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.

The English language is public domain (the language itself, not everything said with it). So it’s worthless, right? No dollars change hands when people use it. Perhaps it could be made worth something if someone were to own it. The owner could charge a license fee to people who use English, making substantial revenue on this suddenly valuable language.

Congress can take works in the public domain and make intellectual property of them according to the Tenth Circuit Court of Appeals in a case that approved Congress “restoring” public domain works to copyrighted status. (The case is Golan v. Holder, and the Supreme Court has granted certiorari.)

But would we really be better off if the English language were given a dollar value through the mechanism of ownership and licensing? No. What is now a costless positive-externality machine would turn into a profit-center for one lucky owner. The society would not be better off, just that owner. If we had to pay for a language, we would regard that as a cost.

In a similar vein, Mike Masnick at TechDirt indulges the somewhat tongue-in-cheek observation that Microsoft costs the world economy $500 billion by accumulating to itself that would have gone to other things. It’s a sort of Broken Window fallacy for intellectual property: the idea that creating ownership of intellectual goods creates value. What is not seen when intellectual property is withheld from the public domain is the unpaid uses that might have been made of it.

Now, Microsoft has reaped wonderful benefits from its intellectual creations because it has bestowed wonderful benefits on societies across the globe. But might it have provided all these benefits for slightly less reward, leaving more money with consumers for their preferred uses?

This is all a way of challenging the mental habit of assuming that dollars are equal to value. In the area of intellectual property (whether or not protected by federal statutes), things that have no effect on the economy (because they’re in the public domain) may have huge value. Things privately owned because of intellectual property law may have less value than they should, even though their owners collect lots of money.

No, I’m not here to tell you more about the “supersized” FTC. Berin has done yeoman’s work to highlight that issue, among other things with the PFF event you can review here. On TechDirt, Mike Masnick wrote this morning about how the feds are itching to regulate the Internet.

This is about the direct government invasions of privacy likely to occur if S. 3217 passes. On the Cato@Liberty blog I write about the detailed financial market research that new regulatory agencies would do—research aimed at you.

Example:

Section 1071(b) requires any deposit-taking financial institution to geo-code customer addresses and maintain records of deposits for at least three years. Think of the government having its own Google map of where you and your neighbors do your banking. The Bureau [of Consumer Financial Protection] may “use the data for any other purpose as permitted by law,” such as handing it off to other bureaus, like the Federal Bureau of Investigation.

“Washington, D.C. has determined that Washington, D.C. should manage the financial services industry. Your personal and private financial affairs will be managed there too.”

What would I say about my own writing but read the whole thing?

I’ve written before about my dislike of “the cloud.”

The term implies that there aren’t specific actors doing specific things with data, which will tend to weaken people’s impression that they have rights and obligations when using or providing cloud services. We’re talking privacy problems.

When “cloud” services fail, the results can be widespread and significant. Think of cloud computing as a sibling of security monoculture.

TechDirt’s indefatigable Mike Masnick reminds us of this with a tweet today about hiccups in Google Calendar that may have prevented him getting on a conference call. He’s written once or twice about the cloud in terms of legal/discovery issues, privacy issues, and business/regulatory hurdles.

Remote computing is not going away, but it’s a fad that should fade over time. I think I hit the right notes in an earlier post where I said:

There will always be a place for remote storage and services—indeed, they will remain an important part of the mix—but I think that everyone should ultimately have their own storage and servers. (Hey, we did it with PCs! Why not?) Our thoroughly distributed computing, storage, and processing infrastructure should be backed up to—well, not the cloud—to specific, identifiable, legally liable and responsible service providers.

Over at TechDirt, Mike Masnick has an interesting post asking “Why Did Apple Approve Spotify?” which builds on an AdAge column asking a similar question: “Did Apple Sacrifice ITunes With Latest Apps?”  As the title of that AdAge piece suggests, some folks are wondering if Apple shot itself in the foot by approving Spotify, a music streaming app that some regard as a potential iTunes killer.  I don’t really have any comment on the business angle here, rather, I wanted to just comment on Mike’s suggestion that one possible explanation for Apple’s approval of the app is that:

As we noted when the app was approved, Apple appears to be somewhat gunshy, following the FCC inquiry into why it “blocked” Google Voice on the iPhone (and, yes, Apple still insists it didn’t actually block the app, but Google says otherwise). Given the scrutiny, Apple probably realized that it was in for some serious political trouble if it blocked an app like Spotify, which would have received a lot of press attention. Oddly, the AdAge article doesn’t mention this at all.

Indeed, it is odd that AdAge didn’t bother mentioning that fact.  But what I find doubly odd here is that nobody is even blinking an eye at the prospect of such political meddling with — or even possible FCC regulation of — Apple, iTunes, or music streaming market in general!  Seriously, have we gotten to the point now in our Bold New World of Neutrality Regulation that innovative high-tech companies must live in fear of constant regulatory intervention even when they completely lack any statutory authority to play these games?  Moreover, does anyone think that the a bunch of Beltway bureaucrats can micro-manage music and high-tech application markets and give us more options than we have today?

I know the prospect of such meddling makes some academics and regulatory activists groups happy, but I can’t see how this ends well for consumers or high-tech markets more generally.  Regardless, for those of you who laugh when we suggest that the slippery slope of regulation is real, consider this case to be Exhibit A.  Or perhaps it’s Exhibit B since the Google Voice spat with Apple was already moving the FCC in the direction of becoming a device regulator and applying “handset neutrality” principles that have no basis in law.  It’s your anything-goes government at work.

If you’re like me, you’ve really connected with TechDirt over the years – really become a fan. You’re looking for a way to express your appreciation for the good work they do, and show others that you’re a smart, forward-thinking person.

Well, now you can do just that by buying a limited edition TechDirt t-shirt, among many other enticing packages of rivalrous goods.

The Federal Circuit significantly limited the patentability of software and business methods today.  Mike Masnick at TechDirt summarizes the holding of the case as follows:

the court has said that there’s a two-pronged test to determine whether a software of business method process patent is valid: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing. In other words, pure software or business method patents that are neither tied to a specific machine nor change something into a different state are not patentable.

I’m sure several of my TLF colleagues will have a great deal to say about this.   Tim Lee has already written about this on Ars Technica:

The Bilski decision, then, is a clear signal that the pendulum has begun to swing back toward tighter limits on software and business patents. However, it remains to be seen how far the court will go in this direction. Bilski was a relatively easy case. The applicant made little effort to hide the fact that he was seeking to patent a mental process, something the Supreme Court has clearly said is not allowed. Therefore, the Federal Circuit’s rejection of this patent doesn’t tell us how it will rule when confronted with software or business method patents that are tied more directly to a physical machine or a transformation of matter. And indeed, the Federal Circuit reiterated that some software and business method patents are valid, so we are unlikely to return to the near-prohibition on such patents that prevailed until the early 1980s.

Thoughts?

… environmental attorney Dusty Horwitt, who recently published this outlandishly stupid and highly offensive editorial in the Washington Post calling for an information tax to reduce the supply of information in society. “[I]n our information-overloaded society,” he argues, “the concept of [too much information] is no joke. The information avalanche coming from all sides — the Internet, PDAs, hundreds of television channels — is burying us in extraneous data that prevent important facts and knowledge from reaching a broad audience.” His repressive solution?

It’s possible that over time, an energy tax, by making some computers, Web sites, blogs and perhaps cable TV channels too costly to maintain, could reduce the supply of information. If Americans are finally giving up SUVs because of high oil prices, might we not eventually do the same with some information technologies that only seem to fragment our society, not unite it? A reduced supply of information technology might at least gradually cause us to gravitate toward community-centered media such as local newspapers instead of the hyper-individualistic outlets we have now.

Mike Masnick of TechDirt and Richard Kaplar of the Media Institute do a fine job of ripping Mr. Horwitt’s absurd proposal to shreds. As Kaplar argues, it is “sheer lunacy” to “tax the technologies of freedom.” Unlike gasoline, there are no good reasons — not one — for government to ever take steps to reduce the supply of information. Mr. Horwitt is calling for public officials to use their taxing powers to destroy or limit opportunities for human communications and the free exchange of speech and expression. It is completely antithetical to a free society.

Moreover, if Mr. Horwitt really thinks there is too much information in this world, then perhaps he should lead by example and take his own site offline first! The rest of us will take a world of information abundance over a world of information scarcity any day of the week.