News

'Huge Win' on Net DVR

8/08/2008 8:00 PM Eastern

After more than two years on the sidelines, Cablevision Systems' long-awaited network digital video recorder product finally appeared ready to enter the game last week, after an appeals-court judge paved the way for a centralized service programmers fear could make ad-skipping much easier for many more TV viewers.

In a 3-0 decision Aug. 5, a panel of the 2nd U.S. Circuit Court of Appeals reversed a lower court decision that said the application — dubbed the Remote Server DVR, or RS-DVR — violated the copyrights of television programmers.

Essentially, the federal judges agreed with Cablevision's argument for the past two years — that the RS-DVR is nothing more than a conventional DVR device that happens to be located at the cable company's headend, instead of a masked video-on-demand service.

The appeals court likened the service to a video cassette recorder, and stated that a key determination is that in both VCRs and RS-DVRs it is the customer that makes the copy, not the cable system or the manufacturer of the device.

“We do not believe that an RS-DVR customer is sufficiently distinguishable from a VCR user,” the court said in its decision.

More than a dozen programmers sued to block the product after the Long Island, N.Y.-based cable company announced plans to test its RS-DVR in 2006.

Cartoon Network, CNN, 20th Century Fox, Universal Studios, Paramount Pictures, Disney Enterprises, CBS, ABC, NBC Studios, Turner Broadcasting System, Turner Network Sales, Turner Classic Movies and Turner Network Television sued Cablevision in May 2006, claiming the RS-DVR was a blatant violation of copyright laws.

They could choose to continue the appeals process, seeking a motion for reconsideration before the full 2nd Circuit.

At least one media attorney believes any appeal would have to go straight to the U.S. Supreme Court.

“There is little or no likelihood that the same court would review, no less reverse its decision,” said media attorney and The Arts & Technology Law Group owner Gregory Rutchik. “You would have to show an extreme abuse of discretion. That's a very, very hard standard to maintain.”

Pali Research media analyst Richard Greenfield believes the appeals process will continue to drag on. “We suspect programmers will do everything in their power to slow the progress of RS-DVRs,” he wrote in a research note. “We would expect programmers to seek an appeal (with a new injunction pending appeal) up to the Supreme Court (assuming the case was accepted, a ruling would take at least six to nine months, if not longer).”

There's been no word yet from the programmers about what they'll do next.

“We respectfully disagree and are considering the appropriate next steps in this matter,” Cartoon Network spokesman James Anderson said in an e-mail last week.

News Corp. chief operating officer Peter Chernin, during an earnings call last week, said “we need to review the specifics before we decide what our next step is. Historically, you can assume we weren't in favor of that ruling.”

Cablevision's official comment was a statement from chief operating officer Tom Rutledge last Monday. “This is a tremendous victory for consumers, which will allow us to make DVRs available to many more people, faster and less expensively than would otherwise be possible,” he said. “We appreciate the court's perspective that, from the standpoint of existing copyright law, remote-storage DVRs are the same as the traditional DVRs that are in use today.”

Rutledge stopped short of saying when, where and if Cablevision would be rolling out the product. In part, that trepidation could be a combination of waiting for the other shoe to drop (i.e. another programmer appeal) or the possibility that Cablevision and programmers could negotiate a compromise.

Rutledge later suggested in an interview with The
New York Times
that RS-DVR technology could open the gates to a new form of advertising, allowing programmers to insert fresh commercials in programs that had been recorded weeks or even months prior.

“Let's say you record an episode of Lost. Three months later you want to play it back,” Rutledge told the Times. “The advertising that was on Lost is stale and no longer applies, but the capability to refresh the advertising exists if the content owner wants to do that with the cable operator.”

That type of service would require agreements with programmers and appears to signal that Cablevision could be willing to negotiate a compromise. Whether the programmers would sign on to that remains to be seen. But their alternatives appear to be limited.

“This puts the content providers in a difficult predicament,” Rutchik said.

Cablevision first introduced the idea of the RS-DVR in 2006, announcing plans for a small trial in Long Island, N.Y., with about 1,000 “friendly” customers. Those customers, who would not have to pay for the service during the trial, would then provide feedback as to how to improve the service.

While Cablevision never got the chance to begin that trial — the programmers' original lawsuit blocked it — it is safe to assume that it could be restarted relatively quickly. And most analysts believe that the service could be deployed across Cablevision's 3.1 million-subscriber footprint almost as rapidly.

The benefits for Cablevision and other cable operators who deploy the product are obvious.

Sanford Bernstein cable and satellite analyst Craig Moffett called the RS-DVR ruling a “huge win” for cable operators that could translate into substantial capital savings for them.

Moffett estimated in a report that DVR set-top boxes account for as much as 10% of a major cable operator's capital spending.

With the RS-DVR, cable operators would no longer have to buy a physical DVR box (which can cost more than $300 each), could make the service available to all of its digital cable customers basically overnight and could provide that functionality to every television set in a customer's home.

According to SNL Kagan analyst Ian Olgeirson, the average HD-DVR set-top costs a cable operator about $100 more than a stand-alone HD digital set-top. If average DVR penetration is about 20% of digital-cable customers, that could mean a large cable operator like Time Warner Cable (which had 8.483 million digital customer in the second quarter) would have saved about $170 million on set-tops alone.

While cable operators would benefit from costs savings and added efficiencies, programmers primarily see the downside of widescale RS-DVR deployment, mostly in the form of ad-skipping.

While some other operators have disabled or removed fast forward or ad skip buttons on some on-demand playback services — like Time Warner Cable's Start Over — Cablevision has not. And with ad budgets tightening as the possibility of a recession looms, that has struck abject fear into the hearts of programmers.

Moffett wrote that the biggest fear for programmers is likely that with RS-DVR, DVR services will become immensely more popular, thus increasing the potential for ad-skipping. He estimated current DVR penetration is about 20% of cable subscribers, and could balloon to over 60% — equivalent to digital cable's current penetration.

Moffett also said about 56% of advertisements are skipped in DVR playback mode. “That means a huge increase in the number of viewing hours per day potentially subject to ad-skipping.”

Adding to the fear is the fact that almost every cable operator has said that they would deploy a network DVR product if it passed legal muster.

Time Warner Cable CEO Glenn Britt said last week the network DVR is a more elegant engineering solution.

“We've said for a long time that a centralized network DVR is a better engineering solution than having hard drives all over everybody's home,” Britt told analysts during a second-quarter earnings call. “If this particular court case is upheld, we will deploy that.”

Granted, Cablevision could help alleviate that fear by agreeing to remove or disable the ad-skipping function. And though Cablevision has resisted doing that, it may change its mind if that means reaching accord with programmers.

In the past, as Cablevision was striving to convince the courts that its RS-DVR was functionally equivalent to a physical DVR, it was loath to remove or limit the typical fast-forward capability because that might have further differentiated the service from the home device.

“They [Cablevision] have stayed very strong on this case,” said one executive familiar with the company who asked not to be named. “This case is about a service that is a DVR, it's is a more efficient way to do a DVR, it's not a different product.

“If you deployed a hybrid DVR product that had ad-skipping, you would be deploying a different product. And they were very firm on the idea that the objective of this was to do a DVR and the way that consumers expect a DVR to be.”

But now that the courts have said that the RS-DVR is essentially a DVR product, the company may be more willing to compromise.

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