Another Reversal of the FilmOn X Decision

In the continuing saga of looking for alternate ways to get programming to the home, the U.S. Court of Appeals for the Ninth Circuit reversed an earlier ruling that said that FilmOn X had a right to retransmit over-the-air television signals.

FilmOn is a global provider of internet-based programming. They carry over 600 channels of broadcast TV from around the world. They also carry a big library of movies and offer a few of their own theme-based channels (such as Shockmasters that specialize in Alfred Hitchcock movies and television shows).

I won’t go through the history of the company and its attempts to carry the major US networks like ABC, NBC, CBS and Fox. The company was granted the right to carry this content several times in various courts and then had those decisions reversed by other courts. This case marks the third time that the company has been told it doesn’t have the right to retransmit these networks.

The company has tried several ways of delivering these networks to customers. They originally just grabbed the signals out of the air and put them on the internet. When told this wasn’t allowed by the courts they then set up satellite farms to wirelessly send individual signals to customers in a manner similar to Aereo.

This latest ruling said specifically that FilmOn is not eligible to call itself a cable company and to demand that local stations sell them content. That ruling hinged upon testimony provided by the US Patent office that said that such authority for internet-based retransmission was not clear. This differed from an earlier US Supreme Court ruling in the Aereo case that said that internet retransmission was equivalent to cable retransmission.

What’s really at the heart of this case is the definition of who is eligible to retransmit signals from the major over-the-air networks. Congress, through various laws, has given the right (and usually also the obligation) for landline-based cable companies to carry the major networks. Cable companies are obligated to carry those stations that are within certain distances from their customer base.

But over the years those that have been allowed to carry local programming has grown. Within the last decade the satellite cable companies began carrying local stations in many markets. I lived in the Caribbean for many years and some of the cable providers in Puerto Rico and the Virgin Islands somehow obtained the rights to carry some New York City local stations. Today there are a number of OTT providers like Sling TV and Playstation Vue that are carrying local network stations.

But the current rules draw a firm distinction between those that must carry local programming and everybody else. And this gives the flexibility to local stations to decide if they will sell their signal to those without the automatic rights. The big networks have decided to provide programming to Sling TV, but not to FilmOn or Aereo.

Originally both FilmOn and Aereo captured the broadcast signals from the air and put them onto their own networks. That obviously angered the big networks and they got that ruling reversed. But then these providers refused to sell their signal to these two companies. One has to think that was partly done to punish these companies for challenging them, and perhaps partly due to the cable companies who lobbied against competition.

This ruling could really stifle new OTT providers. It seems one part of the OTT appeal is the ability to deliver local network programming as part of their packages. This ruling gives local stations the ability to choose who can or cannot buy their signal, and to thus pick winners and losers in the competitive OTT battlefield.

It’s hard to think that this makes any sense. But Congress or the FCC could clarify this issue if they cared to tackle it. Just over two years ago the FCC put out a Notice for Proposed Rulemaking asking about this exact topic. The FCC wanted to clarify the rights for internet-based programmers to buy content, and in that docket the FCC had suggested that anybody ought to be allowed to buy programming if they agree to pay the market rates for it. But the FCC has never acted in that docket which has led to today’s situation where some providers are given programming and others not. The have-nots aren’t just companies like FilmOn and Aereo, and it’s been reported for years that Apple has been unable to get programming rights.

At some point this needs to be clarified. The last companies we want deciding who can or cannot offer programming services are the major networks, especially since some of them are owned by cable companies. I have no idea if the FCC will address this, but they need to.

Fighting Against the Cost of Programming

Numismatics_and_Notaphily_iconToday I want to talk about the cost of programming from the perspective of a small cable provider. In the cable world, any company without many millions of cable customers is considered small because they have no effective negotiating power against the programmers.

For decades most small cable systems have purchased a lot of their programming with rates negotiated by the National Cable Television Cooperative (NCTC). There are currently 850 member of this cooperative. Altogether the NCTC group represents the second biggest pile of cable customers after Comcast. It’s hard to know the exact number of customers they represent because a few of the larger cable companies like Cox and MediaCom have joined and then left the cooperative over the last few years. At one point I heard the number 20 million subscribers bandied around the industry but it’s probably smaller now.

Not all programmers will work with NCTC and some require cable providers of any size to sign a contract directly with them. But NCTC represents a significant portion of the channels used by cable systems. Within that negotiated pile of content members must still sign a contract with each programmer and are free to sign the NCTC contract, negotiate directly with the programmer, or else sign no contract if they don’t want to carry a given programmer.

Back in 2014 there was a big furor among small cable companies when the Viacom group asked for a huge rate increase, reported to be over 60%. Viacom includes channels like MTV, VH1, Nickelodeon, Comedy Central, Spike, BET, and other music channels. At the time about 60 NCTC members, representing about 900,000 subscribers, decided that they could not afford to pay the higher rates and so dropped the Viacom channels from their cable systems.

We are seeing a similar battle brewing today as AMC is asking for a huge increase in rates with NCTC. I’ve not seen the new proposed rates, but have seen news articles describing this as a 379% rate increase over the term of the new contract, which is probably for five years. AMC includes the channels AMC, We tv, IFC, and Sundance TV. Additionally the new contract also covers BBC America and BBC World News, which are 50% owned by AMC.

How can a programmer ask for such a big increase? Programmers are very attuned to the Nielsen ratings which constantly track the number of people that watch each network. The general concept used by programmers is that their network is worth at least as much as other networks that get the same number of eyeballs, very similar to the way that a professional baseball player sets his worth by comparing his statistics to his peers.

AMC’s popularity has exploded in the last few years as it changed from a channel showing old movies to one which now carries very popular original programming like Mad Men, Breaking Bad, and The Walking Dead. This has raised their Nielsen rating and the network wants to charge more due to being a lot more popular.

The whole programmer industry owes a debt of gratitude to ESPN which was the first network to constantly and significantly increase their fees over the years. Every time that ESPN signed a new deal to carry programming for a sports league they then raised their prices to cover the new fees they were paying to those leagues.

But in doing so ESPN was setting an industry pricing standard against which other networks can be measured. We saw this happen with retransmission agreements with the major broadcast networks that have grown from zero to several dollars each per customer per month over the last decade. And we’ve seen popular channels ask for more as they get more viewers. The funny thing is, though, that when a network loses viewers they never seem to drop their rates.

Caught in the middle of all of this are the service providers that offer cable TV. They keep seeing bigger and bigger increases each year in programming costs and some are reporting overall programming costs growing by at least  15% per year. They are left with little choice but to raise rates, which puts many of them into a poor position compared to the satellite providers. And with each rate increase comes more customer impetus to cut the cord or at least cut back on the programming they purchase.

It’s been my experience that few of my small clients that carry cable have been bold enough to pass on all programming cost increases, and so their margins on cable keep shrinking. On a fully allocated cost basis many of them are underwater with the cable product. And sadly, as is shown by the recent AMC rate demands, there is no end in sight for continued huge increases in programing costs. It’s a lousy time to be a small cable provider, that’s for sure.

Aereo to Get their Day in Court

Digital-tv-antenna-620x400The various Aereo cases have finally worked their way up to the Supreme Court who will hear the case on April 22. There have been a number of District Court findings on Aereo, some for and some against them, prompting the Supreme Court to arbitrate the differences.

Aereo is now a little over two-years old and in that time has stirred up a lot of controversy. Aereo offers a package of network programming and web programming delivered directly to customers devices such as a pad, computer or cell phone. They have been very successful in the market so far and have announced recently that they have sold all they can in several markets like New York City and Baltimore.

But the reason that they are so controversial is that they have assembled their package without paying retransmission fees to the networks. Retransmission fees are those fees paid to the major networks – ABC, CBS, FOX and NBC – for the right to carry their programming. These fees are gigantic. In most markets the cost to now carry a local affiliate station is in the range of $2 per customer per month. And that is a remarkable figure since as recently as five years ago there was no charge to most cable companies for carrying these networks.

These fees are a significant part of the reason why cable rates are climbing so quickly. At $2 per network channel, these fees have increased the cost of cable by $96 per year to a cable subscriber. And nationwide these fees drive over $7 billion per year in revenues.

Aereo found a way around retransmission fees. The networks all use public spectrum, and for the use of that spectrum they broadcast their shows through the air for anybody with a set of rabbit ears to get free. Aereo uses a technology that basically uses a separate set of rabbit ears (actually a tiny one-inch antenna) for each customer. They receive the programming at a centralized hub and then send it to the customer’s devices.

Customers love this. The one thing you can’t get when you try to wean off cable is a live version of the network shows. People by the millions have dropped cable or downsized cable packages. At home such customers can get programming on their TVs for free with an antenna. But there is no easy way for them to get this to tablets and smartphones, which has become a very popular way of watching TV.

I like what Aereo is doing. Certainly as a customer I think this is a good thing. If I can receive this programming for free at my house then I feel I ought to have the right to pay somebody to help me get that free programming onto my iPad. That is really all that Aereo is doing. I certainly am offended that the network channels want me to pay $96 per year for programming that I can get with a $50 set of rabbit ears.

Some network execs have said that if Aereo wins at the Supreme Court they will pull their channels off the free airwaves and only sell them through cable TV. I have a hard time believing that any network would have enough hubris to do this. I am picturing a big political backlash when the networks that carry local sports and the local NFL teams disappears from the airwaves.

The networks are making huge gobs of money today, and while the money from retransmission fees is making them fatter, they still derive most of their revenues from advertising. One would have to think that their advertising model would change drastically if they were to suddenly become just another of the many cable channels. Personally, I hope one of them tries this and then loses their ass and their customer base. Because we would all benefit from using the spectrum they will vacate.