Once again the confluence of modern technology and content distribution has led to court. While many cable operators have arranged to rent customers digital video recorders (DVRs) so they can have TiVo-like control over their video content, Cablevision took the next step and decided to offer a TiVo-like service on their central server. They weren’t the first cable operator to consider such a service, but they were the first to launch despite the fact that their content distribution license might not cover such a service. Their launch was met by a law suit by major content creators contending that, in fact, their distribution license did not cover such a service.

My colleague James V. DeLong has argued, fairly persuasively, that Cablevision will end up on the losing end of this legal challenge.[1] But I am less interested in the legal merits of each side in the suit, and more interested in how this suit, and others like it, could lead to continued respect for content creation while at the same time empowering new consumer use of content. I believe the present suit is not a hindrance but a blessing. If the parties involved would agree to work together, a simple solution could be reached that would allow cable customers to use a network-operated DVR while at the same time providing some assurance to content creators that their works will be protected.

Looking at Patent Examples

The intellectual property issues at play in the current Cablevision controversy involve copyright law, but there are lessons from the world of patents that are applicable here. Copyright and patents differ, naturally. Patents are short in duration and require renewals; renewal obligations are banned under US copyright law and the Berne Convention, and terms are far longer.[2] But both have a market feature known as licensing, and patent licensing experience is applicable in the Cablevision dispute.

In any given consumer electronics product, including the DVR device that may be in a consumer’s entertainment center, there are numerous technologies and software that are under patent. How can all of these goods be produced, and reach the market so quickly, if there are so many entities from whom to obtain licenses? One answer is that in the high-tech world, it is not uncommon for large patent holders to essentially declare détente with other large patent holders. “You can use my patents, I can use your patents, and we’ll promise not to sue each other.” This is an effective way to reduce transaction costs. At any given point, one patent holder may be enjoying an advantage against another based on the current market value of a given patent portfolio, but there’s a general recognition that in the long run agreeing to these “zero-price” licenses will be more beneficial than engaging in the complex machinations of individual licensing.

Note that these agreements are mutual. Company X cannot simply choose to use Company Y’s patented technology by merely offering Y access to X’s patents; it must be viewed as beneficial to Y as well. (If Company X has patents of no use to Y then Y has no incentive to agree, but perhaps X can introduce another company, Z, into the equation and between the three companies there will be enough in common to justify zero-price licensing.)

What Cablevision Needs

 Recognizing that the dispute in the Cablevision case involves copyright licensing, not patent licensing, we can still see parallels in the motivations of Cablevision and the content providers. Let’s assume that Cablevision does in fact need additional licenses from the content creators to offer a network-based DVR service. The transaction costs of negotiating all of those licenses could be quite large indeed. The transaction costs of simply shipping DVR boxes to consumers, and letting them practice Betamax-based time-shifting, would likely be less. So in this scenario, it seems current licensing law has precluded a useful consumer service from coming to pass.

But not necessarily. If Cablevision did have to negotiate all of those licenses, what could the content creators charge? In the scenario above, it doesn’t look like they could charge much at all, because Cablevision has a reasonably affordable alternative, namely providing DVR boxes to consumers. A further disincentive to Cablevision negotiating licenses is the fact that the market, in fact, would get quite messy. Some highly sought content providers such as ESPN and HBO would likely demand a high fee, while less popular networks might actually be willing to pay a small fee to be included, for fear a consumer using the network-based DVR wouldn’t watch any programming not included in it.

There is also the issue that content licensing tends to be an ongoing affair, whereas the purchase and distribution of DVR boxes would be a one-time matter, with only the marginal cost of providing a new box to each new customer. There would be no network storage costs or related administrative costs; the consumer with a box bears those. Thus, the ongoing licensing cost for the content creators is a further disincentive for Cablevision to pursue licensing.

What would Cablevision’s incentive have to be for it to seek licenses rather than pursue an external box strategy? The aggregate licensing fees of all of the content creators over time would have to be less than the ongoing cost of shipping DVR boxes to consumers. That doesn’t mean a zero-price license necessarily, but a zero-price license certainly would involve the lowest transaction costs.

So if this market condition isn’t met, if the cost of licensing is not less than that of box distribution, Cablevision goes ahead and provides customers with DVR boxes, and those customers can now time-shift programming and fast-forward through commercials. The content creators receive not a dime in addition to their existing distribution license, and have no control over consumer consumption of their content.

What the Content Industry Needs

Is there an alternative here for the content industry? I would argue there is. In the scenario above, Cablevision refused to pursue licenses because the transaction costs were too high, so the content companies ended up exactly where they were at the beginning, with consumers performing TiVo-like functionality at the ends of the network and no additional revenues coming to the content companies. But there are benefits the content industry could seek beyond financial compensation.

The content industry, for obvious and understandable reasons, is concerned with piracy. When a consumer stores content on a DVR, the content industry has no control over what happens to that content. The DVR has to have an output port, or the content couldn’t be viewed on a TV, so there is always the risk of DVR-recorded content leaking onto the Internet, perhaps on a file-sharing service like BitTorrent.

Cablevision, by hosting its content on its central server, could exercise far more control over the content’s final destination. It could employ technological protection measures that would have the content act more like streaming video, something harder for a would-be pirate to capture and record separately.

I will not make the claim that Cablevision’s TPM system would prevent all piracy, but it could make piracy more difficult, while still giving consumers many of the uses and features they’re accustomed to with a conventional DVR. They could record shows to watch later. They could fast-forward through commercials. They could pause live TV.

There might be features currently available to external DVR users that wouldn’t be available in the protected network model. Consumers likely wouldn’t be able to take a “recording” off of the Cablevision network and record it on a VHS tape or burn it on a DVD, for example. But Cablevision’s service is supposed to offer 45 hours of programming, so if a consumer wanted to hold on to a movie for some length of time, they could do so without having to delete it to make room for other recordings.

It’s also not clear that a network DVR would work with a device such as Sling Media’s Slingbox, which allows space shifting of DVR content. However, external DVRs would remain in the market, so a consumer who wished that functionality could still have it; for consumers who had no need to watch their recorded TV programming a world away over a broadband connection, the features of a network DVR might be sufficient. It must also be noted the Betamax decision cited by Cablevision in its legal defense addressed time-shifting, not space-shifting as occurs with Slingbox, so the device’s legal status remains in doubt.[3]

In some respects a network DVR might be more user-friendly than an external box. One bonus of the network-based service is that consumers presumably will be able to access their DVR recordings from any cable-connected TV in the house, unlike a home where DVR content must be watched on the TV that is hooked up to the DVR.[4]

Reaching Détente

The answer here seems simple. The content industry should offer to drop the suit against Cablevision and extend a zero-price licensing agreement for a network-based DVR service, on the condition that the service will incorporate TPMs acceptable to the content industry. Cablevision should accept that offer and proceed on constructing its service. The content industry should then offer those same terms to any other cable operator. This would remove the case from federal court, which should be welcomed by fair use advocates, as the court in the case might issue a narrower interpretation of fair use than many have at present.

If this détente were to occur, an important step would have been taken to protect content. Cable operators would have a low-cost, consumer-friendly service to offer their customers. Our court system would have one less dispute to resolve between the technology and content industries. And most important, consumers would have access to a low-cost, robust TiVo-like service throughout their homes without having to clutter those homes with yet another appliance. This détente seems far superior for all parties than seeing the case through to its legal end, even for the suit’s eventual winner. To quote a Chinese proverb, “One may win the lawsuit, but lose one’s money.”[5]

* Patrick Ross is a Senior Fellow and Vice President for Communications and External Affairs at The Progress & Freedom Foundation. The views expressed here are his own, and are not necessarily the views of the PFF Fellows, its staff or board.

1. James V. Delong, “(Cable)Vision or Delusion?”
   Progress on Point 13.16,
   The Progress & Freedom Foundation, June 2006
   ( http://www.pff.org/issues-pubs/pops/pop13.16
   _cablevision.pdf).
2. For more on copyright terms, bans on formalities,
   and the US law under the Berne Convention, see
   Patrick Ross, “How Long is Long Enough?
   Copyright Term Extensions and the Berne
   Convention,” Progress on Point
   13.15, The Progress & Freedom Foundation, June 2006
   ( http://www.pff.org/issues-pubs/pops/pop
   13.15copyright_term_lengths.pdf).
3. One devoted Slingbox user to question the
   legality of Slingbox was Capitol Bcstg. President
   Jim Goodmon, who in a recent interview expressed
   amazement that the service “hasn’t been stopped already.”
   (Broadcasting & Cable Magazine, “Goodmon: Stop
   the Slingbox,” Feb. 5, 2006 (ttp://www.
   broadcastingcable.com/article/CA6304972.html?
   display=Breaking+News&referral=SUPP&nid=2228).
   For more see “The SlingBox, Space-Shifting and
   the Future of Broadcasting,” a PFF blog entry of
   Feb. 6, 2006 by Adam Thierer ( http://blog.pff.org
   /archives/2006/02/the_riaa_satell.html).
4. There are home networks that can allow one
   to watch DVR content on multiple TVs, but this is
   not common in most US homes, and presumably
   these households make up a very small percentage
   of the ones being targeted by Cablevision with its network
   -based service.
5. The Columbia World of Quotations, Entry 1782, Columbia University
   Press, 1996.