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The International Center for Law & Economics (ICLE) and TechFreedom filed two joint comments with the FCC today, explaining why the FCC has no sound legal basis for micromanaging the Internet and why “net neutrality” regulation would actually prove counter-productive for consumers.

The Policy Comments are available here, and the Legal Comments are here. See our previous post, Net Neutrality Regulation Is Bad for Consumers and Probably Illegal, for a distillation of many of the key points made in the comments.

New regulation is unnecessary. “An open Internet and the idea that companies can make special deals for faster access are not mutually exclusive,” said Geoffrey Manne, Executive Director of ICLE. “If the Internet really is ‘open,’ shouldn’t all companies be free to experiment with new technologies, business models and partnerships?”

“The media frenzy around this issue assumes that no one, apart from broadband companies, could possibly question the need for more regulation,” said Berin Szoka, President of TechFreedom. “In fact, increased regulation of the Internet will incite endless litigation, which will slow both investment and innovation, thus harming consumers and edge providers.”

Title II would be a disaster. The FCC has proposed re-interpreting the Communications Act to classify broadband ISPs under Title II as common carriers. But reinterpretation might unintentionally ensnare edge providers, weighing them down with onerous regulations. “So-called reclassification risks catching other Internet services in the crossfire,” explained Szoka. “The FCC can’t easily forbear from Title II’s most onerous rules because the agency has set a high bar for justifying forbearance. Rationalizing a changed approach would be legally and politically difficult. The FCC would have to simultaneously find the broadband market competitive enough to forbear, yet fragile enough to require net neutrality rules. It would take years to sort out this mess — essentially hitting the pause button on better broadband.”

Section 706 is not a viable option. In 2010, the FCC claimed Section 706 as an independent grant of authority to regulate any form of “communications” not directly barred by the Act, provided only that the Commission assert that regulation would somehow promote broadband. “This is an absurd interpretation,” said Szoka. “This could allow the FCC to essentially invent a new Communications Act as it goes, regulating not just broadband, but edge companies like Google and Facebook, too, and not just neutrality but copyright, cybersecurity and more. The courts will eventually strike down this theory.”

A better approach. “The best policy would be to maintain the ‘Hands off the Net’ approach that has otherwise prevailed for 20 years,” said Manne. “That means a general presumption that innovative business models and other forms of ‘prioritization’ are legal. Innovation could thrive, and regulators could still keep a watchful eye, intervening only where there is clear evidence of actual harm, not just abstract fears.” “If the FCC thinks it can justify regulating the Internet, it should ask Congress to grant such authority through legislation,” added Szoka. “A new communications act is long overdue anyway. The FCC could also convene a multistakeholder process to produce a code enforceable by the Federal Trade Commission,” he continued, noting that the White House has endorsed such processes for setting Internet policy in general.

Manne concluded: “The FCC should focus on doing what Section 706 actually commands: clearing barriers to broadband deployment. Unleashing more investment and competition, not writing more regulation, is the best way to keep the Internet open, innovative and free.”

For some of our other work on net neutrality, see:

“Understanding Net(flix) Neutrality,” an op-ed by Geoffrey Manne in the Detroit News on Netflix’s strategy to confuse interconnection costs with neutrality issues.

“The Feds Lost on Net Neutrality, But Won Control of the Internet,” an op-ed by Berin Szoka and Geoffrey Manne in Wired.com.

“That startup investors’ letter on net neutrality is a revealing look at what the debate is really about,” a post by Geoffrey Manne in Truth on the Market.

Bipartisan Consensus: Rewrite of ‘96 Telecom Act is Long Overdue,” a post on TF’s blog highlighting the key points from TechFreedom and ICLE’s joint comments on updating the Communications Act.

The Net Neutrality Comments are available here:

ICLE/TF Net Neutrality Policy Comments

TF/ICLE Net Neutrality Legal Comments

With Berin Szoka.

TechFreedom and the International Center for Law & Economics will shortly file two joint comments with the FCC, explaining why the FCC has no sound legal basis for micromanaging the Internet—now called “net neutrality regulation”—and why such regulation would be counter-productive as a policy matter. The following summarizes some of the key points from both sets of comments.

No one’s against an open Internet. The notion that anyone can put up a virtual shingle—and that the good ideas will rise to the top—is a bedrock principle with broad support; it has made the Internet essential to modern life. Key to Internet openness is the freedom to innovate. An open Internet and the idea that companies can make special deals for faster access are not mutually exclusive. If the Internet really is “open,” shouldn’t all companies be free to experiment with new technologies, business models and partnerships? Shouldn’t the FCC allow companies to experiment in building the unknown—and unknowable—Internet of the future?

The best approach would be to maintain the “Hands off the Net” approach that has otherwise prevailed for 20 years. That means a general presumption that innovative business models and other forms of “prioritization” are legal. Innovation could thrive, and regulators could still keep a watchful eye, intervening only where there is clear evidence of actual harm, not just abstract fears. And they should start with existing legal tools—like antitrust and consumer protection laws—before imposing prior restraints on innovation.

But net neutrality regulation hurts more than it helps. Counterintuitively, a blanket rule that ISPs treat data equally could actually harm consumers. Consider the innovative business models ISPs are introducing. T-Mobile’s unRadio lets users listen to all the on-demand music and radio they want without taking a hit against their monthly data plan. Yet so-called consumer advocates insist that’s a bad thing because it favors some content providers over others. In fact, “prioritizing” one service when there is congestion frees up data for subscribers to consume even more content—from whatever source. You know regulation may be out of control when a company is demonized for offering its users a freebie.

Treating each bit of data neutrally ignores the reality of how the Internet is designed, and how consumers use it.  Net neutrality proponents insist that all Internet content must be available to consumers neutrally, whether those consumers (or content providers) want it or not. They also argue against usage-based pricing. Together, these restrictions force all users to bear the costs of access for other users’ requests, regardless of who actually consumes the content, as the FCC itself has recognized:

[P]rohibiting tiered or usage-based pricing and requiring all subscribers to pay the same amount for broadband service, regardless of the performance or usage of the service, would force lighter end users of the network to subsidize heavier end users. It would also foreclose practices that may appropriately align incentives to encourage efficient use of networks.

The rules that net neutrality advocates want would hurt startups as well as consumers. Imagine a new entrant, clamoring for market share. Without the budget for a major advertising blitz, the archetypical “next Netflix” might never get the exposure it needs to thrive. But for a relatively small fee, the startup could sign up to participate in a sponsored data program, with its content featured and its customers’ data usage exempted from their data plans. This common business strategy could mean the difference between success and failure for a startup. Yet it would be prohibited by net neutrality rules banning paid prioritization.

The FCC lacks sound legal authority. The FCC is essentially proposing to do what can only properly be done by Congress: invent a new legal regime for broadband. Each of the options the FCC proposes to justify this—Section 706 of the Telecommunications Act and common carrier classification—is deeply problematic.

First, Section 706 isn’t sustainable. Until 2010, the FCC understood Section 706 as a directive to use its other grants of authority to promote broadband deployment. But in its zeal to regulate net neutrality, the FCC reversed itself in 2010, claiming Section 706 as an independent grant of authority. This would allow the FCC to regulate any form of “communications” in any way not directly barred by the Act — not just broadband but “edge” companies like Google and Facebook. This might mean going beyond neutrality to regulate copyright, cybersecurity and more. The FCC need only assert that regulation would somehow promote broadband.

If Section 706 is a grant of authority, it’s almost certainly a power to deregulate. But even if its power is as broad as the FCC claims, the FCC still hasn’t made the case that, on balance, its proposed regulations would actually do what it asserts: promote broadband. The FCC has stubbornly refused to conduct serious economic analysis on the net effects of its neutrality rules.

And Title II would be a disaster. The FCC has asked whether Title II of the Act, which governs “common carriers” like the old monopoly telephone system, is a workable option. It isn’t.

In the first place, regulations that impose design limitations meant for single-function networks simply aren’t appropriate for the constantly evolving Internet. Moreover, if the FCC re-interprets the Communications Act to classify broadband ISPs as common carriers, it risks catching other Internet services in the cross-fire, inadvertently making them common carriers, too. Surely net neutrality proponents can appreciate the harmful effects of treating Skype as a common carrier.

Forbearance can’t clean up the Title II mess. In theory the FCC could “forbear” from Title II’s most onerous rules, promising not to apply them when it determines there’s enough competition in a market to make the rules unnecessary. But the agency has set a high bar for justifying forbearance.

Most recently, in 2012, the Commission refused to grant Qwest forbearance even in the highly competitive telephony market, disregarding competition from wireless providers, and concluding that a cable-telco “duopoly” is inadequate to protect consumers. It’s unclear how the FCC could justify reaching the opposite conclusion about the broadband market—simultaneously finding it competitive enough to forbear, yet fragile enough to require net neutrality rules. Such contradictions would be difficult to explain, even if the FCC generally gets discretion on changing its approach.

But there is another path forward. If the FCC can really make the case for regulation, it should go to Congress, armed with the kind of independent economic and technical expert studies Commissioner Pai has urged, and ask for new authority. A new Communications Act is long overdue anyway. In the meantime, the FCC could convene the kind of multistakeholder process generally endorsed by the White House to produce a code enforceable by the Federal Trade Commission. A consensus is possible — just not inside the FCC, where the policy questions can’t be separated from the intractable legal questions.

Meanwhile, the FCC should focus on doing what Section 706 actually demands: clearing barriers to broadband deployment and competition. The 2010 National Broadband Plan laid out an ambitious pro-deployment agenda. It’s just too bad the FCC was so obsessed with net neutrality that it didn’t focus on the plan. Unleashing more investment and competition, not writing more regulation, is the best way to keep the Internet open, innovative and free.

[Cross-posted at TechFreedom.]

UPDATE: I’ve been reliably informed that Vint Cerf coined the term “permissionless innovation,” and, thus, that he did so with the sorts of private impediments discussed below in mind rather than government regulation. So consider the title of this post changed to “Permissionless innovation SHOULD not mean ‘no contracts required,'” and I’ll happily accept that my version is the “bastardized” version of the term. Which just means that the original conception was wrong and thank god for disruptive innovation in policy memes!

Can we dispense with the bastardization of the “permissionless innovation” concept (best developed by Adam Thierer) to mean “no contracts required”? I’ve been seeing this more and more, but it’s been around for a while. Some examples from among the innumerable ones out there:

Vint Cerf on net neutrality in 2009:

We believe that the vast numbers of innovative Internet applications over the last decade are a direct consequence of an open and freely accessible Internet. Many now-successful companies have deployed their services on the Internet without the need to negotiate special arrangements with Internet Service Providers, and it’s crucial that future innovators have the same opportunity. We are advocates for “permissionless innovation” that does not impede entrepreneurial enterprise.

Net neutrality is replete with this sort of idea — that any impediment to edge providers (not networks, of course) doing whatever they want to do at a zero price is a threat to innovation.

Chet Kanojia (Aereo CEO) following the Aereo decision:

It is troubling that the Court states in its decision that, ‘to the extent commercial actors or other interested entities may be concerned with the relationship between the development and use of such technologies and the Copyright Act, they are of course free to seek action from Congress.’ (Majority, page 17)That begs the question: Are we moving towards a permission-based system for technology innovation?

At least he puts it in the context of the Court’s suggestion that Congress pass a law, but what he really wants is to not have to ask “permission” of content providers to use their content.

Mike Masnick on copyright in 2010:

But, of course, the problem with all of this is that it goes back to creating permission culture, rather than a culture where people freely create. You won’t be able to use these popular or useful tools to build on the works of others — which, contrary to the claims of today’s copyright defenders, is a key component in almost all creativity you see out there — without first getting permission.

Fair use is, by definition, supposed to be “permissionless.” But the concept is hardly limited to fair use, is used to justify unlimited expansion of fair use, and is extended by advocates to nearly all of copyright (see, e.g., Mike Masnick again), which otherwise requires those pernicious licenses (i.e., permission) from others.

The point is, when we talk about permissionless innovation for Tesla, Uber, Airbnb, commercial drones, online data and the like, we’re talking (or should be) about ex ante government restrictions on these things — the “permission” at issue is permission from the government, it’s the “permission” required to get around regulatory roadblocks imposed via rent-seeking and baseless paternalism. As Gordon Crovitz writes, quoting Thierer:

“The central fault line in technology policy debates today can be thought of as ‘the permission question,'” Mr. Thierer writes. “Must the creators of new technologies seek the blessing of public officials before they develop and deploy their innovations?”

But it isn’t (or shouldn’t be) about private contracts.

Just about all human (commercial) activity requires interaction with others, and that means contracts and licenses. You don’t see anyone complaining about the “permission” required to rent space from a landlord. But that some form of “permission” may be required to use someone else’s creative works or other property (including broadband networks) is no different. And, in fact, it is these sorts of contracts (and, yes, the revenue that may come with them) that facilitates people engaging with other commercial actors to produce things of value in the first place. The same can’t be said of government permission.

Don’t get me wrong – there may be some net welfare-enhancing regulatory limits that might require forms of government permission. But the real concern is the pervasive abuse of these limits, imposed without anything approaching a rigorous welfare determination. There might even be instances where private permission, imposed, say, by a true monopolist, might be problematic.

But this idea that any contractual obligation amounts to a problematic impediment to innovation is absurd, and, in fact, precisely backward. Which is why net neutrality is so misguided. Instead of identifying actual, problematic impediments to innovation, it simply assumes that networks threaten edge innovation, without any corresponding benefit and with such certainty (although no actual evidence) that ex ante common carrier regulations are required.

“Permissionless innovation” is a great phrase and, well developed (as Adam Thierer has done), a useful concept. But its bastardization to justify interference with private contracts is unsupported and pernicious.

In our blog post this morning on ABC v. Aereo, we explain why, regardless of which test applies (the majority’s “looks-like-cable-TV” test or the dissent’s volitional conduct test), Aereo infringes on television program owners’ exclusive right under the Copyright Act to publicly perform their works. We also explain why the majority’s test is far less ambiguous than its critics assert, and why it does not endanger cloud computing services like so many contend.

Because that post was so long, and because the cloud computing issue is key to understanding the implications of this case, this post pulls out the cloud computing argument from that post and presents it separately.

In our April essay on these pages, we identified several reasons why the Court could and should rule against Aereo without exposing innovative cloud computing firms to copyright liability:

  1. Both fair use and the DMCA’s safe harbor likely protect cloud hosting services such as Dropbox so long as they respond to takedown notices and are not otherwise aware of the nature of the content uploaded by their users;
  2. Cloud computing services typically lack the volitional conduct necessary to be considered direct infringers; and
  3. If consumers acquire licensed content from cloud services such as Amazon or Google, and stream themselves that content from the cloud, the services’ privity with rights holders should render them safe from copyright infringement liability.

The Court explicitly endorsed our privity argument and implicitly acknowledged our point about DMCA and fair use. As the Court wrote:

[A]n entity that transmits a performance to individuals in their capacities as owners or possessors does not perform to ‘the public,’ whereas an entity like Aereo that transmits to large numbers of paying subscribers who lack any prior relationship to the works does so perform.

The majority’s “looks-like-cable-TV” test (the dissent’s name for it, not ours) actually offers a clearer basis for distinguishing cloud services than the dissent’s (and our earlier blog post’s) volitional conduct test.

Many commenters lament that the Court’s decision leaves cloud computing in peril, offering no real limiting principle (as, they claim, applying the volitional conduct test would have). Vox’s Timothy B. Lee, for example, opines that:

The problem is that the court never provides clear criteria for this “looks-like-cable-TV” rule…. The Supreme Court says its ruling shouldn’t dramatically change the legal status of other technologies…. But it’s going to take years of litigation — and millions of dollars in legal fees — to figure out exactly how the decision will affect cloud storage services.

But the Court did articulate several important limits, in fact. Most significantly, the opinion plainly excepts transmission of underlying works “own[ed] or possess[ed]” by subscribers from its definition of public performance. It also circumscribes what constitutes a public performance to transmissions from a person to large groups of people “outside of [her] family and [her] social circle,” and reinforces that fair use limitations continue to protect those who perform copyrighted works.

At the same time, the Court characterizes Aereo—and the aspect of the service that give rise to its liability—as “not simply an equipment provider…. Aereo sells a service that allows subscribers to watch television programs, many of which are copyrighted, almost as they are being broadcast.”

Crucially, Aereo makes available to each of its subscribers copyrighted content that he or she does not necessarily otherwise own or possess—even if the company also offers its viewers “enhancements” much like a modern cable system. As we noted in our previous post, this distinguishes Aereo from the cloud computing services to which it is compared:

Cloud computing providers, on the other hand, offer services that enable distinct functionality independent of the mere retransmission of copyrighted content.

Even if the Court’s holding were applied in contexts beyond traditional television programming, how many cloud services actually deliver content—rather than just enhancing it, as a DVR does—that its users do not otherwise own or possess? Vanishingly few, if any. Most obviously, talk of the risks Aereo poses to cloud storage and digital lockers—services that, by definition, apply only to content provided by the user and thus previously “owned or possessed” by the user—is simply misplaced.

Insofar as the transmission of third-party content is the defining characteristic of a “looks-like-cable-TV” system, the Court’s test actually offers a fairly clear delineation, and one that offers no risk to the vast majority of cloud services. This may remind many of Justice Potter Stewart’s infamous “I know it when I see it” test for adjudging obscenity, but it firmly removes a large swath of cloud computing services from the risk of direct copyright liability under Aereo.

And to the extent that some cloud services might seem to fail this test—YouTube, for example—those services (like YouTube and unlike Aereo) routinely obtain performance licenses for the content they provide. Although some of YouTube’s content may not be legally provided to the service, that doesn’t affect its direct copyright infringement liability. Instead, it merely affects the indirect liability YouTube faced before Aereo and continues to face after Aereo. And any such providers that do not currently obtain public performance licenses can and will simply do so with small textual amendments to their existing content licenses.

In other words, the Court’s ruling boils down to this: Either get a license to provide content not already owned by your subscribers, or provide only that content which your subscribers already own. The crux of the Aereo ruling is remarkably clear.

Meanwhile, the volitional conduct test, like most legal tests, doesn’t offer a bright line, despite some commenters’ assertions that it would have been a better grounds for deciding the case. While the volitional conduct test is an imprecise, sliding scale—regardless of the type of service or the underlying relationship between end-users and content providers—the Court’s Aereo test offers relatively clear rules, imposing direct liability only on services that transmit without a public performance license content that its users do not already own or possess.

For the many cloud services we know and love—and for the cloud computing startups yet to exist—the Court’s decision in Aereo should be little cause for concern. Legitimate hand-wringing over potential threats to the cloud will have to wait until another day.

Yesterday, the Supreme Court released its much-awaited decision in ABC v. Aereo. The Court reversed the Second Circuit, holding that Aereo directly infringed the copyrights of broadcast television program owners by publicly performing their works without permission. Justice Breyer, who wrote the opinion for the Court, was joined by five other Justices, including Chief Justice Roberts, Justice Kennedy, and the liberal-leaning bloc. Interestingly, Justice Scalia dissented on textualist grounds, joined by his conservative-leaning colleagues Justice Thomas and Justice Alito.

As this split illustrates, debates about intellectual property often don’t break down along partisan or ideological lines, and the division between the majority and the dissent in Aereo focused entirely on how to interpret the copyright statute, not on the underlying philosophical merits of property rights or policy judgments regarding the costs and benefits of stronger or weaker IP.

The majority, relying on both the legislative history and the text of the Copyright Act of 1976, emphasized that the Act sought to foreclose the workaround by cable companies of broadcasters’ copyrights that the Supreme Court had previously sanctioned in a duo of cases—and that Aereo’s conduct was functionally almost identical to the unauthorized retransmissions by cable companies prior to the 1976 Act.

Justice Scalia dissented on two grounds: first, that the majority based its reading of the statute on legislative history, a practice he opposes as a means of divining a statute’s meaning; and second, that the majority relied on a vague and inapt comparison between Aereo’s allegedly infringing conduct and cable companies’ pre-1976 retransmissions of broadcast network programming.

We argue here, building on our amicus brief and our previous blog post on Aereo, that, regardless of which test applies, Aereo infringes on television program owners’ exclusive right under the Copyright Act to publicly perform their works. Moreover, we argue that the Court’s test in Aereo is far less ambiguous than its critics assert, and that it does not endanger cloud computing services like so many contend.

The Court Adopts (Some of) Our Arguments

In our brief, we reviewed two key Supreme Court rulings that influenced how Congress rewrote the Copyright Act in 1976. As we explained:

In the 1960s, two owners of programming aired over broadcast television separately brought copyright infringement suits against cable companies that—like Aereo—retransmitted television broadcasts of the plaintiffs’ works without compensating the owners. Fortnightly Corp. v. United Artists Television, Inc., 392 U.S. 390 (1968); Teleprompter Corp. v. CBS, Inc., 415 U.S. 394 (1974). In both cases, this Court found for the defendants, holding that a cable company’s retransmission of a television broadcast signal did not constitute a “performance” of that program under the Copyright Act in force at the time. Dissatisfied with these rulings, Congress effectively abrogated Fortnightly and Teleprompter in the Copyright Act of 1976, defining a transmission of a performance as a performance itself. 17 U.S.C. § 101. Although Congress’s immediate reason for making this change was to bar cable companies from retransmitting broadcast television programs without compensating their owners, the law was written so as to be as future-proof as possible.

We argued that for the Court to find that the Copyright Act does not reach Aereo’s conduct would run contrary to the law’s text and purpose, for Aereo designed its system to evade copyright in much the same way as cable companies operated prior to 1976. The Court agreed with this analogy, holding that:

By means of its technology (antennas, transcoders, and servers), Aereo’s system receives programs that have been released to the public and carries them by private channels to additional viewers. It carries whatever programs it receives, and it offers all the programming of each over-the-air station it carries [alterations, citations, and quotation marks omitted].

Furthermore, in our April essay on these pages, we identified several reasons why the Court could and should rule against Aereo without exposing innovative cloud computing firms to copyright liability:

  1. Both fair use and the DMCA’s safe harbor likely protect cloud hosting services such as Dropbox so long as they respond to takedown notices and are not otherwise aware of the nature of the content uploaded by their users;
  2. Cloud computing services typically lack the volitional conduct necessary to be considered direct infringers; and
  3. If consumers acquire licensed content from cloud services such as Amazon or Google, and stream themselves that content from the cloud, the services’ privity with rights holders should render them safe from copyright infringement liability.

The Court explicitly endorsed our privity argument and implicitly acknowledged our point about DMCA and fair use. As the Court wrote:

[A]n entity that transmits a performance to individuals in their capacities as owners or possessors does not perform to ‘the public,’ whereas an entity like Aereo that transmits to large numbers of paying subscribers who lack any prior relationship to the works does so perform.

What about Dropbox and similar services? The Court took pains to note that its opinion does not consider “whether the public performance right is infringed when the user of a service pays primarily for something other than the transmission of copyrighted works, such as the remote storage of content.” The Court also cited the Digital Millenium Copyright Act of 1998, observing that “to the extent commercial actors or other interested entities may be concerned with the relationship between the development and use of such technologies and the Copyright Act, they are of course free to seek action from Congress.”

Below, we first discuss Justice Scalia’s dissent, and explain why Aereo’s volitional conduct with respect to copyrighted works sufficed to render the company directly liable for infringement, even under Scalia’s standard. We next discuss the implications for cloud computing, and explain why the Court’s test may in fact be clearer than the volitional conduct test, actually offering more legal protection for cloud computing than the dissent’s standard would.

Aereo Is Liable for Copyright Infringement Under the Volitional Conduct Test

Scalia, ever the critic of judges relying on legislative history and exercising too much discretion over substantive law, rejected what he called the majority’s “looks-like-cable-TV” standard. Instead, he argued that the Court should adopt the volitional conduct test used by various federal appellate courts, writing that “[a] defendant may be held directly liable only if it has engaged in volitional conduct that violates the Act.”

Scalia then asserted that Aereo is more like a copy shop than a video-on-demand service, because Aereo allows its customers to choose which programs they view and when to activate the copying function. Therefore, Scalia argued, Aereo “plays no role in selecting the content, [and] cannot be held directly liable when a customer makes an infringing copy.” Distinguishing Aereo’s conduct from that of Netflix, Scalia noted that the latter company’s “selection and arrangement [of content] constitutes a volitional act directed to specific copyrighted works and thus serves as a basis for direct liability” (or would so serve if Netflix lacked the requisite licenses).

Yet even if Justice Scalia is right that the volitional conduct test would be easier for courts to apply in future cases than the majority’s “looks-like-cable-TV” test—and, as we discuss below, we believe this widely-held view is incorrect—it does not follow that the dissent properly applied the volitional conduct test to Aereo.

First, Aereo does in fact “curate” the content it offers, in several respects. In its attempt to drive a Mack truck through the 2nd Circuit’s holding in Cartoon Network that a cable company doesn’t publicly perform works by offering its users remote DVR service, Aereo built a business model around over-the-air television content—which represents only a small fraction of the content Aereo could have obtained from free, publicly accessible sources (e.g, the Internet). Aereo also selected the cities in which it installed the dime-sized antennas that pick up over-the-air programming.

Perhaps most importantly, as far as we can tell, Aereo does not offer all the ATSC broadcasts transmitted over-the-air in the cities where the service is available. In New York, for example, Aereo claims to offer 16 channels (and several virtual sub-channels), but it doesn’t claim to offer such channels as WMBQ-CD, WDVB-CD, WNYZ-LP, or WASA-LD—all of which are broadcast over-the-air throughout central New York, according to AntennaWeb. Meanwhile, Aereo does offer Bloomberg TV—a non-broadcast channel for which Aereo voluntarily sought and acquired licenses to retransmit.

Second, evaluating whether Aereo’s actions to make available over-the-air programming embody sufficient volition to render the company itself—as opposed to its users—directly responsible for performing broadcast television turns on more than the extent to which Aereo curated its offerings. As the Court explained, Aereo built a complex system of “antennas, transcoders, and servers” for the sole purpose of monetizing broadcast television shows. In “providing this service,” the Court noted, “Aereo uses its own equipment, housed in a centralized warehouse, outside of its users’ homes.” If Aereo merely bought some office space near the top of a New York skyscraper, along with some general-purpose servers connected to the Internet via fiber-optic broadband, the company could certainly rent out these assets to the general public without facing any liability for directly publicly performing copyrighted broadcast programs. Even if some of Aereo’s subscribers placed tiny antennas in their allocated spaces and configured their server instances to stream broadcast television to themselves, Aereo would—at the very worst—face liability for vicarious copyright infringement. But this is not how Aereo operated.

Aereo has, in other words, actually taken numerous “volitional” steps to make available copyrighted content to its subscribers. And while it also offers some services ancillary to the transmission of content (most notably remote-DVR functionality), it offers those as adjuncts to its core function of transmission, not as standalone services.

Had Aereo prevailed, the company and its competitors would likely have pursued other technical workarounds to monetize other types of copyrighted works without their owners’ permission. Although Aereo chose to start with over-the-air broadcast programming—presumably because it could plausibly argue that its subscribers already had an implied right to view over-the-air broadcasts—broadcast television is hardly the only form of valuable content that the public can lawfully access free of charge in one way or another. What about cable television networks that stream some of their shows online for free? Or news websites that allow unauthenticated users to access a limited number of stories free of charge each month? If Aereo had convinced the Court to bless its business model, it would have sent copyright owners a very clear message: don’t publicly distribute your works in any format, or else.

The Court’s Holding Doesn’t Imperil Cloud Services

Many commenters lament that the Court’s decision leaves cloud computing in peril, offering no real limiting principle (as, they claim, applying the volitional conduct test would have). Vox’s Timothy B. Lee, for example, opines that:

The problem is that the court never provides clear criteria for this “looks-like-cable-TV” rule…. The Supreme Court says its ruling shouldn’t dramatically change the legal status of other technologies…. But it’s going to take years of litigation — and millions of dollars in legal fees — to figure out exactly how the decision will affect cloud storage services.

But the Court did articulate several important limits, as we note above. Most significantly, the opinion plainly excepts transmission of underlying works “own[ed] or possess[ed]” by subscribers from its definition of public performance. It also circumscribes what constitutes a public performance to transmissions from a person to large groups of people “outside of [her] family and [her] social circle,” and reinforces that fair use limitations continue to protect those who perform copyrighted works.

At the same time, the Court characterizes Aereo—and the aspect of the service that give rise to its liability—as “not simply an equipment provider…. Aereo sells a service that allows subscribers to watch television programs, many of which are copyrighted, almost as they are being broadcast.”

Crucially, Aereo makes available to each of its subscribers copyrighted content that he or she does not necessarily otherwise own or possess—even if the company also offers its viewers “enhancements” much like a modern cable system. As we noted in our previous post, this distinguishes Aereo from the cloud computing services to which it is compared:

Cloud computing providers, on the other hand, offer services that enable distinct functionality independent of the mere retransmission of copyrighted content.

Even if the Court’s holding were applied in contexts beyond traditional television programming, how many cloud services actually deliver content—rather than just enhancing it, as a DVR does—that its user do not otherwise own or possess? Vanishingly few, if any. Most obviously, talk of the risks Aereo poses to cloud storage and digital lockers—services that, by definition, apply only to content provided by the user and thus previously “owned or possessed” by the user—is simply misplaced.

Insofar as the transmission of third-party content is the defining characteristic of a “looks-like-cable-TV” system, the Court’s test actually offers a fairly clear delineation, and one that offers no risk to the vast majority of cloud services. This may remind many of Justice Potter Stewart’s infamous “I know it when I see it” test for adjudging obscenity, but it firmly removes a large swath of cloud computing services from the risk of direct copyright liability under Aereo.

And to the extent that some cloud services might seem to fail this test—YouTube, for example—those services (like YouTube and unlike Aereo) routinely obtain performance licenses for the content they provide. Although some of YouTube’s content may not be legally provided to the service, that doesn’t affect its direct copyright infringement liability. Instead, it merely affects the indirect liability YouTube faced before Aereo and continues to face after Aereo. And any such providers that do not currently obtain public performance licenses can and will simply do so with small textual amendments to their existing content licenses.

In other words, the Court’s ruling boils down to this: Either get a license to provide content not already owned by your subscribers, or provide only that content which your subscribers already own. The crux of the Aereo ruling is remarkably clear.

Meanwhile, the volitional conduct test, like most legal tests, doesn’t offer a bright line, despite some commenters’ assertions that it would have been a better grounds for deciding the case. While the volitional conduct test is an imprecise, sliding scale—regardless of the type of service or the underlying relationship between end-users and content providers—the Court’s Aereo test offers relatively clear rules, imposing direct liability only on services that transmit without a public performance license content that its users do not already own or possess.

For the many cloud services we know and love—and for the cloud computing startups yet to exist—the Court’s decision in Aereo should be little cause for concern. Legitimate hand-wringing over potential threats to the cloud will have to wait until another day.

Conclusion

Strange bedfellows aside, the Supreme Court reversed the Second Circuit and adopted a rationale similar to the one we articulated in our amicus brief. Even under the volitional conduct test advocated by Scalia in his dissenting opinion, Aereo should lose, just as we argued in our previous post on the issue. This will not be the last time the Court wrestles with applying the nearly 40 year-old Copyright Act to novel technology, but Aereo stands little chance of undermining the cloud computing sector. Although the great IP debate will surely continue, this much is settled law: You cannot build a business model around the idea of rebroadcasting copyrighted network content without paying for it.

Interested observers on all sides of the contentious debate over Aereo have focused a great deal on the implications for cloud computing if the Supreme Court rules against Aereo. The Court hears oral argument next week, and the cloud computing issue is sure to make an appearance.

Several parties that filed amicus briefs in the case weighed in on the issue. The Center for Democracy & Technology, for example, filed abrief arguing that a ruling against Aereo would hinder the development of cloud computing. Thirty-six Intellectual Property and Copyright Law Professors also filed a brief arguing this point. On the other hand, the United States—represented by the Solicitor General—devoted a section of its amicus brief in support of copyright owners’ argument that the Court could rule against Aereo without undermining cloud computing.

Our organizations, the International Center for Law and Economics and the Competitive Enterprise Institute, filed an amicus brief in the case in support of the Petitioners (as did many other policy groups, academics, and trade associations). In our brief we applied the consumer welfare framework to the question whether allowing Aereo’s business practice would increase the societal benefits that copyright law seeks to advance. We argued that holding Aereo liable for copyright infringement was well within the letter and spirit of the Copyright Act of 1976. In particular, we argued that Aereo’s model is less a disruptive innovation than a technical work-around taking advantage of the Second Circuit’s overbroad reading of the law in the Cablevision case.

Although our brief didn’t directly address cloud computing writ large, we did articulate a crucial distinction between Aereo and other cloud computing providers. Under our reasoning, the Court could rule against Aereo—as it should—without destroying cloud computing—as it should not.

Background

By way of background, at the center of the legal debate is what it means to “perform [a] copyrighted work publicly.” Aereo argues that because only one individual subscriber is “capable of receiving” each transmission its service delivers, its performances are private, not public. The Copyright Act gives copyright owners the exclusive right to publicly perform their works, but not the right to perform them privately. Therefore, Aereo contends, its service doesn’t infringe upon copyright owners’ exclusive rights.

We disagree. As our brief explains, Aereo’s argument ignores Congress’ decision in the Copyright Act of 1976 to expressly define the transmission of a television broadcast “by means of any device or process” to the public as a public performance, “whether the members of the public capable of receiving the performance … receive it in the same place or in separate places and at the same time or at different times.” Aereo has built an elaborate system for distributing live high-def broadcast television content to subscribers for a monthly fee—without obtaining permission from, or paying royalties to, the copyright owners in the audiovisual works aired by broadcasters.

Although the Copyright Act’s text is less than artful, Congress plainly wrote it so as to encompass businesses that sell consumers access to live television broadcasts, whether using traditional means—such as coaxial cable lines—or some high-tech system that lawmakers couldn’t foresee in 1976.

What does this case mean for cloud computing? To answer this question, it’s worth dividing the discussion into two parts: one addressing cloud providers that don’t sell their users licenses to copyrighted works, and the other addressing cloud providers that do. Dropbox and Mozy fit in the first category; Amazon and iTunes fit in the second.

A Ruling Against Aereo Won’t Destroy Cloud Computing Services like Dropbox

According to the 36 Intellectual Property and Copyright Law Professors, a loss for Aereo would be bad news for cloud storage providers such as Dropbox:

If any service making multiple transmissions of the same underlying copyrighted audiovisual work is publicly performing that work, then the distinction between video-on-demand services and online storage services would vanish, and all such services would henceforth face infringement liability. Thus, if two Dropbox users independently streamed “We, the Juries,” then under Petitioners’ theory, those two transmissions would be aggregated together, making them collectively “to the public.” Under Petitioners’ theory of this case—direct infringement by public performance—that would be game, set, and match against Dropbox.

This sounds like bad news for the cloud. Fortunately, however, Dropbox has little to fear from an Aereo defeat, even if the professors are right to worry about an overbroad public performance right (more on this below). The Digital Millenium Copyright Act (DMCA) grants online service providers—including cloud hosting services such as Dropbox—a safe harbor from copyright infringement liability for unwittingly storing infringing files uploaded by their users. In exchange for this immunity, service providers must comply with the DMCA’snotice and takedown system and adopt a policy to terminate repeat-infringing users, among other duties.

Although 17 U.S.C. § 512(c) refers only to infringement “by reason of … storage” directed by a user, courts have consistently interpreted this language to “encompass[] the access-facilitating processes that automatically occur when a user uploads” a file to a cloud hosting service. Whether YouTube streams an infringing video once or 1,000,000 times, therefore, it retains its DMCA immunity so long as it complies with the safe harbor’s requirements. So even if Aereo loses, and every DropBox user who streams “We, the Juries” is receiving a public performance, DropBox will still be safe from copyright infringement liability in the same way as YouTube, Vimeo, DailyMotion, and countless other services are safe today.

An Aereo Defeat Won’t Kill Cloud Computing Services like Amazon and Google

As for cloud computing providers that provide copyrighted content, the legal analysis is admittedly trickier. These providers, such as Google and Amazon, contract with copyright holders to sell their users licenses to copyrighted works. Some providers offer a subscription to streaming content, for which the provider has typically secured public performance licenses from the copyright owners. Cloud providers also sell digital copies of copyrighted works—that is, non-transferable lifetime licenses—for which the provider has generally obtained reproduction and distribution licenses, but not public performance rights.

But, as copyright law guru Devlin Hartline argues, determining if a performance is public or private turns on whether the cloud provider’s “volitional conduct [is] sufficient such that it directly causes the transmission.” When a user streams her own licensed content from a cloud service, it remains a private performance because the cloud service took no willful steps to facilitate the playback of copyrighted material. (The same is true for Dropbox-like services, as well.) Aereo, conversely, “crosse[s] the line from being a passive conduit to being an active participant because it supplies the very content that is available using its service.”

Neither Google’s nor Amazon’s business models much resemble Aereo’s, which entails transmitting content for which the company has secured no copyright licenses—either for itself or for its users. And to the extent that these services do supply the content being transmitted (as Spotify or Google Play All Access do, for example), they secure the appropriate public performance right to do so. Indeed, critics who have focused on cloud computing fail to appreciate how the Copyright Act distinguishes between infringing technologies such as Aereo and lawful uses of the cloud to store, share, and transmit copyrighted works.

For instance, as CDT notes:

[S]everal companies (including Google and Amazon) have launched personal music locker services, allowing individuals to upload their personal music collections “to the cloud” and enabling them to transmit that music back to their own computers, phones, and tablets when, where, and how they find most convenient.

And other critics of broadcasters’ legal position have made similar arguments, claiming that the Court cannot reach a holding that simultaneously bars Aereo while allowing cloud storage:

[I]f Aereo is publicly performing when you store a unique copy of the nightly news online and watch it later, then why aren’t cloud services publicly performing if they host your (lawful) unique mp3 of the latest hit single and stream it to you later?… The problem with this rationale is that it applies with equal force to cloud storage like Dropbox, SkyDrive, iCloud, and Google Drive. If multiple people store their own, unique, lawfully acquired copy of the latest hit single in the cloud, and then play it to themselves over the Internet, that too sounds like the broadcasters’ version of a public performance. The anti-Aereo rationale doesn’t distinguish between Aereo and the cloud.

The Ability to Contract is Key

These arguments miss the important concept of privity. A copyright holder who does not wish to license the exclusive rights in her content cannot be forced to do so (unless the content is subject to a compulsory license). If a copyright holder prefers its users not upload their licensed videos to the cloud and later stream them for personal use, the owner can include such a prohibition in its licenses. This may affect users’ willingness to pay for such encumbered content—but this is private ordering in action, with copyright holders and licensees bargaining over control over copyrighted works, a core purpose of the Copyright Act.

When a copyright holder wishes to license content to a cloud provider or user, the parties can bargain over whether users may stream their content from the cloud. These deals can evolve over time in response to new technology and changing consumer demand. This happens all the time—as in therecent deal between Dish and Disney over the Hopper DVR, wherein Dish agreed that Hopper would automatically excise the commercials accompanying ABC content only after three days elapse after each show airs.

But Aereo forecloses the possibility of such negotiation, making all over-the-air content available online to subscribers absent any agreement with the underlying copyright owners of such programs. Aereo is thus distinct from other cloud services that supply content to their users, as the latter have permission to license their content.

Of course, broadcasters make their programming freely available over the airwaves, without any express agreement with viewers. But this doesn’t mean broadcasters lose their legal right to restrict how third parties distribute and monetize their content. While consumers can record and watch such broadcasts at their leisure, they can’t record programs and then sell the rights to the content, for example, simply replicating the broadcast. The fact that copyright holders have entered into licenses to “cloud-ify” content with dedicated over-the-top apps and Hulu clearly suggests that the over-the-air “license” is limited. And because Aereo refuses to deal with the broadcasters, there’s no possibility of a negotiated agreement between Aereo and the content owners, either. The unique combination of broadcast content and an unlicensed distributor differentiates the situation in Aereo from typical cloud computing.

If broadcasters can’t rely on copyright law to protect them from companies like Aereo that simply repackage over-the-air content, they may well shift all of their content to cable subscriptions instead of giving a free option to consumers. That’s bad news for folks who access free television—regardless of the efficiency of traditional broadcasting, or lack thereof.

The Cablevision Decision Doesn’t Require a Holding for Aereo

Commentators argue that overruling the Second Circuit in Aereo necessarily entails overruling the Second Circuit’s Cablevision holding—and with it that ruling’s fair use protections for DVRs and other cloud computing functionality. We disagree, however. Rather, regardless of whether Cablevision was correctly decided, its application to Aereo is improper.

In Cablevision, the individual cable subscribers to whom Cablevision transmitted copies of plaintiff Cartoon Network’s television programming were already paying for lawful access to it. Cartoon Network voluntarily agreed to license its copyrighted works to Cablevision and, in turn, to each Cablevision subscriber whose cable package included the Cartoon Network channel.

The dispute in Cablevision thus involved a copyright holder and a licensee with a preexisting contractual relationship; the parties simply disagreed on the terms by which Cablevision was permitted to transmit Cartoon Network’s content. But even after the decision, Cartoon Network remained (and remains) free to terminate or renegotiate its licensing agreement with Cablevision.

Again, this dynamic of voluntary exchange mitigates Cablevision’s impact on the market for television programming, as copyright holders and cable companies settle on a new equilibrium. But unlike the cable company in Cablevision, Aereo has neither sought nor received permission from any holders of copyrights in broadcast television programming before retransmitting their works to paying subscribers.

Even if it is correct that Aereo itself isn’t engaging in public performance of copyrighted work, it remains the case that its subscribers haven’t obtained the right to use Aereo’s services, either. But one party or the other must obtain this right or else establish that it’s a fair use.

Fair Use Won’t Save Aereo

The only way legitimately to rule in Aereo’s favor would be to decide that Aereo’s retransmission of broadcast content is a fair use. But as Cablevision’s own amicus brief in Aereo (supporting Aereo) argues, fair use rights don’t cover Aereo’s non-transformative retransmission of broadcast content. Cloud computing providers, on the other hand, offer services that enable distinct functionality independent of the mere retransmission of copyrighted content:

Aereo is functionally identical to a cable system. It captures over-the-air broadcast signals and retransmits them for subscribers to watch. Aereo thus is not meaningfully different from services that have long been required to pay royalties. That fact sharply distinguishes Aereo from cloud technologies like remote-storage services and remote DVRs.

* * *

Aereo is not in the business of transmitting recorded content from individual hard-drive copies to subscribers. Rather, it is in the business of retransmitting broadcast television to subscribers.

* * *

Aereo…is not relying on its separate hard-drive copies merely to justify the lawfulness of its pause, rewind, and record functions. It is relying on those copies to justify the entire television retransmission service. It is doing so even in the many cases where subscribers are not even using the pause, rewind, or record functions but are merely watching television live.

It may be that the DVR-like functions that Aereo provides are protected, but that doesn’t mean that it can retransmit copyrighted content without a license. If, like cable companies, it obtained such a license, it might be able to justify its other functionality (and negotiate license terms with broadcasters to reflect the value to each of such functionality). But that is a fundamentally different case. Similarly, if users were able to purchase licenses to broadcast content, Aereo’s additional functionality might also be protected (with the license terms between users and broadcasters reflecting the value to each). But, again, that is a fundamentally different case. Cloud computing services don’t create these problems, and thus need not be implicated by a proper reading of the Copyright Act and a ruling against Aereo.

Conclusion

One of the main purposes of copyright law is to secure for content creators the right to market their work. To allow services like Aereo undermines that ability and the incentives to create content in the first place. But, as we have shown, there is no reason to think a ruling against Aereo will destroy cloud computing.

I have a new article on the Comcast/Time Warner Cable merger in the latest edition of the CPI Antitrust Chronicle, which includes several other articles on the merger, as well.

In a recent essay, Allen Grunes & Maurice Stucke (who also have an essay in the CPI issue) pose a thought experiment: If Comcast can acquire TWC, what’s to stop it acquiring all cable companies? The authors’ assertion is that the arguments being put forward to support the merger contain no “limiting principle,” and that the same arguments, if accepted here, would unjustifiably permit further consolidation. But there is a limiting principle: competitive harm. Size doesn’t matter, as courts and economists have repeatedly pointed out.

The article explains why the merger doesn’t give rise to any plausible theory of anticompetitive harm under modern antitrust analysis. Instead, arguments against the merger amount to little more than the usual “big-is-bad” naysaying.

In summary, I make the following points:

Horizontal Concerns

The absence of any reduction in competition should end the inquiry into any potentially anticompetitive effects in consumer markets resulting from the horizontal aspects of the transaction.

  • It’s well understood at this point that Comcast and TWC don’t compete directly for subscribers in any relevant market; in terms of concentration and horizontal effects, the transaction will neither reduce competition nor restrict consumer choice.
  • Even if Comcast were a true monopolist provider of broadband service in certain geographic markets, the DOJ would have to show that the merger would be substantially likely to lessen competition—a difficult showing to make where Comcast and TWC are neither actual nor potential competitors in any of these markets.
  • Whatever market power Comcast may currently possess, the proposed merger simply does nothing to increase it, nor to facilitate its exercise.

Comcast doesn’t currently have substantial bargaining power in its dealings with content providers, and the merger won’t change that. The claim that the combined entity will gain bargaining leverage against content providers from the merger, resulting in lower content prices to programmers, fails for similar reasons.

  • After the transaction, Comcast will serve fewer than 30 percent of total MVPD subscribers in the United States. This share is insufficient to give Comcast market power over sellers of video programming.
  • The FCC has tried to impose a 30 percent cable ownership cap, and twice it has been rejected by the courts. The D.C. Circuit concluded more than a decade ago—in far less competitive conditions than exist today—that the evidence didn’t justify a horizontal ownership limit lower than 60% on the basis of buyer power.
  • The recent exponential growth in OVDs like Google, Netflix, Amazon and Apple gives content providers even more ways to distribute their programming.
  • In fact, greater concentration among cable operators has coincided with an enormous increase in output and quality of video programming
  • Moreover, because the merger doesn’t alter the competitive make-up of any relevant consumer market, Comcast will have no greater ability to threaten to withhold carriage of content in order to extract better terms.
  • Finally, programmers with valuable content have significant bargaining power and have been able to extract the prices to prove it. None of that will change post-merger.

Vertical Concerns

The merger won’t give Comcast the ability (or the incentive) to foreclose competition from other content providers for its NBCUniversal content.

  • Because the merger would represent only 30 percent of the national market (for MVPD services), 70 percent of the market is still available for content distribution.
  • But even this significantly overstates the extent of possible foreclosure. OVD providers increasingly vie for the same content as cable (and satellite).
  • In the past when regulators have considered foreclosure effects for localized content (regional sports networks, primarily)—for example, in the 2005 Adelphia/Comcast/TWC deal, under far less competitive conditions—the FTC found no substantial threat of anticompetitive harm. And while the FCC did identify a potential risk of harm in its review of the Adelphia deal, its solution was to impose arbitration requirements for access to this programming—which are already part of the NBCUniversal deal conditions and which will be extended to the new territory and new programming from TWC.

The argument that the merger will increase Comcast’s incentive and ability to impair access to its users by online video competitors or other edge providers is similarly without merit.

  • Fundamentally, Comcast benefits from providing its users access to edge providers, and it would harm itself if it were to constrain access to these providers.
  • Foreclosure effects would be limited, even if they did arise. On a national level, the combined firm would have only about 40 percent of broadband customers, at most (and considerably less if wireless broadband is included in the market).
  • This leaves at least 60 percent—and quite possibly far more—of customers available to purchase content and support edge providers reaching minimum viable scale, even if Comcast were to attempt to foreclose access.

Some have also argued that because Comcast has a monopoly on access to its customers, transit providers are beholden to it, giving it the ability to degrade or simply block content from companies like Netflix. But these arguments misunderstand the market.

  • The transit market through which edge providers bring their content into the Comcast network is highly competitive. Edge providers can access Comcast’s network through multiple channels, undermining Comcast’s ability to deny access or degrade service to such providers.
  • The transit market is also almost entirely populated by big players engaged in repeat interactions and, despite a large number of transactions over the years, marked by a trivial number of disputes.
  • The recent Comcast/Netflix agreement demonstrates that the sophisticated commercial entities in this market are capable of resolving conflicts—conflicts that appear to affect only the distribution of profits among contracting parties but not raise anticompetitive concerns.
  • If Netflix does end up paying more to access Comcast’s network over time, it won’t be because of market power or this merger. Rather, it’s an indication of the evolving market and the increasing popularity of OTT providers.
  • The Comcast/Netflix deal has procompetitive justifications, as well. Charging Netflix allows Comcast to better distinguish between the high-usage Netflix customers (two percent of Netflix users account for 20 percent of all broadband traffic) and everyone else. This should lower cable bills on average, improve incentives for users, and lead to more efficient infrastructure investments by both Comcast and Netflix.

Critics have also alleged that the vertically integrated Comcast may withhold its own content from competing MVPDs or OVDs, or deny carriage to unaffiliated programming. In theory, by denying competitors or potential competitors access to popular programming, a vertically integrated MVPD might gain a competitive advantage over its rivals. Similarly, an MVPD that owns cable channels may refuse to carry at least some unaffiliated content to benefit its own channels. But these claims also fall flat.

  • Once again, these issue are not transaction specific.
  • But, regardless, Comcast will not be able to engage in successful foreclosure strategies following the transaction.
  • The merger has no effect on Comcast’s share of national programming. And while it will have a larger share of national distribution post-merger, a 30 percent market share is nonetheless insufficient to confer buyer power in today’s highly competitive MVPD market.
  • Moreover, the programming market is highly dynamic and competitive, and Comcast’s affiliated programming networks face significant competition.
  • Comcast already has no ownership interest in the overwhelming majority of content it distributes. This won’t measurably change post-transaction.

Procompetitive Justifications

While the proposed transaction doesn’t give rise to plausible anticompetitive harms, it should bring well-understood pro-competitive benefits. Most notably:

  • The deal will bring significant scale efficiencies in a marketplace that requires large, fixed-cost investments in network infrastructure and technology.
  • And bringing a more vertical structure to TWC will likely be beneficial, as well. Vertical integration can increase efficiency, and the elimination of double marginalization often leads to lower prices for consumers.

Let’s be clear about the baseline here. Remember all those years ago when Netflix was a mail-order DVD company? Before either Netflix or Comcast even considered using the internet to distribute Netflix’s video content, Comcast invested in the technology and infrastructure that ultimately enabled the Netflix of today. It did so at enormous cost (tens of billions of dollars over the last 20 years) and risk. Absent broadband we’d still be waiting for our Netflix DVDs to be delivered by snail mail, and Netflix would still be spending three-quarters of a billion dollars a year on shipping.

The ability to realize returns—including returns from scale—is essential to incentivizing continued network and other quality investments. The cable industry today operates with a small positive annual return on invested capital (“ROIC”) but it has had cumulative negative ROIC over the entirety of the last decade. In fact, on invested capital of $127 billion between 2000 and 2009, cable has seen economic profits of negative $62 billion and a weighted average ROIC of negative 5 percent. Meanwhile Comcast’s stock has significantly underperformed the S&P 500 over the same period and only outperformed the S&P over the last two years.

Comcast is far from being a rapacious and endlessly profitable monopolist. This merger should help it (and TWC) improve its cable and broadband services, not harm consumers.

No matter how many times Al Franken and Susan Crawford say it, neither the broadband market nor the MVPD market is imperiled by vertical or horizontal integration. The proposed merger won’t create cognizable antitrust harms. Comcast may get bigger, but that simply isn’t enough to thwart the merger.

By Geoffrey Manne & Berin Szoka

As Democrats insist that income taxes on the 1% must go up in the name of fairness, one Democratic Senator wants to make sure that the 1% of heaviest Internet users pay the same price as the rest of us. It’s ironic how confused social justice gets when the Internet’s involved.

Senator Ron Wyden is beloved by defenders of Internet freedom, most notably for blocking the Protect IP bill—sister to the more infamous SOPA—in the Senate. He’s widely celebrated as one of the most tech-savvy members of Congress. But his latest bill, the “Data Cap Integrity Act,” is a bizarre, reverse-Robin Hood form of price control for broadband. It should offend those who defend Internet freedom just as much as SOPA did.

Wyden worries that “data caps” will discourage Internet use and allow “Internet providers to extract monopoly rents,” quoting a New York Times editorial from July that stirred up a tempest in a teapot. But his fears are straw men, based on four false premises.

First, US ISPs aren’t “capping” anyone’s broadband; they’re experimenting with usage-based pricing—service tiers. If you want more than the basic tier, your usage isn’t capped: you can always pay more for more bandwidth. But few users will actually exceed that basic tier. For example, Comcast’s basic tier, 300 GB/month, is so generous that 98.5% of users will not exceed it. That’s enough for 130 hours of HD video each month (two full-length movies a day) or between 300 and 1000 hours of standard (compressed) video streaming. Continue Reading…

Thomas Hazlett and I have posted The Law and Economics of Network Neutrality:

The Federal Communications Commission’s Network Neutrality Order regulates how broadband networks explain their services to customers, mandates that subscribers be permitted to deploy whatever computers, mobile devices, or applications they like for use with the network access service they purchase, imposes a prohibition upon unreasonable discrimination in network management such that Internet Service Provider efforts to maintain service quality (e.g. mitigation congestion) or to price and package their services do not burden rival applications.

This paper offers legal and economic critique of the new Network Neutrality policy and particularly the no blocking and no discrimination rules. While we argue the FCC‘s rules are likely to be declared beyond the scope of the agency‘s charter, we focus upon the economic impact of net neutrality regulations. It is beyond paradoxical that the FCC argues that it is imposing new regulations so as to preserve the Internet‘s current economic structure; that structure has developed in an unregulated environment where firms are free to experiment with business models – and vertical integration – at will. We demonstrate that Network Neutrality goes far further than existing law, categorically prohibiting various forms of economic integration in a manner equivalent to antitrust’s per se rule, properly reserved for conduct that is so likely to cause competitive harm that the marginal benefit of a fact-intensive analysis cannot be justified. Economic analysis demonstrates that Network Neutrality cannot be justified upon consumer welfare grounds. Further, the Commission‘s attempt to justify its new policy simply ignores compelling evidence that “open access” regulations have distorted broadband build-out in the United States, visibly reducing subscriber growth when imposed and visibly increasing subscriber growth when repealed. On the other, the FCC manages to cite just one study – not of the broadband market – to support its claims of widespread foreclosure threats. This empirical study, upon closer scrutiny than the Commission appears to have given it, actually shows no evidence of anti-competitive foreclosure. This fatal analytical flaw constitutes a smoking gun in the FCC‘s economic analysis of net neutrality.

Read the whole thing.  Under review at a law review near you …

Larry Downes (who, like me, is a senior fellow at TechFreedom and a contributor to the excellent book, The Next Digital Decade: Essays on the Future of the Internet) and I taped an episode of Jim Glassman’s talking head show, Ideas in Action, a couple months ago, and it is airing this week on PBS stations around the country.  Except in Portland, where I live.  But have no fear–because the Internet remains sufficiently unregulated, you can get it right here.  The topic is “The Next Digital Decade: How Will the Internet Change by 2020?”  It’s a narrow topic.  In the 27 minutes allotted, we manage to cover telecom regulation, antitrust, net neutrality, privacy, IP, standards, public choice theory, culture, political repression, technological innovation and a few more topics for good measure.  Not to spoil the ending, but asked at the end what we thought the biggest danger to the Internet is in the coming decade, I answered errant antitrust enforcement (when the only tool you have is a hammer . . .); Larry answered privacy.  Enjoy.