Legalmatter

By: Brian J. Meli

Cord-cutting is a term thrown around so loosely these days that it’s become a well-worn noun, used in jest to describe the growing, technologically astute consumer class credited with bringing about the reversal in cable TV’s dominance. “Cord-cutters,” in addition to claiming responsibility for flagging cable TV subscription growth, and for being the source of sleepless nights for many a cable exec, are increasingly coming to represent a lifestyle choice—one championed by a generation of bold, resourceful young consumers who’ve never known a world without the Internet.

That choice: to refuse to pay for content they don’t want and never asked for.

Today, a tour of the average millennial household is just as likely to uncover an over-the-top Internet-connected device for streaming video from services like Netflix, Hulu, Amazon or Sony (known in communications parlance as OTTs), as it is to have a box installed by the friendly neighborhood cable guy. And the prospect that many more subscribers will follow suit and transition to OTT-only households, has cable companies scrambling for ways to counter the trend.

It’s not that 18-24 year-olds don’t appreciate the choice and convenience that a thousand-plus cable channels provide (the kind of choice and convenience that those of us born in the last quarter of the 20th Century could once scarcely imagine). It’s that they don’t care for the oversized cable bills that come with all those channels. Especially when they find themselves watching so few of them.

Which brings us to another term being tossed around a lot lately: a-la-carte. As in, the ability of cable subscribers to choose the channels they subscribe to, instead of being force fed a cornucopia of programming they don’t watch. And as in, something cable companies have long been loath to offer their customers. 

But if Tom Wheeler, Chairman of the FCC, is to be believed, the last few months of 2015 might be remembered as the point in time when that all changed. When viewer access to a-la-carte programming finally became a reality. But more than that, when the balance of power in program access began shifting away from the cable companies.

Last year, the FCC issued a Notice of Proposed Rulemaking that would, if enacted, rewrite the rules for OTTs, making them more like traditional cable companies. The deadline Wheeler set for deciding the proposal? Fall, 2015. And so, with decision time looming, it’s time to start speculating about what such an order would mean.

Down with OTT

What does making an OTT (which includes any service delivering video over the Internet, like YouTube) more like a cable company really mean? It means finessing a long-held legal distinction, established by the FCC, between two kinds of video service providers, based mainly on their underlying technology. Traditionally, providers who deliver video services over hard lines and satellite signals, known as multichannel video programming distributors (MVPDs), have been subject to heavy FCC regulation; while OTTs, who deliver those services over the Internet, have not. In exchange for having to submit to that regulation, MVPDs are granted many guaranteed benefits, like protections against program discrimination and special retransmission rights—benefits that ensure equal access to broadcasts and prevent any one MVPD from having monopoly control over content.

In form, the proposed rule change would repeal this technological distinction, expanding the scope of MVPDs to include many OTTs. A new, technology-neutral MVPD definition would determine provider status based solely on the services it delivers, not the method by which it delivers them. In function, it could mean a lot more: granting vastly expanded rights to Internet video providers, while subjecting them to the same regulatory framework cable companies currently operate under.

Video killed the cable TV star

The big benefit of OTTs suddenly being granted MVPD status is immediately obvious: equal access to the same programming the cable companies deliver. This would be a game changer not only for OTTs, but for consumers. It would mean that Internet providers would have retransmission rights to local broadcasts and cable-affiliated programming, effectively allowing them to deliver a cable-like experience over the Internet, eroding cable’s vice-like grip over American television entertainment. And that’s the point behind the proposed rule change: to give consumers more choice.

But it’s about more than just choice over how people watch TV. The change would also give consumers more control over what they watch. The FCC has been outspoken in its belief that OTTs are better suited to offer small or specialized video packages that would allow consumers to mix-and-match programming to suit their tastes. If that’s true, and Internet TV can give people the power to tailor channels to their individual preferences, it could be the big push the cable companies need to finally switch to an a-la carte model themselves.

Whether or not that comes to pass, the FCC is, by revisiting the MVPD issue now, signaling the time has come for its regulations to reflect that the Internet has become a viable distribution channel for television programming—much like it did when it rewrote the rules for satellite technology in the early 1990s.

To MVPD, or not to MVPD?

Though it’s tempting to imagine a world where your favorite TV shows will be streamed live via YouTube, or where all you need to watch your favorite NFL team every Sunday is a Netflix subscription, the proposed rule change won’t make either a reality quite yet. Even with a new, technology-neutral definition, many OTTs still won’t meet the additional requirement that they be a “program distributor who makes available for purchase, by subscribers, multiple channels of video programming.” The FCC refers to this as “linear channel” distribution, whereby a provider makes a scheduled programming lineup available to viewers. And it distinguishes it from on-demand video services, which consumers can access any time they choose.

This means that if the new MVPD definition does become a reality, OTTs who currently deliver on-demand services will have a choice to make: shift their service offerings to a linear programming model to gain MVPD status and compete directly with the cable and satellite giants. Or, keep their current formats, remain loosely regulated, and settle for limited access to the content their MVPD peers enjoy.

It’s a choice that at least one OTT seems to have already made. Amazon, whose Amazon Prime streaming service currently competes with Netflix and Hulu, has publicly stated that the additional regulatory burden imposed by the change would hamper its ability to innovate. So it’s safe to assume Amazon has no immediate plans to transition itself to an MVPD. On the other hand, Sony, whose OTT Playstation Vue service is, in many ways, already acting like an MVPD by offering linear service in select markets, would be all but assured of becoming classified as an MVPD. In fact, the Sony model seems likely to have been one of the catalysts behind the FCCs proposal in the first place, since the agency can’t very well allow some providers to act like unregulated MVPDs, while others are fully regulated.

What the majority of OTTs decide to do in response to the proposed change remains to be seen. However, given that some, like Netflix, have begun creating and distributing their own content, its conceivable that many would be willing to keep the status quo and tell the cable companies they can keep their programming. So far, being an OTT hasn’t exactly been bad for business, and becoming reliant on the old cable model now, at this stage, might not make a lot of sense. Considering the huge losses OTTs have already inflicted on the cable industry, holding course wouldn’t be an outrageous strategy, by any means.

The larger point here is that not all OTTs are created equal. There are diverse business interests and profit motives at play. And while some will certainly choose to embrace the benefits and challenges that come with MVPD status, others, like Amazon, will spurn them.

The FCC giveth, and the FCC taketh away

There is a fair share of resistance to this proposal among cable providers as well. Obviously, cable companies aren’t going to be enamored with anything that could open up additional sources of competition and further hasten the decline of their subscriber numbers. But there’s also the complicating factor that many of the companies showing a bona fide interest in offering linear Internet programming are already classified as MVPDs. Providers like Dish Network, with their Sling TV product, and DirecTV—both established MVPD players—are among those currently experimenting with linear Internet offerings. In effect, they are the mirror image of OTTs like Sony. That is, they are MVPDs trying to act like, and by extension be treated like, OTTs.

The FCC doesn’t want traditional MVPDs trying to innovate their way out of being regulated any more than it wants OTTs to, so this proposal could be viewed as much as a check on the cable companies as it is an empowerment of OTTs. It’s clear that the cable companies see it that way at least. Already the trade association representing the cable companies has come out and said that it believes the proposal is unconstitutional.

Don’t touch that remote…

If the proposed rule change does happen, and in all likelihood it will—in some form—it won’t transform the way Americans watch television overnight. But it may come to be seen as the beginning of the end of cable’s 30-year reign over American television. Or the end of the beginning of the Internet’s bid to challenge for the crown, depending on your point of view. But even if neither comes to pass, one thing is certain: we are witnessing a deliberate effort from a highly engaged FCC to strengthen and expand its regulatory authority over the Internet—an effort that began with its 2015 Open Internet Order and continues with this proposal. Whether this “vigilant oversight,” as Chairman Wheeler terms it, will ultimately benefit consumers or not, is anyone’s guess. But if history is any indication, in the interconnected and often dueling worlds of innovation and regulation, given enough time, innovation usually wins out.

Cord cutters of the world, rejoice.

The content of this blog is intended for informational purposes only. The information provided in this blog is not intended to and does not constitute legal advice, and your use of this blog does not create an attorney-client relationship between you and Brian J. Meli. Under the rules of certain jurisdictions, the material included in this blog may constitute attorney advertising. Prior results do not guarantee a similar outcome. Every case is different and the results obtained in your case may be different.