahoo to get together and I’m so excited I can’t even!”  (It’s not clear whether she meant that it’s the first ever worldwide live stream for an album date announcement/single release party, or the first ever worldwide live stream for these companies together, or what, but her enthusiasm was contagious, and her fans didn’t seem to care.)  In the view of Claire Suddath, a writer for Businessweek, however, Taylor Swift followed all the rules and everything about this was completely expected.

This was contrasted with Beyoncé’s now-legendary promotion-free drop of her “visual album” Beyoncé on Instagram at midnight in December (which she later followed up with an equally unexpected promotion-free remix of ***Flawless, released over social media at midnight a few weeks ago).  “Weird Al” Yankovic did something similar this summer too, although he pointed out that he did it with his last album, before Bey, and that she was in fact ‘doing a Weird Al.’  While none of these examples involved displacing intermediaries and selling to fans directly like Louis C.K., Weird Al did notably take advantage of different video sites for each daily exclusive video release.

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Yesterday, it was reported that Community, which had been canceled by NBC in May, was just picked up for a sixth season (at least) by Yahoo.

The creation and distribution of original programming by new entrants is a growing phenomenon.  Traditional over-the-air broadcast television is no longer the sole source of episodic programming.  As DisCo has previously noted, shows like House of Cards and Alpha House have risen to fame on web-based services like Netflix and Amazon, entirely in the absence of network backing.  Just as record labels are no longer the sole gatekeepers to music production, it is increasingly clear that television networks are no longer the gatekeeper to serialized video content.

Increased competition and disintermediation in the market for video content is unmistakably a good thing for consumers, who have more options for entertainment than ever before, and for creators and entrepreneurs, who can produce programming without needing permission or funding from existing gatekeepers.  This allows for more risk-taking and creative choices, without having to worry about what incumbents find desirable.

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The long-awaited Aereo opinion is out.  The Second Circuit was reversed 6-3, and it’s not encouraging for the cloud industry, as we feared.  (This appears to be 2(a) in Matt’s list of possible outcomes, more of a broad reversal than a narrow reversal.)

Matt has written several posts on how this case impacts the cloud industry ([1], [2]).  He explained that while the broadcasters may not intend to go after the cloud, any argument that attempts to just eliminate Aereo would also implicate cloud services.  And in fact, several members of the Supreme Court were concerned at oral argument (which I attended) with the effect of this decision on the cloud, although this was not sufficiently represented in the majority opinion.

The United States government had filed an amicus brief arguing that the Court could find Aereo unlawful while simultaneously not threatening the cloud, but as Matt explained, this is not possible.  (The majority, however, appears to have been persuaded by the U.S. government’s argument, as I explain below.)

Not only does this decision against Aereo potentially affect the cloud industry for legal reasons, but it is likely to deter investment in innovative new services.  The certainty provided by Cartoon Network LP, LLLP v. CSC Holdings, Inc., 536 F.3d 121 (2008)) (popularly known as Cablevision) led to additional investment in U.S. cloud computing companies ranging from $728 million to $1.3 billion during the two years after the decision.  (Cablevision also happens to be the case that Aereo’s business model heavily relies upon.  As explained below, the majority does not cite the case, which is odd.)  Today’s decision may mean that the next Aereo is unable to secure funding from investors.  And that’s bad for everyone.

Some initial takeaways from the majority opinion:

First of all, the split was unique for copyright cases.  The majority opinion was written by Justice Breyer, who has often been on the side of limited copyright and increased innovation.  (See, e.g., his opinion in Kirtsaeng, and his dissents in Eldred and Golan.)

1. Breyer starts off by calling Aereo a “technologically complex service”

This is not a good start.  That is reminiscent of the ‘Rube Goldberg’ argument, but Aereo should not be faulted for designing a system that complies with the law.  The majority does not even cite the main precedent Aereo relies on, Cablevision, except for in a parenthetical.  This signifies that a results-oriented decision is to follow, rather than one that follows the law.  It also may implicate the broader cloud storage industry, if how the technology works does not matter to the Court.

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Today CCIA launched ConsumerTVChoice.net, a new site to promote competition and choice in the TV set-top box marketplace, and to encourage consumer advocacy around this issue.

While CCIA has supported Congress’s renewal of STELA, which expires at the end of the year, CCIA has denounced attempts by some lawmakers to add anticompetitive provisions into STELA that would undermine the FCC’s statutory consumer protection mandates regarding open standards for electronic boxes that can access both your cable programming and online video.

This issue is consistent with CCIA’s mission at its founding more than 40 years ago – to raise awareness when incumbent companies try to snuff out competition and innovation.  From fighting for the ability of third party developers to write independent software for IBM mainframes, to championing the right of consumers to plug non-AT&T devices into their wall jacks, battles CCIA has supported have been critical to the thriving tech industry we have today.  The mainframe battle paved the way for the entire software industry and rise of Silicon Valley.  The third party device issue resolution resulted in innovations like the first cordless phones, answering machines, fax machines, computer modems and game consoles.

While it’s impossible to fully predict what further innovations could result from consumers having more freedom to watch content on the device of their choice, it is clear that Big Cable is resisting change even while more efficient methods of accessing TV and other content are emerging.  The hope in launching this website is to help consumers understand that ability to choose is at risk in Congress right now so they can make their views known before it’s too late.  Consumers will be the losers if dominant businesses can legislate challengers out of the game.

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One might conclude Kevin Spacey has a finger on the pulse of the culture market: he bet heavily on the dark political series House of Cards when pundits scoffed at all-at-once Internet-only distribution [1, 2, 3] — now a smashing success.  Spacey will also soon feature as the arch-villain in the next installment of the best-selling Call of Duty video game (trailer), at a time when A-list actors are not often associated with gaming.  The Call of Duty franchise, however, is expected to generate at least $1B in revenue later this fall — an annual figure that the Hollywood box office can only dream of.

On top of his forward-thinking choices in roles, he has also spoken publicly about fighting piracy through alternative distribution models.  Spacey has previously said on at least two occasions, in May 2013 and in August 2013, that piracy can be reduced by giving the people what they want, when they want it, at a reasonable price.

This week, Spacey made a comment at the amusingly pirate-themed International Indian Film Academy awards about House of Cards being popular in India, adding that since Netflix doesn’t exist in India, they’re “stealing” it.  While reports differed on whether Spacey’s comment was serious or in jest (or, even, whether House of Cards is not available in India) the remark is consistent with his understanding that piracy is reduced when consumers have lawful convenient affordable options to watch what they want to watch.

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This morning, I attended the ABC v. Aereo oral argument at the Supreme Court that Matt previewed this morning.  (To be more specific, I got there last night at 7pm and camped out for more than 12 hours.)  Below are 8 of my takeaways from the argument, featuring quotes from the preliminary transcript:

  1. Unintended Consequences

The Court is obviously concerned about unintended consequences, including (and especially) for the cloud.  Justice Breyer in particular pressed this argument to the broadcasters’ lawyer, Paul Clement, who didn’t appear to effectively dissuade him.

JUSTICE BREYER: [A]re we somehow catching other things that really will change life and shouldn’t, such as the cloud?  And you said, well, as the government says, don’t worry, because that isn’t a public performance.  And then I read the definition and I don’t see how to get out of it.

  1. Deference to Cablevision

The Court was very willing to discuss Cablevision, a crucial Second Circuit case, but one that is not binding in the Supreme Court.  Justice Kennedy brought up a hypo about Cablevision being law to the broadcasters and the government.

JUSTICE KENNEDY: Just assume that CableVision is our precedent.  I know that it isn’t, but let’s just assume that it is.  How would you distinguish the CableVision from your case and how is it applicable here?  Assume that it’s binding precedent.  Just that’s a hypothetical.

  1. Interest in Sony, Fair Use

Despite not being an issue that people frequently talk about regarding Aereo (perhaps because it did not come up in Cablevision because it was waived), fair use, and particularly the precedent from Sony, came up a few times from Aereo’s lawyer, David Frederick.

MR. FREDERICK:  In Sony, this Court held that consumers have a fair use right to take local over-­the-­air broadcasts and make a copy of it.  All Aereo is doing is providing antennas and DVRs that enable consumers to do exactly what this Court in Sony recognized they can do. . . . MORE »

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