On Copyright and Business Models: Why ivi Deserved to Be Shut Down

by on September 19, 2012 · 9 comments

Imagine a service that livestreams major broadcast television channels over the Internet for $4.99 a month — no cable or satellite subscription required. For an extra 99 cents a month, the service offers DVR functionality, making it possible to record, rewind, and pause live broadcast television on any broadband-equipped PC.

If this service sounds too good to be true, that’s because it is. But for a time, it was the business model of ivi. Cheaper than a cable/satellite/fiber subscription and more reliable than an over-the-air antenna, ivi earned positive reviews when it launched in September 2010.

Soon thereafter, however, a group of broadcast networks, affiliates, and content owners sued ivi in federal court for copyright infringement. The court agreed with the broadcasters and ordered ivi to cease operations pending the resolution of the lawsuit.

ivi appealed this ruling to the 2nd Circuit, which affirmed the trial court’s preliminary injunction earlier this month in an opinion (PDF) by Judge Denny Chin. The appeals court held as follows:

  • The rights holders would likely prevail on their claim that ivi infringed on their performance rights, as ivi publicly performed their copyrighted programs without permission;
  • ivi is not a “cable system” eligible for the Copyright Act’s compulsory license for broadcast retransmissions, as ivi distributes video over the Internet, rather than its own facilities;
  • Allowing ivi to continue operating would likely cause irreparable harm to the rights holders, as ivi’s unauthorized distribution of copyrighted programs diminishes the works’ market value, and ivi would likely be unable to pay damages if it loses the lawsuit;
  • ivi cannot be “legally harmed by the fact that it cannot continue streaming plaintiffs’ programming,” thus tipping the balance of hardships in plaintiffs’ favor;
  • While the broad distribution of creative works advances the public interest, the works streamed by ivi are already widely accessible to the public.

As much as I enjoy a good statutory construction dispute, to me, the most interesting question here is whether ivi caused “irreparable harm” to rights holders.

Writing on Techdirt, Mike Masnick is skeptical of the 2nd Circuit’s holding, criticizing its “purely faith-based claims … that a service like ivi creates irreparable harm to the TV networks.” He argues that even though ivi “disrupt[s] the ‘traditional’ way that [the broadcast television] industry’s business model works … that doesn’t necessarily mean that it’s automatically diminishing the value of the original.” Citing the VCR and DVR, two technologies that disrupted traditional methods of monetizing content, Mike concludes that “[t]here’s no reason to think” ivi wouldn’t “help [content owners'] business by increasing the value of shows by making them more easily watchable by people.”

Mike has a point. Perhaps many ivi subscribers previously didn’t watch much, if any, broadcast television. But thanks to ivi, some of these viewers may get hooked on hit network shows like American Idol, NCIS, or Person of Interest. Some ivi subscribers might even go on to buy seasons of their favorite shows on Blu-ray or DVD. If these assumptions hold true, ivi might actually increase the market value of the television programs it streams. So why aren’t rights holders applauding ivi — or emulating it — instead of trying to shut it down?

Perhaps it’s because the rights holders worry that ivi could attract a large audience of “cord cutters” who previously bought season passes to their favorite shows from Internet media stores such as iTunes or Amazon Instant Video. Rights holders might also worry that ivi could induce cord cutting by inducing people to cancel their basic cable or satellite television service. Why pay a cable company $16.50 a month for local broadcast channels when you can get them from ivi for less than a third of the price of cable?

Broadcasters might worry about ivi undercutting their advertising revenues. Because television ad rates are largely based on viewership statistics — as determined by audience measurement companies like Nielsen — each person who unplugs his antenna or cancels his cable subscription for ivi is one fewer Nielsen viewer. (Although ivi is reportedly interested in cutting a deal with Nielsen to ensure its ratings reflect ivi’s audience, it appears no deal was in place when ivi launched.) From the broadcasters’ perspective, it doesn’t matter if lots of ivi subscribers actually watch television ads, as advertisers typically aren’t willing to pay for eyeballs they can’t measure.

Adding insult to injury, ivi streamed the local channels of two markets, Seattle and New York City, to subscribers worldwide. Because broadcast affiliates typically sell ad slots to local businesses, every person who uses ivi but doesn’t reside in Seattle or NYC amounts to one fewer set of eyeballs for a local affiliate.

So ivi could be helping rights holders, hurting them, or doing some of both. To determine ivi’s net impact on content owners’ bottom line, we need to know whether the first type of viewers discussed above (those who spend more on content because of ivi) makes more money for content owners than they lose on other viewers (those who substitute ivi viewing for media store purchases, over-the-air viewing, or pay-TV subscriptions). Unfortunately, we lack the data to answer these questions with confidence.

Nevertheless, there are good reasons to assume that ivi subscribers who generate less revenue for content owners after signing up for ivi vastly outnumber those who generate more revenue.

Consider ivi’s natural subscriber base: people who already pay for network television content — via pay-TV, Internet media stores, or streaming services like Hulu Plus — or watch for free via authorized, ad-supported sources. For many of these viewers, ivi presents a compelling alternative to other sources of network television content.

But what about ivi’s potential to deliver networks a new, untapped audience? Well, at $60 per year, ivi won’t likely play well with casual viewers who aren’t even sure if network television is worth watching. These viewers far more likely to test the network TV waters by streaming recently-aired shows for free on Hulu or network websites.

ivi is also unlikely to attract many network television lovers who’d otherwise miss out on it because they lack the cash. That’s because most low-income television junkies already tune in — perhaps via free, over-the-air network television (which nearly all TV owners can already access with nothing more than a $20 antenna and $30 converter box). From the content owners’ perspective, each user who switches from an over-the-air antenna to an ivi subscription is basically a wash.

At best, ivi may attract some viewers who can’t afford or aren’t willing to pay for basic cable, and live too far away from an urban area to receive an over-the-air signal. But do these viewers outnumber the many TV junkies who want cheaper, more convenient access to network television content? I highly doubt it. And, had ivi tried to persuade the 2nd Circuit that its service actually benefits rights holders, I suspect the Court wouldn’t have bought the argument unless ivi could marshall data that probably doesn’t exist.

Business Models, Innovation, and Incentives

If ivi is such an attractive alternative to “legacy” business models, why don’t the broadcast networks simply follow ivi’s lead by offering a comparable service? It seems like a no-brainer; after all, networks and affiliates already have established relationships with advertisers, and enjoy immediate access to perfect digital copies of their content. A joint venture of the major networks, perhaps in collaboration with their affiliates, would surely dominate ivi (assuming both services were comparably priced).

What explains the broadcasters and rights holders’ reticence toward this business model? Perhaps they’re too stupid or lazy to see the green in front of them. Maybe they’re too attached to obsolete business models to monetize their content in a rational, profit-maximizing manner.

But the rights holders could also be acting perfectly rationally. Maybe the $6 monthly fee ivi charges isn’t the profit-maximizing price at which to charge consumers for high definition, live, recordable, rewindable network television content. Perhaps the business strategy currently employed by broadcasters and creators — complex and confusing as it may be to most people — captures more income for the creation and distribution of television shows than alternative business models.

I don’t know whether content owners ought to shun or embrace ivi’s business model. Neither does Mike Masnick — or, for that matter, anyone. At best, armed with extensive economic data and market research, we’d still only be able to make an educated guess as to how content owners should structure their businesses. Modern consumers’ preferences are simply too opaque, divergent, and dynamic for any producer to systematically squeeze out every last drop of profits or surplus.

Even under uncertainty, however, decisions must still be made. In the market for creative works, their creators (and their assignees) are empowered by the Copyright Act with an exclusive, but limited, right to decide how to monetize their works. So it is that broadcasters and affiliates may dictate how television shows are distributed, and decide how much to charge for them, for a limited time and with certain exceptions.

This is why broadcasters may give their content away for free to anybody near a metropolitan area who has an antenna and converter box, while simultaneously preventing third parties like ivi from distributing the same exact content (whether free of charge or for a fee). At first, this may seem absurd, but consider how many websites freely distribute their content on the terms they see fit. That’s why I can read all the Techdirt articles I desire, but only on Techdirt’s website. If copyright protection excluded content distributed freely to the general public, creators of popular ad-supported content would soon find others reproducing their content with fewer ads. Between Hulu — with its several minutes of ads per episode — and a competing service offering the same content, but with nothing more than a few text ads, many viewers would prefer the latter option.

Of course, the Copyright Act is no guarantee that a particular business model will succeed, or that a content creator will make a profit. It simply vests in each rights holder the power to decide among business models for monetizing their content.

Why let creators and their assignees make these decisions? Even if we believe that that public policy ought to “promote the Progress of … useful Arts” — an admittedly controversial belief that is beyond the scope of this essay — why give content creators exclusive rights to copy, distribute, perform, transmit, and sell their expressive works? There are, after all, plenty of other ways government could encourage people to create movies, books, music, video games, and other socially valuable expressions.

For instance, we could award monetary prizes to creators of popular works, perhaps by measuring how often they’re viewed or experienced. We could create a federal Department of Creative Expression and hire 50,000 of the nation’s most talented writers, artists, and musicians to create books, movies, television shows, and songs all day. We could also give individuals and companies generous, refundable tax credits for income derived from expressive works.

But, for the most part, we don’t do these things. Of the many ways our government could foster the creation of expressive works, we chose copyrights — as have many other governments over the years.

So why copyright? Two reasons: knowledge and incentives.

In an ever-changing world, the best way to discover how to  monetize creative works is through trial-and-error. By empowering lots of individual creators and companies to experiment with different ways of distributing content, knowledge emerges through spontaneous order, as rights holders mimic their successful competitors while constantly trying to figure out an even smarter way to make money. Instead of relying on a centralized bureaucracy or a small group of lawmakers to decide how much to charge for creative works, the institution of copyright disperses such decisions, harnessing the wisdom of the crowd for a better outcome.

If decentralized decision-making works so well, why limit it to creators? Surely if everybody could monetize creative works, we’d enjoy even more innovative distribution strategies. But this would push the value of creative works down to their marginal price, zero. While it’s still possible to make money by distributing free content, as Mike has explained as comprehensively as anyone, it’s not necessarily the best way for creators to make money. If it were, everybody would already be doing it!

Therefore, we give content creators and their assignees a limited, exclusive right — a temporary monopoly, as it’s often described — over their works. They get to decide not only what to create, but how to distribute it. Whether they reap vast rewards or lose their shirts depends solely on the decisions they make.

To be sure, our Copyright Act abounds with excesses and deficiencies, many of which we’ve discussed on these pages over the years. (For instance, it lacks a registration or renewal requirements, imposes draconian criminal penalties on noncommercial infringement, and confers copyrights on too broad a range of subject matter.) Despite these problems, however, the exclusive right to monetize expressive works — a right that ivi flagrantly violates — is at the core of copyright. If there’s one exclusive right that copyright laws should secure for content creators, it’s the right to sell complete copies of newly-produced creative works made for the purpose of private commercial gain.

If ivi doesn’t violate this right, I don’t know what does.

 

  • http://jerrybrito.com Jerry Brito

    Can you explain this: “Because broadcast affiliates typically sell ad slots to local businesses, every person who uses ivi but doesn’t reside in Seattle or NYC amounts to one fewer set of eyeballs for a local affiliate.” How is an additional person watching outside of the broadcaster’s metro area causing a loss of eyeballs for that broadcaster?

  • Pingback: Sorry broadcasters, I have little sympathy for your copyrights claims | Jerry Brito

  • Ryan Radia

    I should’ve said “one fewer set of eyeballs for their respective local affiliate.” A U.S. resident living in a Designated Market Area (DMA) who substitutes ivi for local OTA viewing is one less viewer for that person’s respective DMA. This assumes, of course, the person was previously a viewer of their local OTA network channels. New York-based local advertisers for the most part don’t value viewers in, say, D.C. – but D.C. advertisers do. Thus, if 3% of D.C. OTA viewers switch to ivi, that means less revenue for D.C. affiliates. It may mean more revenue for New York affiliates, if ivi viewers are measured (which I don’t believe they were when ivi was in operation). But whatever NYC affiliates gain, DC affiliates will lose more, because NYC affiliates only gain valuable viewers for national ads (whereas DC affiliates lose valuable viewers for all ads, local and national).

  • http://jerrybrito.com Jerry Brito

    How ridiculous is it that we’re talking about targeting viewers by where you aim your radio signals and counting viewership based on Nielsen estimates? It’s only because of federal spectrum policy (and the broadcasters who want to keep it alive) that we don’t have targeted ads, accurate viewer information, and all the innovation that would accompany them.

  • http://techdirt.com/ Michael Masnick

    Hi Ryan… you did need to post this the day before I headed out of town for a “partial” vacation, didn’t you? I will try to get back to it at some other point, but I want to correct one blatant factual error regarding Techdirt. You claim: “That’s why I can read all the Techdirt articles I desire, but only on Techdirt’s website.
    If copyright protection excluded content distributed freely to the
    general public, creators of popular ad-supported content would soon find
    others reproducing their content with fewer ads.”

    This is a common line of argument against us, and I’ve responded to it many times. Our content is public domain, it is freely copyable, and many blogs do copy it. And you know what? It doesn’t hurt our traffic at all. I’d argue it likely helps it, because people come to Techdirt because we have that content first, they know we’re the originator, and there’s also value in the community that comments there. None of that has anything to do with copyright.

    So, you can read Techdirt content on lots of other websites that copy it if you want. I’d like to think that we’re moderately “popular” and we’re “ad-supported,” but if someone else reproduced our content with fewer ads or no ads at all, I doubt it would attract many people at all.

  • http://www.facebook.com/steffen.hentrich Steffen Hentrich

    If it is possible to make money by distributing free content, why should the government grant a monopoly? A state monopoly is certainly not the best way for consumers to enjoy content. I’m sure that from business perspective a monopoly granted by the state is the best way to make money. But since when is the ability to make money a case for state intervention? From a free market perspective we should argue from a consumer point of view.

  • Ryan Radia

    Sorry for the terrible timing, Mike! You’ll appreciate knowing that I originally wrote a paragraph to pre-emptively address your response, but ultimately cut it for brevity.
    Techdirt is admittedly a poor example of a publicly-accessible website that benefits substantially from copyright protection. First, its ads are fairly unintrusive (although the Goldman Sachs video is worth blocking if you’re on a tight bandwidth cap) and thus there is little reason for readers to seek its content elsewhere. Second, Mike has put his money where his mouth is when it comes to monetizing content without relying on copyright: he’s built a seemingly successful business around Techdirt that generates revenue from consulting services (Floor64) and premium add-on features (Techdirt Insider).
    I have no doubt that if copyrights were abolished, lots of great content — including content created for commercial purposes — would continue to be created. The existence of copyrights, however, do not undermine Techdirt’s business model (excepting, of course, the draconian aspects of our copyright regime). Rather, copyright greatly augments the scope of potential business models for monetizing content. Copyright makes possible the flourishing of business models that would be viable in a zero-transaction cost world, but aren’t feasible in reality because of substantial fencing and enforcement costs.
    If unbreakable DRM existed and contracts could be costlessly enforced and negotiated, copyright would be redundant. But because DRM is usually relatively easy to crack, and enforcing contracts is costly, welfare-enhancing business models that would exist in a perfectly frictionless marketplace break down in reality. At its best, copyright law does nothing more than mimic the legal arrangements that would exist in a zero-transaction cost world.

  • Ryan Radia

    State intervention isn’t justified whenever it might enable somebody to make more money than he would otherwise. But it is justified (in this libertarian-leaning utilitarian’s view) where it’s highly likely to enable wealth-enhancing voluntary transactions without significantly undermining other freedoms. Thus, the state recognizes each land owner’s “monopoly” over his land, even in cases of an absentee owner who has allowed his land to lie fallow for decades without mixing his labor with the land (save for a fence). The state’s enforcement of these property rights, to borrow an argument from Richard Epstein, limits the freedom of individuals to traverse unoccupied land as they please. Yet most of us, including many libertarians, accept this limit as a reasonably modest sacrifice of freedom that furthers voluntary transactions (e.g., by allowing long-term land speculation).
    Another example: despite the ancient rule of property law that “whoever owns [the] soil, [it] is theirs all the way [up] to Heaven and [down] to Hell,” we permit airplanes to fly over private land, so long as they fly at least 100 or 150 feet above the land (or any buildings thereon). This is correct, in my view, because the minor loss of liberty caused by depriving land owners of the right to refuse overflights is justified by the massive benefits of allowing companies to fly across the country without negotiating with each land owner.
    This isn’t to say that copyright is necessarily wise; it may well be an unjustified intrusion upon other, more fundamental rights (as Tom Bell has argued). But I do not think it wise to dismiss it out of hand simply because it involves the granting of a “state monopoly.”

  • http://www.facebook.com/steffen.hentrich Steffen Hentrich

    Intellectual property limits the freedom of using other peoples property even there is no scarcity of ideas. The idea of scarcity is crucial if we are talking about property rights. And it isn’t a minor loss of liberty if you prevent the use of existing knowledge to improve other peoples property. You don’t take others property if you copy it. Even from a utilitarian point of view there is no case for government intervention as Boldrin and Levine wrote widely about. There is absolutely no evidence for net innovation incentives from IP. Even without IP it is possible to have wealth-enhancing voluntary transactions if you take in account that ideas are worthless without scarce complements. There is always a comparative advantage and we libertarian should not try to impose more walls for liberty than necessary.

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