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Thursday, May 01, 2014

Aereo & Disruptive Tech

[crossposted HBR]

Last week, the Supreme Court heard oral arguments to determine the fate of Aereo, a Manhattan-based startup. The question before the court is whether Aereo’s business model violates the Copyright Act. Aereo allows its customers to watch broadcast television over the internet. Instead of purchasing pricey rabbit ears or a clunky antenna (neither aesthetically nor environmentally friendly, particularly in big cities) Aereo shrinks the rabbit ears to the size of a dime and provides customers the ability to store programs on a remote cloud-based DVR and play them back on their gadget of choice, be it a laptop, tablet, or smartphone.

Aereo’s investor, Barry Diller, the creator of Fox some three decades ago, envisioned Aereo as a business that would loosen up the “closed cable-broadcast-satellite circle.” Naturally, this didn’t sit well with the circleitself. In a flurry of litigation, major broadcasters including ABC, NBC, CBS and Fox, are asking the courts to stop Aereo. The Second Circuit has held that Aereo did not violate the Copyright Act, finding that Aereo facilitates a series of private performances controlled by the users rather than transmitting the content as a “public performance,” which would be illegal. The broadcasters appealed to the Supreme Court and the question now turns on how to understand the business: Is Aereo more like an unauthorized cable provider, failing to pay retransmission fees for its online streaming, or is it a cloud-based antenna/dvr/slingbox installer analogous to a hardware store renting to end-users miniature rooftop antennas, which is everyone agrees is perfectly legal?

While the oral arguments in the court revealed more confusion than clarity, here are four lessons that the Aereo dispute should remind us all:

It ain’t illegal just because it threatens your business model. An argument that a new venture poses a threat to your lucrative business is not a legal argument. The broadcasters are claiming, quite unconvincingly, that if Aereo is allowed to operate, they will cease over-the-air broadcasting and move to exclusively streaming content through cable. Since the largest component of revenues from broadcasting comes from advertising, nearly 90% of revenue, it is difficult to see why adding more viewers diminishes the value of these ads and would result in an overall loss. There may well be loss in retransmission fees, and cable providers seem to be steadily losing subscribers, no doubt aided by the availability of Netflix, Hulu, and, yes, Aereo, but losing profits to new technology, increased consumer choice, and changing consumption patterns does not make the competition unlawful.

It ain’t illegal just because it deliberately avoids infringement. In the hearings, Justice Roberts echoed the appellate court’s dissenting judge who called Aereo’s technology platform a sham: “a Rube Goldberg-like contrivance over-engineered in an attempt to avoid the reach of the Copyright Act and to take advantage of a perceived loophole in the law.” By contrast, the Justices Sotomayor and Kagan wanted to understand how Aereo differs from a hardware store selling broadcast equipment to consumers. The case is a good reminder that designing a system that deliberately avoids copyright infringement is not circumvention but compliance. Aereo’s attorneys argue that using individualized user-controlled mini-antennas instead of one large antenna allowed Aereo to save time, space, and money. (If Aereo were to use one large antenna, they would need to secure permits from each city, adding considerable red tape.) Whatever the reason the technology was designed as it was, if it complies with the law then it is legal.

If it ain’t broke, don’t fix it. Everyone agrees that consumers have the right to free access to public broadcasting. The principle that the public airwaves are free as air is foundational. The channels that are broadcast over-the-air and that Aereo enables its customers to store and view are the very same channels that the public has a right to receive for free, without royalty pay and without the help of Aereo. At the same time, in the Copyright Act of 1976, overturning previous court decisions, Congress required cable companies to pay fees for retransmission. In two early decisions, Fortnightly Corp. v. United Artists Corp. (1968) and Teleprompter Corp. v. Columbia Broadcasting System, Inc. (1974) the Supreme Court ruled that cable providers were rabbit ear antennas which did not infringe on broadcasters’ copyrights. As a result of intense lobbying, Congress overturned the Court’s interpretation and created a scheme in which cable providers are granted a compulsory license and are required to pay a retransmission fee to broadcasters. The 1976 Copyright Act more broadly imposes liability on any service that “publicly performs” a copyrighted television program when it retransmits a broadcast “by means of any device or process.” So while retransmission is not limited to a particular system, like cable, the question at the core of the Aereo case is what is “public performance.” The technological maneuvers to avoid legal liability should be understood in relation to the breadth of the Copyright Act, which Congress has patched in ways that have turned the logic of free-as-air on its head: free as long as the end-user is not being aided by innovative technologies. Increasingly, research in the field of copyright law is challenging the wisdom of this directional tightening. The right to access the public airwaves, and with them public discourse and knowledge, has been subverted by a demand that consumers continue to rely on outdated, clunky technology.

The drive for innovation ultimately prevails over the threat of litigation. The broadcasters have publicly stated that no one should shed a tear if a court decision dooms Aereo because the business is a “gimmick.” We could add Aereo to a long distinguished line of technological “gimmicks” that have been challenged in court including the VCR, DVR, and more recently initiatives like Google Books. In the end, the public thirst for choice and progress proves stronger than laws that threaten to hamper innovation. In fact, it is often the most innovative and revolutionary technologies and business models that are charged with illegality because they disrupt entrenched economic interests. (Uber and Lyft’s current battles with the taxi industry come to mind; so do battles over the limits of patenting.)

In the Supreme Court hearings in Aereo there was a lot of hazy talk about “the cloud.” The justices rightly worried about the secondary effects a ruling against Aereo would have on cloud computing technology, including DropBox, iCloud, and Cablevision (RS-DVR), which provide users the functional equivalent of hardware storage and viewing in the cloud. Just as the threat that the networks will abandon the airwaves seems empty, the claim that one court decision against remote storage of content will stifle the development of the entire cloud computing industry and other innovative user-controlled technologies is largely over-stated. Still, investors and entrepreneurs will certainly gain more confidence if the Court’s ultimate decision creates more certainty, and if Congress’s laws encourage competition and reduce barriers to entry.

Posted by Orly Lobel on May 1, 2014 at 01:41 AM | Permalink

Comments

Don't be fooled. Ride-sharing is not about "innovation" or "creating competition" It's about all that CASH that your local municipality was taking IN from issuance / transfer of transportation business permits and their subsequent regulation. They want that. They could care less about anything else. City revenue LOST is literally ride-sharing law-breakers PROFIT. How, you ask? Simple, ride-sharing private corporations aggressively refuse regulation and refuse paying for business permits claiming a "new" business model (well, because "GPS"). Where city made MILLIONS - city will now get PENNIES. There is nothing else but a THEFT from municipal coffers. Ride-sharing private corporations will flood local markets - and minimum wage drivers will wait for hours for 1 single smartphone dispatch. Who benefits from all this madness? Ride-sharing California-based oligarchy. That's who. If THEY truly wanted a FAIR competition - they would pay SAME EXACT expenses that all your local transportation businesses are paying daily. That would be FAIR. But that would mean a FAIR competition. And ride-sharing corporations would lose that in A DAY - so they perpetuate a myth of them being special and different.... "well, because GPS". Ride-sharing is a FRAUD on a mass-scale. Shame to all local politicians who sell out their local economies and their local businesses for the sake of 2-3 California ride-sharing oligarchies
If we call for FTC to take a look at this whole matter - then let's begin with closed-door cartel-like meeting that ride-sharing multi-BILLION dollar private California corporations had just a few months ago to "shape up" their common strategies..That would be a good place to start investigating this ride-sharing fraud. And here are relevant links to read:
1. http://pando.com/2014/02/25/ridesharing-companies-meet-to-discuss-public-liability-insurance-wont-share-details-with-the-public/
2. http://www.bizjournals.com/sanjose/news/2014/01/24/uber-admits-to-dirty-tricks-in-nyc.html
3. http://www.nbcchicago.com/investigations/Ride-Service-May-Pose-Risk-to-Passengers-256639641.html
4. http://www.hg.org/article.asp?id=32579

Posted by: Mike | May 1, 2014 11:57:51 AM

"It ain’t illegal just because it deliberately avoids infringement."

But if the legal question is a close one, it is reasonable to introduce policy considerations, and it is a relevant policy consideration whether the arguable infringement comes from the inherent capabilities of the technology (as with VCRs) or from an ingenious attempt to avoid what would otherwise be clear infringement (as with Aereo).

Posted by: AF | May 1, 2014 12:10:02 PM

"It ain’t illegal just because it threatens your business model."

when resources are abundant and/or society undeveloped the name of the game is competition. when resources are scarce and/or society developed the name of the game is protectionism. we're gonna see a lot more protectionism and/or attacks on society in the years to come. it's the way the world works.

Posted by: gman | May 1, 2014 12:16:44 PM

Mike posted in part "Where city made MILLIONS - city will now get PENNIES. There is nothing else but a THEFT from municipal coffers." HAHAHAHAHAHAHAHAHA thanks for the laugh.

In case you are wondering what I find so funny about this, the city was stealing money in the first place with this scheme, because it is premised on and only possible with the government's monopoly to initiate force in a given geographical area. Now that some people are avoiding this "legal" extortion by employing voluntary means, you get people like Mike claiming that the cities are being stolen from. Hilarious!!!!!!

Posted by: Joe | May 1, 2014 12:19:10 PM

Responding to AF at 12:10PM:

Deliberate avoidance of infringement is the bright line, not whether or not it is INTENDED to be a workaround. For suppliers of equipment (such as my company), this is always clear.

If a competitor has a patent on a popular system, of course you attempt to create a competitive product that does not violate the patent. If the patent holder did not write his patent in a manner that prevents competitive designs, then that is the fault of the patent holder. Not of his competition.

Posted by: David Jay | May 1, 2014 12:22:14 PM

Mike, thank you for your comment. Your revelation that the ride share companies will take money away from cities make it great news for consumers. For too long corrupt, bloated cities backed by worker-hating union bosses have gouged citizens with their wicked schemes.

Thank you, Mike, for revealing that this old, corrupt method is going away. I'm glad these 'oligarchs' are braking the politician-union boss evil axis. Thanks to Mike, I know I owe them a thank you.

Posted by: Chad | May 1, 2014 12:23:21 PM

Of course this will destroy the broadcast outlets and they are going to scream and buy politicians like crazy. This is the last nail in the MainStreamMedia complex and if they can't own the airwaves then the Democrats with bylines are doomed. ABC vs Instpundit and YouTube. Unfair!

At last!!!!

Posted by: SenatorMark4 | May 1, 2014 12:35:08 PM

"minimum wage drivers will wait for hours for 1 single smartphone dispatch"

Yes, as opposed to those drivers who pay over $100,000 for a medallion of their own, or hundreds a night to "lease" one from a government-mandated monopoly, and after paying their gas, tolls, etc, and a nice chunk to the cab "company" for which they work, they may have a few bucks left over to last a day or two.

Think about it, Mike, why don't you see 20-year cab drivers any more and it is almost always new immigrants? Because it already *is* essentially a minimum-wage job. If not exactly by the numbers, it certainly is an entry-level job from which one leaves as soon as they are on their feet and a better opportunity arises.

Posted by: TomJB | May 1, 2014 12:36:00 PM

"The drive for innovation ultimately prevails over the threat of litigation." Is this established by law or is it just wishful thinking? The history of copyright litigation contains losses by innovators. Just think back just to the Kinko's case. Did the new technology win?

If the broadcasters are destroyed or impoverished or if they switch to all cable or internet distribution will the public then be the winner?

Posted by: stubbs | May 1, 2014 1:54:09 PM

"If the broadcasters are destroyed or impoverished..."

Hahahahahahahahahahahahaha [takes a breath] hahahahahahahahahahahahaha!

Posted by: Jim | May 1, 2014 8:34:09 PM

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