OTT Upstarts Expand Ways to Gain Content

Scott Weaver, CEO, ivi

Scott Weaver, CEO, ivi

What exactly is a cable system? That’s one of the main questions raised by the debut of ivi TV, a Seattle-based start-up whose broadband video service has sparked a legal and regulatory battle that could eventually redefine copyright and telecom laws.

Along with fellow headline-grabber FilmOn, ivi is among the more recent, higher profile companies offering over-the-top (OTT) video services for free or a fee without permission from the broadcast and cable networks whose content they provide. But in at least two respects, these upstarts are similar to larger OTT players such as Google in that they all face an uphill battle obtaining content, and they’re all forcing changes in how video is distributed and monetized.

“There’s a great deal of suspicion and fear from Hollywood and the broadcasters about the fact that technologically there are so many new ways to distribute their content, but where’s the revenue going to come from?” says Mike Paxton, In-Stat’s principal analyst for digital entertainment. “They don’t want some outside entity like ivi or Google TV controlling their content unless they’re signing a deal with them.”

Mining for Content

OTT providers have a couple of technological options for obtaining content for their customers. Both involve legal and regulatory gray areas, which exist – many say – because technology has evolved faster than legislators and regulators can keep up.

“The first would be a simple syndication strategy,” says Kirk Edwardson, director of marketing at Espial, which makes video middleware and browsing software for service providers. “An OTT operator would provide a ‘portal’ to existing broadcast or cable network content that is already streaming. In this sense, they would simplify finding existing content through an EPG or search engine.”

In Espial’s case, an OTT provider using its browser to enable aggregation of content by end users sets up a means by which the Web video is formatted for presentation on whatever device is in use. If the content is out there, it can be captured.

Minerva Networks, as another example, is using its own middleware platform to crawl the CDN (content delivery network) cache nodes for metadata that will help the middleware aggregate the content into a provider’s navigation system, automatically making it part of the lineup available to end users. (See p. 14.) And there’s Google TV’s Chrome, which captures what’s available in Flash, based on licensing where necessary or without licensing where the content is freely delivered without restrictions.

In all these instances, the question becomes, does the value added and the benefits accrued through use of these techniques create a new environment where content providers’ free-to-Web strategies are not applicable with regard to what’s assumed to be the usage rights? In other words, just because it’s out there on the Web in an ad-supported environment where high-volume of views are crucial to monetization, does that mean it’s automatically licensed for aggregation by entities that are deriving value that has nothing to do with the ad revenues flowing back to the content owners?

“If you can just go out and capture anything based on RSS feeds of metadata from CDN caches, why are we and so many other people going through all these hoops to negotiate rights to content?” asks one supplier of cloud-based support for blended Web and subscription content over managed and unmanaged networks. Speaking on background, he adds, “These people are playing with fire, but, right now, because there’s not that much impact from all this activity, nobody is paying much attention. But the rules will get clarified, and the results could upset a lot of big plans.”

Benign or Poison ivi?

When it comes to the other technology option for mining OTT content on a no-pay basis, people are definitely paying attention. As described by Edwardson, this option “would require a live video feed – terrestrial, satellite or cable – that could be captured, transcoded and then streamed to a CDN, [such as] Akamai, Limelight or Level 3, via an interface provided by them.”

This is ivi’s mode of operation. Its antennas in Los Angeles, New York, Seattle and Chicago capture local stations’ over-the-air signals, which ivi then encodes for distribution to subscribers who pay $4.99 per month. In some ways this replicates the first cable services – a point that ivi makes to help argue why it shouldn’t be shut down – but with the difference that it’s scaled up from a single community to anywhere in the United States and, in some case outside the U.S., where there’s a broadband connection.

“I was looking to be the first downloaded and online cable company, where we have the same business model as the cable company,” says ivi CEO Todd Weaver. “However, the consumer just comes to our site and would download the software,” which is basically a combination player and virtual set-top box.

Regardless of whether it involves over-the-air signals (OTA) or another means, this second, “content-capture” option creates some variables that can affect quality of service – and thus an OTT service’s market potential.

“The quality of the content will depend on the quality of the input, the quality of the transcoder, the quality of the Internet delivery and implementation of adaptive rate streaming,” Edwardson says. “What we’ve seen is that OTT operators are typically transcoding/encoding content at about 60-75 percent lower file size than a full signal.

“Adaptive streaming will select the best-fit video stream (bit rate) to ensure the best quality video within the available bandwidth. One potential weakness of CDNs is that they don’t always reach the edge of the network, so delivery over the last mile can still potentially be an issue.

” ivi’s Weaver started tackling some of OTT’s technological challenges in 2005.

“The first problem of scale we solved by adding peer distribution,” Weaver says. “So every viewer also participates in uplinking that live channel to other peers. That means our costing model is turned back to a broadcast model.” In other words, each ivi player when in use by a viewer “builds up and tears down a multicast tree in memory,” Weaver says.

This isn’t an academic distinction. The architecture could affect the company’s legal and regulatory position.

“The compulsory license is only a ‘performance’ right license, and it only covers ‘simultaneous’ retransmissions,” says one attorney who isn’t involved with any party to ivi’s lawsuits but is following them. “A peer distribution model, as described, would seem to raise some questions with respect to those requirements.”

Fuzzy Picture

The compulsory license is a key aspect of ivi’s legal arguments and its business model. Section 111 of the U.S. Copyright Act created a statutory license that lets cable systems retransmit OTA signals. Under this license, MSOs pay a royalty fee based on a percentage of gross receipts.

“Does the compulsory license that cable operators rely on apply to what ivi is doing?” says the attorney, speaking on background. “They claim that they don’t need to go out and negotiate with the copyright owners for licenses for this content, that they have a statutory license that they just have to comply with and pay statutory royalties, and then they’re home free.

” Ivi plans to pay a fee to the U.S. Copyright Office, which then would distribute that money to broadcast networks. But exactly how much is anyone’s guess at this point.

Under the rules, ivi won’t have to file any revenue information with the Copyright Office until March 1. The company hasn’t released any subscriber figures, making it difficult to calculate how much revenue it could drive to broadcaster networks. But if ivi makes less than $137,000 in any six-month period, its total royalty fee could be just $52, according to one analysis of the formulas that the Copyright Office uses.

Therein lies the rub for broadcasters, which receive tens of millions of dollars from MSOs and other multichannel providers. OTT threatens that revenue stream if it becomes popular enough to divert a significant number of customers to a service with a lower reimbursement rate.

“I can’t say it’s frivolous,” the telecom attorney says. “It’s pushing the envelope. I can’t say that there isn’t a judge out there that might not agree with them.

But I think the odds are stacked against them.” In-Stat’s Paxton has a similar view. “They make somewhat of a decent case that what they’re doing is legal,” he says. “Are they going to get slapped down? Probably.

” ivi argues that from a copyright perspective, it fits the definition of a cable system because it “receives signals transmitted or programs broadcast by one or more TV broadcast stations licensed by the FCC, and makes secondary transmissions of such signals or programs by wires, cables, microwave or other communications channels to subscribing members of the public who pay for such service.

“ivi also argues that because it charges for broadcasters’ content, it’s legally a different animal from FilmOn, which was hit with a temporary restraining order (TRO) in November. (FilmOn didn’t respond to multiple requests for an interview). So far, the courts agree with ivi on that point. ” Judge Buchwald, [who issued FilmOn’s TRO,] stated it best when she denied the networks’ motion to inappropriately associate ivi with the FilmOn case by ruling, ‘Case decline as not related,” ivi says in a press statement.

ivi’s Catch-22

Over the years, the Copyright Act has been amended to make it apply to non-traditional cable systems such as MMDS “wireless cable” and DBS providers. Now the question is whether it’s been broadened enough to cover Internet-based video services, or whether the courts will read it narrowly and expect Congress to provide additional clarity.

“You can make an argument that it’s broad enough to cover them, that we’re reaching a point where it’s getting harder and harder to distinguish what is a cable system and what isn’t,” the telecom attorney says.

But if ivi is successful in positioning itself as a cable operator, that could come back to bite the company.

“On the retransmission consent front, they’ve got to do the exact opposite,” the telecom attorney says. “They’ve got to argue that they’re not a cable system for that purpose, because if they’re a cable system or an MVPD, they would have the obligation to get retransmission consent [from broadcasters].

“It’s going to be hard to convince a judge that over here they are and over there they’re not.

“For the courts, part of the challenge is that regulatory definitions haven’t kept up with the pace of technological change. Back when they were written or rewritten, Internet-distributed video wasn’t even a pipe dream.

“Video programming is defined sort of what TV looked like in 1984,” the attorney says. “Television [today] doesn’t look like television in 1984. So again, it’s hard to figure out how that might be read [by the courts].

“Are these guys [ivi] onto an idea that’s going to have to be addressed? Probably so,” he continues.

“If [updating regulatory definitions is] going to get done, the earliest I could see that would be 2014, when the satellite legislation once again will expire and Congress has to do something in the arena of the retransmission of broadcast signals by satellite,” he adds. “It kicks open the door to talk about those issues.”

Another wild card is the date when a Seattle court makes its initial ruling on ivi. After receiving cease-and-desist letters from content providers such as ABD, Fox and NBC Universal, ivi filed a Complaint for Declaratory Judgment of Copyright Non-Infringement in the U.S. District Court in Seattle.

Those companies responded with a filing in a New York court, as well as a motion to dismiss in Seattle.

“The [N.Y.] judge said, ‘You can file anything you want, but we’re not going to rule on anything until the Seattle judge decides,'” Weaver says.

Once the jurisdiction is decided, then the court would hear the content providers’ motion for a preliminary injunction. It’s anyone’s guess when any of that will happen.

“In Seattle, it could be 18 months,” Weaver says. “In New York, it could be two to two and a half years.” Regardless of which side prevails in that round, appeals are almost guaranteed. Rehashing everything at the appellate level could take another 12-18 months. After that, it could go to the U.S. Supreme Court. By then, Congress might have made regulatory changes that clarify the situation – or add new wrinkles.

Future Partner to Broadcasters?

To address content provider fears about piracy, ivi developed a downloadable conditional access system, which uniquely identifies every customer’s player. “The content is fully protected,” Weaver says. “It can be played only in our player, which allows us the luxury of being able to guarantee the monetization of content.”

A willingness and ability to thwart piracy could eventually make ivi and broadcasters partners rather than adversaries. For example, broadcast and cable networks might see ivi as one option for executing their OTT strategy.

“It’s not like the broadcasters and content owners might look at ivi and say, ‘Bad idea,'” the telecom attorney says. “They might say: ‘Good idea. We just want to make sure we monetize it properly.'”

Indeed, ivi’s spokesperson claims at least one network has privately said ivi is beneficial. “I had dinner with someone from NBC Universal, and they told me they see ivi TV as a natural extension of their existing business model,” says Hal Bringman, who has worked with MP3.com and Napster. “In fact, we increase their rate card by increasing viewership. All ads are intact and unaltered. But the ’empire’ they have created with MVPDs (multichannel video programming distributors) creates a control issue that they feel the need to protect.

“The problem is that they risk losing control of everything by saying no to ivi TV and Google TV, just like the music industry did,” Bringman adds. “They need to embrace innovation and use OTT offerings for new revenue streams and not try and protect archaic business models that are not sustainable.”

Some also have questioned whether broadcasters’ networks of affiliate stations are archaic.

“People ask, ‘Why not break the bond with the affiliates and go directly to cable?'” CBS CEO Les Moonves said in December 2008. “It is something that down the road could happen.”

Broadband provides broadcast networks with another option: Go to viewers via an OTT service, either their own – including the ABC-NBC-Fox-owned Hulu – or through a third party such as ivi, Google or Apple. That option becomes more viable as everything from the FCC’s National Broadband Plan to service provider fiber expansions means more and more households have access to broadband. Those changes won’t happen overnight, nor will the legal and regulatory wrangling surrounding ivi and the larger issue of OTT. “We’re positioning ourselves where we can be that de facto standard to carry content,” Weaver says. “However, it’s going to be a number of years before they consider the Internet viable from a numbers standpoint. Also, by that time, our suit probably is over.”