Early in the last century, the United States government entered into a bargain with the pioneers of what has become an incredibly lucrative franchise: broadcasting.
The Consumer Electronics Association has historically challenged attempts to limit consumer recording rights. This CEA graph illustrates that motion picture industry revenues continue to grow despite – or perhaps because of – the introduction of “threatening” technologies.
The Telecommunications Act of 1934 defined the terms of this bargain, creating the Federal Communications Commission to regulate the telecommunications industries, including broadcasting. In essence, the government “lent” broadcasters a chunk of a public resource — i.e., a license to use the airwaves to broadcast audio, and later video, to the masses. In return, broadcasters were charged with offering a free public service. If a broadcaster abused the public trust, the FCC could pull their license.
The products of broadcasters are available to anyone; there are no conditions set to access these products other than the purchase of a radio or TV receiver. As a result of this bargain, broadcasters have been held to different standards than competitors who have used conditional access technology and subscriber fees to provide a degree of control over the content they deliver.
The freedom to access content delivered through the air does not necessarily mean that this content is free. The ability to offer something more than the minimal public service commitments imposed by the government requires that revenues be generated to pay for the content that most of us want to see. Thus free has become synonymous with advertiser supported.
There is no question about the fact that commercial broadcasting is a profitable business. TV stations in the top 25 U.S. markets, affiliated with the major broadcast networks, typically enjoy profit margins in the range of 35 percent to 50 percent. The total revenues produced by television broadcasters in 2000 — the most profitable year in their history — were $40.843 billion. Radio broadcasters added another $19.819 billion. TV revenues slid 12 percent in 2001 to $35.930 billion, while radio revenues slid 7.4 percent to $18.360 billion.
The mass media funnel
Despite the fact that broadcasters see more than $50 billion in revenues each year, and some enjoy profit margins that greatly exceed most of the companies that advertise, a big chunk of those revenues are used to pay for content.
The real beneficiaries of broadcasting are the folks who suck from the small end of the mass media funnel:
The Hollywood studios that produce motion pictures and TV programming;
The record companies that produce popular music;
The small number of artists who reach the top and can demand millions from the studios and record companies;
College athletics, professional sports franchises and professional athletes;
And the politicians who created the mass media franchises and use them to set the public agenda and retain their power.
Content is big business; it is the largest export category of the U.S. economy. It is a business that continues to be driven in part by the public's appetite for entertainment, and in part by the ability to charge ever more for a product that broadcasters have been providing for free.
How did the content moguls reach the lofty position they enjoy today?
It should come as no surprise that they used the power of the mass media. If advertising can stimulate the demand for a product or service, it can stimulate the demand for content.
Television coverage of sporting events stimulates interest in sports, which in turn helps fill stadiums. In the case of a government-granted monopoly called the National Football League, local TV blackouts are used to make sure that those stadiums are full.
Radio broadcasting is the promotional arm of the music industry. The popularization of music via broadcasting drives demand for recorded music and concert appearances by top artists.
And the TV and motion picture industries use television programming and promos to stimulate demand for their artists and content: at theaters, on TV, on VHS and on DVD.
The TV receiver, a device that five decades ago provided unconditional access to the only source of video entertainment in the home, is no longer controlled by broadcasters. Approximately 85 percent of U.S. homes now subscribe to a multichannel TV service; and nearly 100 percent have a VCR or DVD player to watch packaged media. As a result, broadcasters' share of the TV audience has slipped from 100 percent to less than 40 percent, and this does not take into account the time spent watching packaged media content.
Waving the conditional access flag
Apparently consumers have reached a rather profound conclusion. Maybe the deal between broadcasters and the politicians isn't all it was cracked up to be. Maybe free is too high a price to pay for TV.
Consumers have demonstrated their willingness to pay for content directly, even if they are still subjected to the advertising that supports broadcasters. And they are willing to pay more for content that is free of those annoying ads.
But direct payment for content carries with it some baggage. Content producers and distributors need to prevent those who have not paid from accessing the content. They need two things that broadcasters do not have: a technology solution for conditional access and an infrastructure for collecting the payments. Cable and DBS have both.
Conditional access is easier for packaged media since it must be purchased. But packaged media, not to mention radio and TV broadcasts, can be copied. Copyright owners have never liked this, but the fact that they are willing to provide free content via broadcasters undermines their case that all forms of copying should be illegal.
In 1982, Jack Valenti, president and CEO of the Motion Picture Association of America (MPAA), warned: “The VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone.”
To the MPAA, home recording technology would undermine the value of their franchise. But the consumer electronics industry and consumers won this battle. The principle of fair use was created via the Supreme Court “Betamax decision,” and was later embodied in U.S. statutes.
The court found that the possibility of a technology being used in a manner that infringes on copyright protections does not justify banning a technology that can be used for non-infringing purposes. It ruled that making copies of a program for personal use does not infringe on the rights of the content owner. Recording a radio or TV broadcast, or making personal copies of content to use on other devices is a legal, non-infringing use.
At least that's the way it has been for the past 20 years. If the content moguls get their way, however, the ability to make legal copies of content will be severely curtailed.
Once again they are running up the red flags, warning their pals in Congress that all things digital are a threat to their survival but, as the figure shows, their revenues continue to grow. The terms of the debate have evolved from the 1982 vision of “illegal” taping, to copying, to downloading and now pirating. Consumers, who are spending billions each year for their entertainment fixes, are now criminals in the eyes of the content moguls.
Rather that pointing to the obvious — that broadcasting is the promotional engine that drives the content industry — broadcasters are buying into the spin that the consumer is a threat. The fact that the content moguls own most of the major networks could be a major factor; however, there are other issues in play here as well.
Digital recording technology — a.k.a. the personal video recorder (PVR) — makes it easier for consumers to skip commercials and to control the consumption of programming. In broadcasters' eyes, this threatens to undermine the advertiser-supported model, not to mention the value of program adjacency in capturing channel surfers.
Broadcasters would like to extend the business model, offering content protected by conditional access. This would allow them to compete with programming that contains sex, violence and speech that is currently restricted in free-to-air broadcasts, and to participate in the revenues generated by premium services. The 1996 Telecommunications Act authorizes such services; in 1998 the FCC issued regulations that allow broadcasters to offer ancillary services if they share five percent of the revenues generated with the government.
Broadcasters would like to protect their exclusive market-based franchises. Distribution infrastructures that have no physical boundaries, like the Internet, represent an opportunity to extend their reach into other markets, and the reach of competitors into their market.
Thus, broadcasters have raised a flag of their own…the Broadcast Flag.
On the surface, the Broadcast Flag appears innocuous enough. Just a few bits that tell a receiver whether a program can be copied: unlimited times, once or never. But the technologies needed to make the Broadcast Flag useful as a deterrent to illegal copying are mostly useless…especially with respect to eliminating the sharing of video via the Internet.
Hidden behind the Broadcast Flag is an overt effort to control the flow of digital media content on every device that speaks the language of bits. Digital TV receivers are one target; personal computers another. However, it is the networks that will interconnect all kinds of devices in the future, including the Internet, that are the real target.
Today it is not uncommon for a motion picture to appear on the Internet within a day or two of release…sometime before the release. How is this possible? For one, Hollywood is responsible, as they provide advance copies of many movies to industry insiders and movie critics. Somehow, some of these copies find their way to the Internet. If all else fails, someone simply sneaks a camcorder into the theater and shoots the movie right off the screen. The quality is not as good as a digital master, but it is good enough.
Shooting a TV show off the display will be even easier in the privacy of a home or office. There are so many “analog holes” to plug that it will be impossible for the Broadcast Flag to work in a meaningful way. And this completely ignores the reality that it will not slow down professional pirates for one nanosecond.
It appears that the era of free TV may be drawing to a close, as unconditional access to broadcasts will be nevermore.
Craig Birkmaier is a technology consultant at Pcube Labs, and hosts and moderates the Open DTV Forum.