Broadband Cable Association of Pennsylvania

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May 25, 2012

When Barry Diller backed a start-up that streams local broadcast signals over the Internet, it looked like another unorthodox move by a famously offbeat mogul. Now that start-up has become a grenade that is threatening to wound the television industry. Major TV networks' legal efforts to shut down the service, called Aereo, will be tested in federal court next week. Lawyers not involved in the case say the company has a decent argument, based on legal precedents set in prior media industry lawsuits. The TV industry is closely watching how the case plays out, particularly because Aereo doesn't share any of the fees it collects with broadcasters, who claim copyright infringement.

So, as Time Warner Cable Inc. Chief Executive Glenn Britt hinted recently, a victory in court by Aereo could embolden cable and satellite-TV operators to stop paying fees to carry broadcast networks' signal. That revenue has become increasingly vital to broadcasters over the past couple of years, offsetting weak growth in advertising. For the 70-year-old Mr. Diller, who made his name rebelling against conventional practice in television, the havoc that could be wreaked by Aereo is unavoidable. "Nothing gets created unless it disrupts something," he said mantra-like one day as he sipped floral-scented tea high up in his iceberg-shaped IAC building at the western edge of Manhattan.

Aereo launched its service in March, charging $12 a month to stream the local broadcast signals of TV stations via the Web to consumers' iPads or computers. It is currently available only in New York City, where several thousand residents subscribe. It could expand by the end of the year to more than 100 cities. Unless, that is, the federal court in New York grants broadcasters' request for a preliminary injunction at hearings on Wednesday and Thursday.

The litigation is "going to be a great and important contest," says Mr. Diller. Grandly, he describes Aereo as an attack on the "closed system" of mainstream television. Broadcasters have a different view. "You can't take our signal. You just can't," CBS Corp. Chief Executive Les Moonves said last week. "He is stealing the broadcast programming," said another broadcast network executive. "Is he going to pay his writers and producers or get them to work for free?" "Media companies are by nature so used to control and concentration," said Mr. Diller, adding, "They're not on the side of angels."

In 1986, after a stint heading Paramount Pictures, Mr. Diller took on the television establishment, launching a fourth network, Fox. "I p- off a lot of broadcasters," Mr. Diller said. "They tried to stop that, too." Fox is a unit of News Corp., which also owns The Wall Street Journal. In recent years, Mr. Diller has made the Internet his passion. He oversees a collection of Web assets spanning Match.com, Ask.com and CollegeHumor under IAC/InterActiveCorp, along with two other companies that own travel websites Expedia and TripAdvisor. He says the TV establishment isn't delivering what consumers want from online video, a space he describes as "three trillion versions of a cat swinging from a tree."

A former IAC executive made him aware of the Aereo concept early last year. At first, Mr. Diller says he was energized by the prospect of "getting a closed system to crack open." But he also wondered "what's wrong with this pony?" He said he "scratched around," asking questions about its technology and lawfulness, but "I couldn't find the flaw." In February, Mr. Diller's IAC led a group of investors in a $20.5 million round of funding, imagining what he calls an "alternative system." He believed it could exist alongside the current television ecosystem, but major broadcasters NBC, ABC, CBS, Fox and a unit of Univision Communications Inc. filed two lawsuits before it launched. NBC is a unit of Comcast Corp. and ABC is a unit of Walt Disney Co.

The lawsuits argue that Aereo violates copyright law at least in part because it reformats and retransmits the networks' TV signals and then charges a fee for it-without getting consent of the broadcasters. Aereo claims it is simply transmitting broadcast TV signals to customers and allowing them to record programming, arguing that each user is essentially renting a dime-sized antenna. Aereo locates the antennas-tens of thousands of them-in a converted warehouse in downtown Brooklyn.

One suit says Aereo's contention that it is renting antennae to consumers who are doing the rebroadcasting is a "fiction." The essence of Aereo's legal defense lies in three arguments: television broadcasts over public airwaves; anyone has the right to stick up an antenna; and there is a long-established right for individuals to record programs off the TV-think videocassette recorders or DVRs. Aereo points to the 1984 Sony Betamax case that found the making of personal recordings to be legal, as well as a 2008 decision in favor of Cablevision Systems Corp. against the major entertainment companies that allowed for personal recordings on a cloud-based DVR. "Reading Cablevision, Aereo has a strong case," said James Grimmelmann, professor at New York Law School. "Aereo's argument would appear to have some foundation," agrees Marc Reiner, an intellectual property attorney at Anderson Kill & Olick P.C.

"We look forward to our day in court," says Fox spokesman. "No amount of technological gimmickry by Aereo-or claims that it is simply providing a set of sophisticated "rabbit ears"-changes the fundamental principle of copyright law that those who wish to retransmit Plaintiffs' broadcasts and may do so only with Plaintiffs' authority," broadcasters say in filings. Next week's hearings, where U.S. District Judge Alison Nathan will decide whether to switch off the service, could be decisive. "Once she rules, one way or the other," said Prof. Grimmelmann, "the handwriting will be on the wall for what will happen if the case goes forward." And if Aereo gets shut down? "If the court says you can't do it, it's over," Mr. Diller said. "There's no plan B." Wall Street Journal


A controversial bill that would ban (California) state agencies from regulating telephones that use Internet connections passed a state Senate committee after the measure's author accepted amendments that would strengthen some consumer protections. The proposal by Sen. Alex Padilla (D-Pacoima) is backed by AT&T Inc., Verizon Communications Inc., and cable and high-tech companies. They contend they need "certainty" that the California Public Utilities Commission will not try to oversee the Internet and phone companies that transmit voice signals over fiber optic lines.

AT&T was the fifth-largest contributor to Padilla's campaign coffers with $23,900 from 2007 through 2010, according to nonpartisan political data firm MapLight.org. In all, Padilla received $69,644 from telecommunications services and equipment interests during that period. The suggested amendments, presented by Padilla at a hearing Thursday of the Senate Appropriations Committee, are designed to assuage the fears of PUC members that they'll be stripped of the few powers they still have to protect voice-over-Internet telephone customers.

The new wording, which has not been legally drafted, ensures that Padilla's bill "will not be misinterpreted as going back on any existing consumer protection," he said. No changes will occur to laws that require telephone companies to guarantee service anywhere in California, provide subsidized basic services to low-income customers and maintain a 911 emergency network. The latest proposal also would empower PUC staff to take informal actions to resolve consumer complaints about voice-over-Internet billing or quality problems, Padilla said.

At the same time, the legislation, SB 1161, is aimed at quelling concerns at high-tech companies that the PUC at some point might end its light-handed attitude toward voice-over-Internet phones as well as the Internet. "We want to continue to foster innovation and enhancement of service," the senator said. PUC members, meeting in San Francisco at the same time that Padilla's bill was being debated in Sacramento, said they wanted to work with the Legislature to craft a compromise. The proposed amendments, said Commissioner Catherine Sandoval, "are a great step in the right direction, but we need to go further." Another commissioner, Mark Ferron, said he respected Padilla's good faith in writing the bill but questioned whether "SB 1161 is a solution in search of a problem." Los Angeles Times


NBCUniversal is in talks to buy out Microsoft Corp's 50 percent stake in joint venture MSNBC.com, media reports said. NBCU parent Comcast Corp is conducting due diligence and the partnership with NBC News could be unwound by this summer, said Adweek, which first reported the talks. "Discussions are taking place," Amy Lynn, director of communications at NBC News, told the Wall Street Journal.

The companies are likely to negotiate a deal ensuring that MSNBC.com secures real estate on MSN.com, similar to the treatment Fox Sports receives, Adweek said. NBC and Microsoft joined forces in 1996 to create a cable news channel and online news operation that melded broadcasting with then-emerging internet technology. MSNBC and MSNBC.com are now separate operations, and Microsoft no longer has a stake in the cable channel. In recent years MSNBC has moved toward overtly liberal programming, featuring commentators such as Chris Matthews and Rachel Maddow, while the news website has kept its focus on straight news reporting and the main online outlet for NBC News. Reuters

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