Implications of Supreme Court Decision Not to Block Remote Storage DVR

The Supreme Court decision today chose not to review a Court of Appeals ruling that rejected claims by film studios and television studios stating that the network DVR approach would infringe copyrights. While recording programs ("time shifting") using a personal DVR is legal, the studios argued that a network DVR, one that was not in the home but operated remotely by the cable operator in a data center, was creating a temporary copy and was thus illegal. The court's decision not to review the case, affirms that the lower court ruling stands - use of remote DVRs are legal as well. The result of this decision has very interesting implications.

To be clear here's how it works:
A Digital Video Recorder (DVR) such as a TiVo is connected to your TV and has been deemed legal. In the past, the courts have ruled that time shifting content is legal, and not infringing on copyrights. Cablevision essentially built a remote DVR. Rather than sitting next to your TV, it resided in Cablevision's datacenter (or in "the cloud" as some will think of this). Aside from that, it did exactly the same thing. It was functionally identical: Users would be able to save shows, fast forward and rewind. Essentially the studios were insisting that by moving where the box lived, it somehow made it illegal. The Court of Appeals disagreed.

My thoughts on this decision and the implications:

• I believe the Court of Appeals got it right. Functionally there is no difference and thus no copyright violation. If it is performed locally or remotely and the capability is the same, the location of the storage or the location of the function is irrelevant. They are both time shifting content.
• From the cable operator's perspective, a network DVR will likely be much more efficient to operate and run. What they need is scalable and reliable infrastructure that allows users to perform individual time shifting on their stored programs. This is akin to an emerging "cloud service" infrastructure -- a lot of disk storage, and other software and hardware to manage each users storage of shows, and how to play it out efficiently. It is similar in some regards to existing on-demand services already offered by them, albeit with a much larger library of content, and users essentially determining the equivalent of an on demand playlists. Depending on how it's implemented it could be very efficient because they may not need one copy of the stored show (a file) per customer. Instead there can be one instance of the show and they can provide access to it governed by permissions, regardless of number of households/customers. So it is potentially very scalable, with a minimum of storage requirements, and could be easily tracked.
• It's potentially greener too -- they don't have to necessarily produce millions of DVR boxes that will later be discarded.
  
• It will broaden use of DVRs. This is a great thing for consumers -- people get to watch what they want, when they want it. Tivo has proved this. I would expect that this is also a good thing for both the cable operators and the studios/networks: People actually watch more TV -- just at thier own time. Now they have to figure out how to adapt to this behavioral change -- not fight it.
• It still has technical limitations: 1. A set top box is still required. Until technologies like Tru2way are implemented which provide streamlined interactive TV capabilities (e.g. the ability to use a remote control that comes with the TV to control non TV programming functions like a remote DVR) and the TVs incorporate them, a set top box of some kind will be required to process the forward, rewind, pause etc. signals. So why not get the DVR in the same box? This will hinder some adoption. 2. Performance. Because the signal to pause or rewind has to travel back up to the cable provider, and this could take a couple of seconds, the response time will not be as fast as if the DVR were sitting next to your TV. For some consumers, this will be a problem and another reason not to us a network DVR. 3. Reliability. If the service goes down... you can't watch your shows. With DVR boxes, it's all local, though in some cases the cable signal may still be required to watch the content. If it's unreliable... people will want the box rather than the service.
  
• It could lower DVR service pricing. With this remote DVR infrastructure approach, I would expect DVR service to potentially be less expensive to consumers on a monthly basis. Over time, I would expect it to eventually become part of the basic service as a common feature. One difference is that you can purchase a DVR and pay a one time fee over the lifetime of the box. You won't be able to do that with the service. Over time the service will likely cost consumers more, but it has the ability to continue to grow in capability (e.g., more storage for the same cost) -- which the DVR box could not.
  
• Or it could add additional DVR service tiers. Then again, they could price different tiers based on the amount of storage. This is an interesting possibility for a couple of reasons. First, it allows the operators to derive additional revenue for storing content. DVR boxes were always limited by storage, so you generally couldn't keep shows for very long -- or you had to make decisions about what to keep and what to discard. But you couldn't easily keep too many things forever. Now, however the operators could charge for different storage levels, allowing consumers to hold more of their favorite shows for longer periods. At any point does this become a "long term video rental"?
  
• It could open a new distribution channel and revenue stream for the studios. There is an opening here for the studios to potentially make money with long term content/program leases -- akin to video rentals. Consider the fact that the recording is done by the operator as a service for the customer. However, the biggest difference is that operator can now determine, monitor and record who is recording what. Given that, they insert themselves into the recording process, they now can exert control over what programming can be copied for free and what must be paid for... they could potentially become the new digital video distribution arm of the studios! Perhaps certain content, like on-demand movies, is only released through the cable operators as paid-for content. Perhaps if a customer wishes to store the program for a specific minimum period of time it requires a "digital video rental" fee. There are some really interesting possibilities here that could make the relationship between the studios and cable operators mutually beneficial. Playing this out a bit, the cable providers become another distribution channel, just like videos and iTunes are. Certain content is released on a schedule -- e.g. feature films go to video, DVD and to pay-per-view cable at a particular time. With DVR capabilities, Pay-Per-View potentially evolves into long term video rentals or sales, where the cable providers become the new "digital Blockbuster" -- enabling paid video recording of certain content for placement into a customer's online digital library.
• Cable based "iTunes"? I think a longer term the more interesting question is would this recorded content ultimately merge into our home entertainment library as just another piece of content? iTunes has defined one user interface for all kinds of content. Could the cable operators do this too? Some of them (like DirecTV) offer music channels. So a digital library via our cable company is not out of the question. Beyond that, would it then be allowed to be transferred to our iPhone or iTouch? Would it become accessible to our iTunes library and become accessible on other devices? I think this is a possible longer term opportunity...
  

On ad revenues:

• DVRs, regardless of form, were diminishing ad revenues because of the ability to skip. So the network DVR is really just an evolution of this and is going to erode it faster.
• I don't believe consumers will put up with the ability not to skip ads, if this functionality were to be removed (or enforced) by the cable operators.
  
• The Studios should seek how to leverage the proliferation of DVR use envisioned by this ruling, not fight against it. The Studios need to adapt to this not fight it. They've shown they can do it with music. Now figure out how to do it with TV content. This is boring to watch over and over again with each change in media. It happened with VCRs -- and look where a huge amount of studio revenues now come from!!! So I'm absolutely confident they can do it with "time shifted, file based programming". Network DVRs provide "on demand user selected programming". It could be easily tracked who is watching what, if the operators were willing to provide this data back to the studios. It also wouldn't be hard to add ad insertion capabilities as part of the DVR playback infrastructure -- so then targeted ads could be inserted by the cable operator based on fine demographic information -- and even if they were skipped they would still be seen and would be more relevant than other ads.
  
• "Skipped" ads still play -- just faster. When Tivo first came out there was the ability to skip ads built into the box. The studios pressured Tivo and Tivo caved on it, updating the boxes and removing the capability, only allowing fast forwarding. So now, ads can't be completely skipped, only sped through. That being the case, perhaps someone could figure a way to get their message across when played as a skipped ad -- it's really just faster frames per second. So it's a compressed timeframe and message. How about a 2 second spot ad? Gosh, now they really could do subliminal advertising!

On Competition:

• What happens to Tivo? Over time a majority of people will opt out of purchasing a DVR box. Some people will continue to buy them for any number of reasons (e.g. more privacy, more control, because they like technology and wiring things together). I think the question for Tivo going forward is how much of their intellectual property (IP) in the form of patents and possibly software (e.g. user interface/interaction) can they license to the operators? But that is a different business model than licensing or selling boxes to consumers.
  
• Other operators: With this decision, other cable operators will no doubt go down the same path as Cablevision offering their own remote DVR service -- perhaps competing on price, and possibly competing on features. This would be good, as we'd start to see competition emerge on capabilities and possibly on user interface. DVRs should be easy to use (as they seem to be thus far for the basic play/pause/replay capabilities) but can still use some improvements in content organization, access and replay -- I find the linear search of may cable DVR box to be a really limited organization and search mechanism -- especially as the disk drive sizes, and thus number of programs I can store, increase.

Overall, this decision will open up a whole new set of consumer oriented digital services that will be enabled through the cable operators, and embraced by consumers. And I believe that the studios can and will adapt, and just as with the VCR, will find this to be a great boon to their top and bottom lines.

Additional articles
Business Week
Los Angeles Times
Wall Street Journal Online
Barrons Tech Trader Daily
Paradigm Shifts: Remote Storage DVR


Additional commentary on Tivo and others:
http://blogs.barrons.com/techtraderdaily/2009/06/29/cablevision-network-dvr-gives-edge-over-satellite-rivals/
http://blogs.barrons.com/techtraderdaily/2009/06/29/tivo-shrs-slide-on-high-court-ruling-on-network-dvrs/