Cable Operators

Cablevision's Supreme Win

7/05/2009 2:00 AM Eastern

The U.S. Supreme Court has cleared the path for Cablevision Systems to launch its long-awaited network digital video recorder, refusing last week to hear further appeals from programmers.

The Supreme Court decision — expected after the Office of the Solicitor General, which conducts all litigation for the court, in May recommended that the case not be reviewed — removes the final impediment to the network DVR for Cablevision and could open the floodgates for other operators to follow suit.

In the past, several major operators, including Comcast and Time Warner Cable, have said they would consider a network DVR product if it passed legal muster. But it appears that not everyone is convinced that the legal woes are entirely over.

“If and when we are convinced that all of the legal obstacles have cleared, then we will consider implementing a network DVR,” said Time Warner Cable spokesman Alex Dudley. He declined further comment.

Comcast spokeswoman Jennifer Khoury also declined comment.

While the Supreme Court decision apparently puts Cablevision in the clear, programmers could sue other operators who launch the service if they deem that necessary. And though it would seem that any other network DVR products would mirror the Cablevision offering, making it unlikely that additional cases would advance, not everyone is convinced.

“We still feel like they have a lot of different opportunities,” said one cable operator who asked not to be named. “We are more than happy to let Cablevision continue to lead on this one.”

Time Warner Inc. spokesman Ed Adler declined to comment. Time Warner networks CNN and Cartoon Network were among the original plaintiffs in the RS-DVR case. Other programmers deferred comment to the Motion Picture Association of America, which according to reports said it was disappointed with the court's decision and would continue to do what is necessary to protect its members' legal rights.

Another possible delay for other operators is the technology behind the product. According to a research report by Sanford Bernstein cable and satellite analyst Craig Moffett, because network DVRs require a large amount of downstream capacity, they are likely limited to operators that have deployed switched digital, all digital or other similar methods to recapture bandwidth. Cablevision is practically all digital — it has 92% digital penetration.

For that reason Moffett expects that Comcast will be next in the network DVR scrum, although a few years down the road, followed by Time Warner Cable.

Cablevision — which has been testing the service internally for months — said last week that the first product to come out after the ruling will be an add-on for customers that will allow them to pause live TV when the phone rings, whether they have a DVR set-top box or not. That product is expected to be launched later this summer, followed at some point by a fully functional network DVR product.

Calling the Supreme Court decision a “tremendous victory” that “opens up the possibility of offering the DVR experience to all of our digital cable customers,” Cablevision chief operating officer Tom Rutledge hinted in a statement that a compromise with programmers could be reached.

“We are mindful of the potential implications for ad-skipping and the concerns this has raised in the programming community,” Rutledge said in a statement. “We believe there are ways to take this victory and work with programmers to give our customers what they want — full DVR functionality through existing digital set-top boxes — and at the same time deliver real benefits to advertisers.”

The network DVR — or the Remote Server-DVR in Cablevision parlance — has long been considered to be the more elegant solution for cable operators, giving consumers full DVR functionality but placing the technology at the MSO's respective headend. While DVR set-top boxes have been popular across the country — estimates are that 28% of cable customers have a DVR box — they have been plagued by frequent breakdowns and are more costly for cable operators to buy and maintain.

Moffett said in a recent research report that DVRs have been one of the biggest cost drivers for cable operators in the past few years, representing as much as 10% to 15% of total capex. Collins Stewart media analyst Tom Eagan estimated in an earlier research note that the network DVR would save cable operators between $75 and $100 per set-top box. He also estimated that network DVR's could boost total DVR penetration across the country to the mid-30% range by the end of 2010.

Cablevision announced plans to test the service in 2006 and was promptly hauled into court by programmers that saw the product as a way for operators to skirt copyright laws. The programmers won the case in its first iteration when U.S. District Court Judge Denny Chin ruled that the RS-DVR was a violation of copyright. Cablevision immediately appealed and the 2nd U.S. Circuit Court of Appeals agreed with the cable operator, reversing the lower court decision and paving the way for the RS-DVR. The programmers petitioned the Supreme Court last year, which issued its decision not to hear the case last week.

September