Media Wars Move to High Court

Broadband, file-sharing cases will impact future TV revenue

The online revolution and the traditional TV business will clash at the Supreme Court this week, in legal battles that should have dramatic impact on the Internet’s potential to rival television as a source of information and entertainment.

The two cases, both set to be argued Tuesday, March 29, are separate, but revolve around a single dilemma that has bedeviled media and telecom regulators for a decade: Should Washington give big media companies huge advantages in the broadband business in order to encourage multibillion-dollar investments in digital technology and content? Or should the government try to speed consumer adoption of new products and foster entrepreneurial ventures by tearing down roadblocks to competition erected by entrenched corporations?

In one case, the court must decide whether the FCC was wrong not to make cable operators carry rival Internet service providers (ISPs), such as Earthlink, on their high-speed Internet networks. In the other, the justices must rule whether Grokster, and similar peer-to-peer networks, can be held liable for copyright violations when users illegally download music, movies and TV shows.

The economy at stake

“What’s at stake is much broader than movies and music,” says NBC Universal General Counsel Richard Cotton. “It’s about protecting the current and future foundation of the whole U.S. economy, which is now driven by innovation.”

Although Cotton was speaking about the file-sharing case—NBC Universal has billions in TV and movie investments it wants to protect from online pirates—his sentiments also echo the cable industry’s attempt to keep expensive new high-speed networks all to itself.

Hanging in the balance are billions of dollars in future profits to be earned from the high-speed digital pipelines being constructed to the front door of nearly every American home. The outcome of this week’s Supreme Court “double-header,” as Legg Mason analyst Blair Levin calls it, will determine whether big media companies that own traditional TV networks and other communications platforms will have the upper-hand in the new digital world, or whether they will face stronger competition from entrepreneurs seeking to distribute their own content. The outcome will also affect whether Wall Street will favor owners of cable lines, TV stations and other network infrastructure over new-content developers, Levin says. “One of the most important questions facing telecom and media investors is what part of the value chain will increase its market worth.”

In the cable-Internet case, the justices will begin reviewing a seven-year legal fight over independent ISPs’ right of access to cable operators’ online networks. At issue is a 2002 FCC decision declaring that the agency does not need to impose access mandates on cable until there is evidence that cable operators are significantly interfering with consumers’ ability to navigate the Internet.

ISPs Earthlink and Brand X, along with the largest consumer groups, argue that competition will be strangled in the broadband market if independent service providers are blocked from the cable pipeline—the best Internet platform available. They will tell the justices that the FCC was wrong to reject access mandates. They say current telecommunications law already obligates cable operators to lease access to competing providers.

“We have lost hundreds of thousands of subscribers because of the FCC decision,” says David Baker, VP of law and policy at Earthlink. Customers are losing out, too, he says, because independent ISPs like Earthlink are quicker to add critical new technologies like spam- and spyware blockers, while cable-run ISPs drag their feet.

If Earthlink and its allies win, subscribers to cable-modem service would be able to choose from many ISPs rather than being forced to use their cable company’s broadband service.

If the justices side with the cable industry, however, operators will be able to dictate what rival services, if any, are available on their networks. For instance, an operator might ban not only independent ISPs, but also companies offering Internet telephone service in competition with the cable company’s brand.

It is easy to see why cable operators, with the FCC’s support, are fighting the idea.

The industry took in $10 billion in revenue from cable-modem subscriptions in 2004, according to the National Cable & Telecommunications Association. Growing at a 30% clip last year, it is cable’s fastest-climbing revenue segment.

Mark Cooper, research director for Consumer Federation of America, says development of new high-speed services will be stymied if cable isn’t forced to carry competing providers. For instance, the largest cable operator, Comcast, is only now rolling out Internet telephone service—three years after independent Vonage began offering the service over cable lines.

“It’s not the Comcasts of the world that are inventing new technologies,” he says.

Daniel Brenner, chief lawyer for NCTA, says it is simply untrue that cable operators aren’t innovating. After all, they’ve spent $95 billion since 1996 upgrading their networks to carry broadband and other digital services. Allowing rivals to piggyback on cable without investing in one inch of their own network is unfair, he says. The FCC’s hands-off-for-now policy is “the best way to promote broadband service and the open values of the Internet, and allow companies to innovate without being hamstrung by government rules.”

In the file-sharing case, the justices must decide whether to let Grokster and similar file-sharing networks operate without any obligation to halt the rampant illegal swapping of copyrighted music files, movies and TV shows.

The Motion Picture Association of America, supported by TV networks and the National Association of Broadcasters, has asked the court to shut down the service, or at least hold Grokster and similar companies liable for the 75%-90% of traffic on its system that is illegal. According to online-traffic monitor BigChampagne, 44 million illegal movie files are currently stored and available for peer-to-peer swapping.

Billions in lost profits

Grokster’s allies acknowledge that file-swapping has cost traditional content providers huge sums of money. The 100 million music files downloaded in 2004 represent $1.3 billion in lost profits, says the Consumer Federation of America. The music industry says its annual losses are actually $4 billion.

The federal-appeals court in San Francisco ruled in August that Grokster itself was doing nothing wrong, because its file-sharing system has legitimate uses and it was not storing illegal files on its own servers. Instead, the system allows swappers to trade files stored on their own computers.

Again, Cooper says Hollywood and other media giants are standing in the way of technology rather than finding ways to adapt their business to new options available to consumers. Now that technology has made it easy for Web surfers to obtain songs one at a time, they are no longer willing to pay the $13 cost for an entire album. Rather than forcing consumers to stick with the old, expensive business model, media companies should make it easier to download single files legally by using royalty-management software already on the market.

Cotton agrees that big media companies must ramp-up efforts to sell content online, but he insists they can’t take a chance on that business as long as it remains vulnerable to massive piracy. “There’s no question we are headed for an on-demand world,” he says. “But the normal legal rules need to apply in the digital space just as in other areas of commerce.”