The Federal Communications Commission (FCC) announced it intends to vote on December 14 to repeal regulations that prevent corporations from blocking or otherwise treating different kinds of Internet traffic unequally. The FCC’s effort to dismantle the principle of “Net Neutrality” is a misguided attempt to undo important regulations meant to “preserve the vibrant and competitive free market that presently exists for the Internet”.
As I watch the lawsuit over the startup Aereo unfold, I can't help but notice the likelihood it will disrupt the television business in the same way that streaming services are disrupting the record business. The company's model has major implications for television broadcasters, and its fight has many similarities to others occuring in the music business.
If you're unfamiliar with the service, Aereo lets users rent a TV antenna (maintained by Aereo) and receive over-the-air (OTA) television signals. These signals are then streamed to the users' Internet-connected device or recorded to a DVR so they can be watched at a different time.
The premise may sound odd (Rent an antenna?), but it is rooted in several long-standing concepts. The first is that the FCC licenses public airwaves to television broadcasters on the basis that they transmit their signals over-the-air for free. Therefore, these transmissions are available to any user who has the equipment to receive them. (Before cable TV, using a "rabbit ears" antenna was the only way to receive television signals at all.) The second is that recording such broadcasts for non-commercial, home use is legal (technically, "fair use" under the Copyright Act, and decided as part of the US Supreme Court's landmark 1984 "Betamax" decision in Sony Corp. of America v. Universal City Studios [PDF]).
Taken together, this means that users can now easily receive and record live television broadcasts, allowing them to watch anywhere and at anytime they want. This may seem perfectly normal, but remember that live television has not had a big impact on the Internet because such use would be considered a "rebroadcast" or "public performance" that needs to be explicitly licensed.
Broadcasters are suing to prevent Aereo from offering their service, saying that Aereo's distribution of these broadcasts infringes on their copyrights. This will not be a short fight, but Aereo recently won an early battle as the Second Circuit upheld a denial of a preliminary injunction against them [PDF]. This poses a major problem for broadcasters, one big enough that Fox has threatened to remove their broadcasts from the airwaves if Aereo wins.
Why such a major disruption?
The money to be made in the content business oftentimes comes from interactions that are not seamless, when tollbooths are placed in the road between the content and the end user. For a long time, construction of these tollbooths was aided by the lack of technology or the cost of distribution. Yet companies are now increasingly able to build businesses based on technological innovations that remove these tollbooths or lower the cost of distribution. For broadcasters, Aereo represents a way around the traditional relationship between content provider and consumer, one that threatens the financial and distribution models they have in place.
The change in user acceptance of streaming content has to do with smartphone market penetration. We are becoming more and more comfortable with our phone being an entertainment device. As that idea becomes more and more prevalent, users will demand even more seamless operation from all content providers, and that will extend beyond phones to any device that people use to enjoy entertainment. Spotify's Daniel Ek was recently profiled on CNET talking about this as it relates to music.
The bottom line is that, as consumers come to expect a certain kind of experience on their phone, they will see all devices similarly. With TV, consumers haven't previously had this kind of flexibility, but Aereo makes it possible. This represents a threat to broadcasters, one they will have to meet head-on if they wish to stay in business.