The House bill was prompted by a series of embarrassing leaks of government-held data on everything from nuclear facilities to Army officers’ Social Security numbers to confidential congressional ethics investigations.  Those ethics panel leaks were labeled by the Recording Industry Association of America as “a powerful catalyst to enact real reforms to protect consumers.”  A recent report revealing the troubling degree of insecurity in federal government file transfers will probably only add urgency to the debate on the Senate bill.  The study, titled “Why Encrypt? Federal File Transfer Report,” was released on May 11, 2010 by MeriTalk, a government IT network, in conjunction with Axway, a company specializing in business-to-business integration software.  The report surveyed 200 federal IT and information security professionals.  It found that an alarming number of these personnel use unsafe file-transfer methods, including physical media (66%), FTP (60%), and personal email accounts like Gmail or Yahoo (52%).  Although 80% claimed their agency had adequate transfer-security policies, only 58% said employees were aware of those policies, and just 42% said such policies were consistently followed. 

It will be worth staying tuned to see whether these damning statistics will convince the entire Senate to bolster federal file-transfer security — and raise awareness about the issue — by passing the Secure Federal File Sharing Act.  One might also wonder whether these legislative developments would influence private-sector policymakers — in corporations and other institutions — to follow the federal government’s lead in banning P2P software use. 

In any event, P2P security initiatives in the private sector may get a direct boost from the federal government through “The P2P Cyber Protection and Informed User Act”, introduced by Senators John Thune (R-SD) and Amy Klobuchar (D-MN). 

If the Secure Federal File Sharing Act seeks to protect the government and the public alike from the dangers of data leaks within federal networks, the Thune-Klobuchar legislation seeks to protect all individual users of P2P software from inadvertently exposing their own private files to the public.  Thune saidhis bill will take aim at “the privacy and security threats associated with” P2P file-sharing.  Klobuchar explained to the Minneapolis Star Tribune that “without proper precautions, P2P software can allow anyone on the network to gain access to all the files on your computer, not just the ones you intend to share.”  She said that because such software often “allow[s] access to private financial or family records, it’s an invitation to identity thieves and sexual predators.” 

The Klobuchar-Thune bill, whose companion legislation has already been passed in the House as the “Informed P2P User Act” (H.R. 1319), includes two major components.  First, it would require all P2P software to provide a user with “clear and conspicuous” notice of the program’s function, and obtain the user’s consent, before the software is downloaded or installed.  Second, the bill would make it illegal to prevent a user from blocking, disabling, or removing P2P software.  The bill would bestow enforcement authority upon the FTC, which in February 2010 notified about 100 private and public organizations that they had suffered P2P-based data breaches.    

It would be worth speculating on whether this wider regulation of P2P software could ultimately have a chilling effect on the general public’s use of programs like uTorrent, Shareaza, Ares, Limewire, and BitComet.  If so, one might imagine that content owners may get behind the bill in an effort to stem the losses from P2P-based infringement.  The bill has received support from the RIAA, the Direct Marketing Association, Stop Child Predators, and 41 state attorneys general.     

Stay tuned.

**  Nathaniel Fintz, a summer associate with the Firm, assisted in the preparation of this post.

Among the suggested changes is FCC Chairman Genachowski’s proposal, dubbed the “Third Way,” a method that would classify only the transmission component of broadband access service as a telecommunications service.  Doing so would render the transmission component subject to Section 202(a) of the Communications Act, which forbids any common carrier to “make any unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services with like communication service.”  In effect, the “Third Way” would enable the FCC to implement net neutrality regulations on the transmission component of an ISP service without otherwise extending the full brunt of Title II telecommunications service regulations to the information service components of an ISP.

Since the proposal was initially released, advocates on both sides of the net-neutrality debate have voiced concerns that this reclassification may be beyond the Commission’s authority.  Just weeks ago, 171 Republican and 73 Democratic Congressmen urged the Commission not to take unilateral action in creating a new regulatory scheme by reclassifying broadband as a modified Title II telecommunications service.  Instead, they are insisting that any such classification change be implemented through legislative channels.  The FCC’s recent action appears to be a polite “No thanks” to those Members of Congress.

The FCC has explained that there is a legal basis for reclassifying broadband without legislative action.  A statement by the Commission’s General Counsel pointed out that in his dissent in National Cable and Telecommunications Association v. Brand X Internet Services, Inc., Justice Scalia said that the “computing functionality” and “broadband transmission component” of an ISP must be acknowledged as “two separate things,” the former an unregulated service under Title II and the latter a telecommunications service which could, in Scalia’s view, be a regulated Title II service.  In the FCC’s view, Scalia’s dissent is “consistent with, although not compelled by, the majority opinion in Brand X.”  The FCC is therefore confident that the Third Way approach will pass judicial scrutiny.

The reclassification of the transmission component under Title II would not place immediate restraints on ISPs, but some ISPs and analysts are concerned that this would lead to further price regulations that could potentially thwart investment opportunities in the broadband space.  AT&T explained that the Notice of Inquiry issuance is disconcerting as “it will create investment uncertainty at a time when certainty is most needed.  It will no doubt damage jobs in a period of far-too-high unemployment.”  Joining the opposition, Verizon suggested that these measures will have “negative consequences for online users and the Internet ecosystem would be severe and have ramifications for decades.”  While it is difficult to predict the precise impact additional regulations might have, the reclassification would undoubtedly extend regulatory authority to the Commission and leave ISPs susceptible to greater oversight.

In an effort to combat increased agency regulation, ISPs have suggested alternatives that allow for more flexible standards and less regulatory control of network management.  Comcast, in its reply comments, insisted that the FCC “should not adopt an absolute ban on discrimination” as this would “prohibit ‘socially beneficial discrimination’ and stifle innovation and investment.” Instead, Comcast explains that the rules should allow the Commission the power to supervise ISPs’ practices and address practices that are questionable while still giving ISPs “the flexibility to innovate and experiment with technologies and business models.”  Comcast further suggests that the regulations created by the FCC should operate in conjunction with independent third-party expert groups to “understand, refine, and address the various technical issues underlying key policy determinations.”   This would create industry-wide cooperation by integrating practical standards with current FCC policies.

Last week, in an effort to reclaim control of the network management debate, notable industry executives formed the Broadband Internet Technical Advisory Group (BITAG).  The purpose of the group is to “develop consensus on broadband network management practices or other related technical issues that can affect users’ Internet experience.”  The group is poised to inform and advise governmental agencies on technical and operational issues facing internet service and content providers that will help establish network management policies.

Regardless of the outcome of the regulatory debate, ISPs must continue managing bandwidth congestion within FCC policies and constraints.  Depending on the breadth of expansion of the regulatory controls, ISPs may seek alternative pricing structures as a way of managing network traffic without employing intense discriminatory network-management practices and running afoul of net neutrality principles or regulations.  Indeed, AT&T’s recent decision to eliminate “all you can eat” mobile data plans in favor of metered billing was intended, in part, to rein in the small number of users that consume a disproportionate amount of data.  AT&T hopes the new scheme will alleviate stress on the networks and help manage congestion.  This move may change the entire economic model for the wireless industry as other wireless providers follow suit.

Congress will obviously continue to debate the implications and necessities of having an unelected agency construct overarching broadband regulations.  However, it is clear that amending the Communications Act will take time and be especially difficult during an election year.

The FCC is accepting comments on the proposed reclassification methods through July 15th.  We’re not sure whether the coming weeks and months will provide much clarity, but we anticipate that there will be opportunities amidst the uncertainty.

**Julie Hanus, a summer associate with the Firm, assisted in the preparation of this post.

Most states and the federal government have specific laws that prohibit unlicensed gambling and lotteries, which are typically defined as “risk[ing] something of value upon the outcome of a contest of chance or a future contingent event not under his control or influence, upon an agreement or understanding that he will receive something of value in the event of a certain outcome” (See NY Penal Law – PEN§225.00 et seq.).  In fact, only state governments, where permitted, are allowed to run lotteries and many states outright prohibit them.  As a general matter, a lottery has three determinative, core elements: consideration (usually the payment of money), chance and prize.  Accordingly, for example, under California law Penal Code Sec. 319 , which is typical of most state anti-lottery laws, a contest or a sweepstakes becomes an illegal lottery when all three of these elements are present.  Therefore, in order to run a legal promotion (such as a sweepstakes or contest) one of the three elements of a lottery must be absent.

Sweepstakes generally enjoy an “exemption” of sorts from the lottery and gambling laws by virtue of the fact that there is no purchase required in order to enter (leading to the “NO PURCHASE NECESSARY” language that accompanies sweepstakes rules), thus eliminating the “risking something of value” element described above.  In contrast, a contest will often retain the consideration element but instead require some demonstration of skill from the participant, thus removing the core element of chance from equation.

Against this backdrop, the first slew of promotion-type apps taking advantage Apple’s revised developer terms have been sweepstakes as opposed to contests.  Specifically, these new applications are allowing entry into games where the winner is selected purely on a randomized basis, without having to demonstrate any skill in participating.  Therefore, laws applicable to the administration of sweepstakes, as opposed to contests, are at issue.

Historically, the largest legal hurdle and source of the most debate regarding the operation of sweepstakes has been over the removal of consideration from the equation.  Merely removing the requirement of an entry fee will not always satisfy the “no consideration” requirement as consideration can come in many forms, including the purchase of a product, an SMS text, subscription fees or otherwise engaging in activities that require substantial time or effort, such as completing an online survey, etc.  And even when some amount of consideration exists, promoters have generally avoided having their sweepstakes classified as unlawful lotteries by providing a universally-available, free alternative method of entry (“AME”) (such as a mail-in postcard, etc.) that provides equal treatment to entrants who use the AME.  Thus far, the sweepstakes applications available on the App Store (whether free or for a fee), such as “Scratch Off Now” from Thought Quarry LLC, which enables marketers to include their branding, messages and products on the app, are coupled with an AME on a corresponding website, allowing entrants the opportunity to participate in the sweepstakes without downloading the particular application.

However, providing an AME may not be enough, under some state laws, to make the promotion legal if the entrants that have paid consideration do not receive something of value for the payment.  An end user may not pay just for a chance to win a prize and state anti-gambling laws may be invoked (as is the case with online poker, sports betting and other forms internet-based gambling) if an end user is required to purchase (a) an app itself or (b) entry in a sweepstakes via such app and does not receive some value in return.  That “return value” needs to only be equivalent to the value paid for the app or the entry.  To take a recent example, paying entrants in a recent sweepstakes promotion tied to the Iron Man 2 movie release received a can of Dr. Pepper.

In addition to providing something of value to entrants, a sweepstakes can avoid classification as an illegal lottery if it clearly promotes the sale of “real” products or services, distinct from the game itself.  Accordingly, it is no surprise that Apple has limited its developers to creating “promotional” sweepstakes and contests. Even Facebook, which similarly allows third parties to run contests and promotions on its platform, continued to refine and post increasingly specific guidelines throughout the past year in an attempt to ensure that these gaming-style promotions are run in accordance with applicable law. In fact, Facebook now prohibits promotional sweepstakes that condition entry upon the purchase of a product, completion of a lengthy task, or other form of consideration.

Needless to say, the risks are real for both social networking sites and device manufacturers housing applications, particularly when both virtual and credit card transactions are occurring on and through the sites and platforms, including where credit card data is maintained (e.g., purchasing raffle tickets via an iPad app where the credit card charged is on file with Apple via iTunes), as the potential exists for liability to extend beyond the app developer.  Ultimately, social networking sites and platform developers need to ensure that their marketing partners, sponsors and developers carefully structure their promotions and apps to comply with anti-gambling laws.

As always, we will keep an eye out for developments in this area of the law, particularly as the lucrative and viral nature of these promotions continue to expand exponentially across new media platforms and devices.

We had previously written about the original sanction order, in which the FCC found that Comcast had violated the non-binding net neutrality principles by examining users’ connections and routing them (in actuality, slowing them down) based on whether the connection was being used for P2P uploads.  In effect, Comcast was managing traffic connections not based on destination but on application.  Comcast appealed the ruling, asserting that the FCC did not have the appropriate authority to issue the sanction.

The Circuit Court’s decision rested, in large part, on where the regulations governing ISPs fall within the provisions of the Communications Act.  In 2002, the FCC defined ISP services as “information” carriers, subject to Title I of the Communications Act, rather than as “telecommunications” services governed by Title II.  That distinction proved fatal to its attempt to sanction Comcast. 

FCC itself conceded that it did not have the express authority under Title I to regulate an ISP’s network management practices.  The FCC was therefore compelled to rely on the broad provisions of Section 4(i) of the Act, which authorizes the Commission to “perform any and all acts, make such rules and regulations, and issue such orders, not inconsistent with this chapter, as may be necessary in the execution of its functions.”  Under prior DC Circuit precedent, this “ancillary” authority may only be used if the FCC can demonstrate that its action, is “reasonably ancillary to the effective performance of its statutorily mandated responsibilities.”  The FCC relied on several Congressional statements of policy to show that regulating Comcast and other ISPs was within its “statutorily mandated responsibilities.”  But as the appeals court decision pointed out, Supreme Court and DC Circuit case law has held on numerous occasions that such statements of policy cannot create “statutorily mandated responsibilities.”  The Court went on to reject the FCC’s claim of “ancillary authority” and vacated the sanction order against Comcast.

So where does this leave the FCC’s net neutrality initiatives?  Several proponents of expanded FCC authority have suggested that the FCC reclassify ISPs as “telecommunications” services under Title II of the Communications Act.  Title II expressly makes it unlawful for common carriers “to make any unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services for or in connection with like communication service”.  Such language would appear to provide solid footing for implementing and enforcing the net neutrality principles.

Indeed, immediately after the DC Circuit’s decision was handed down, FCC Commissioner Michael Copps released a statementurging the FCC to reverse its earlier 2002 determination and treat ISPs as telecommunications services saying “It is time that we stop doing the ‘ancillary authority’ dance and instead rely on the statute Congress gave us to stand on solid legal ground in safeguarding the benefits of the Internet for American consumers.” 

Congress may yet get into the action as well.  Last August, the Internet Freedom and Preservation Act of 2009 was introduced.  The Act expressly makes it unlawful to block, interfere with, discriminate against, impair, or degrade” access to any lawful content from any lawful application or device.”  However, no action has been taken on the bill since its introduction.

Stay tuned.

Dan will be part of a panel entitled “Global Perspective – Changing Rules for P2P and Cloud Computing”, which will discuss the key laws and regulations that P2P and cloud computing software developers and distributors need to comply with, the changes taking place in the regulatory environment affecting P2P and cloud-computing technologies, the impact of recent actions and rulings and other issues in the legal and policy arenas that might foster investment and commercial development of P2P and cloud computing. More information on registration is available on the DCIA’s website.

On a related note, the video from the DCIA’s March 9 conference has been posted.  At that conference, Dan participated in a  panel discussing the various business models utilized by P2P and cloud computing providers, including ad-supported, subscription, paid download and other innovative strategies.

The cable providers who have invested in and implemented TV Everywhere trials deny the allegations that the initiative violates antitrust laws, and instead argue that TV Everywhere benefits consumers by making more content available on the Internet.   While advocates call it “innovative”, antagonists call it “incumbents protecting their turf,” – which as of late will ultimately boil down to a question for the Department of Justice.

Antitrust laws are meant to protect competition in the marketplace, recognizing that competition is necessary to ensure fair pricing and better quality for the consumer.  Therefore, the fundamental question from an antitrust perspective is, will TV Everywhere threaten or hinder competition in the online television content space?  The public interest groups calling for an investigation argue that it most certainly will stifle competition in the emerging market for online television programming.  They go so far as to allege collusion among the major video service providers networks, claiming that the TV Everywhere initiative rests on an illegal “horizontal” agreement among competitors.

In its complaint to the DOJ, Free Press asserts that the TV Everywhere alleged agreements amongst the cable providers are collusive horizontal agreements likely to be found illegal under the applicable per se rules governing antitrust law.  The per se rule applies only to practices that are themselves clearly unreasonable restraints of trade regardless of market facts, such as horizontal collusion, including horizontal price-fixing, market allocation, and certain group boycotts.  Additionally certain tying arrangements are also per se violations.  Antitrust case law has established each such activity as “unreasonable restraints of trade”.

Price Fixing

Price collusion among competitors has been determined by the Supreme Court to be a per se violation of Section 1 of the Sherman Act regardless of the actual impact on the market.  Typically, in order for a court to find per se illegal collusion there must be a “horizontal agreement” in place, i.e., an agreement among competitors.

National Cable and Telecommunications Associations Chief Executive Kyle McSlarrow publicly denounced the anti-competitive allegations in a statement issued in response to the filing of the DOJ complaint.  McSlarrow asserted that TV Everywhere is the result of true market player collaboration rather than collusion.  He defends TV Everywhere noting that antitrust authorities have encouraged collaboration in the past, sometimes even among competitors, for the sake of innovation and market stimulation.  “Distributors do not have the ability to unilaterally decide how content is distributed.  Content owners, through individual business arrangements with a growing array of distributors ultimately make those decisions.  All in all, Free Press and other parties are complaining about decisions content owners make about how their content should be distributed.”

McSlarrow also argued that with respect to the various TV Everywhere initiatives being tested the relationships are purely vertical (i.e., based on arrangements between one content company and one or more individual distributors) and not horizontal (i.e. based on agreements between distributors, one the one hand, and agreements between content owners, on the other hand) in nature.   As he said, “The fact that market participants are experimenting with models in addition to fee- or advertiser-supported models is not a sign of anti-competitive conduct.”

Dividing the Market

Deliberate and strategic division or allocation of customers, territories or portions of the market between competitors, i.e., “market allocation”, has also been deemed a violation of Section 1 of the Sherman Act.  Market allocations are subject to per se illegality findings whether or not price setting is involved, and whether or not the parties involved are actual or potential competitors.  Free Press and other public interest groups assert that the TV Everywhere “horizontal” arrangement amongst the cable providers illegally allocates geographic and product markets.

While the reality is that under the TV Everywhere model, competing distributors allocate markets geographically, that allocation is not a “voluntary” one but rather the result of the fact that each major cable provider has a de-facto “monopoly” in the geographic areas in which they have been granted a franchise to operate.  The cable providers plan to continue, through TV Everywhere, to serve only those consumers within the geographic areas to which they currently provide services, rather than branching out to compete with providers in other areas.  While critics may argue that this is an unlawful “market allocation”, cable providers view this as nothing more than a continuation of servicing their current customer base by including a premium content feature in addition to the services already being provided to such customers.

Tying

Free Press and other public interest groups have also accused the cable providers offering TV Everywhere of unlawful “tying”, which the Supreme Court has held occurs when a seller enjoys a monopolistic position in the market for the tying product and a substantial volume of commerce in the “tied” product is restrained.   Free Press stated that, “by tying online television to incumbent MVPD [multichannel video programming distributors] subscriptions, TV Everywhere is designed to undermine new forms of competition and consumer choice currently emerging over the Internet.”  Free Press, among others, believes that true competitive pressure should require existing cable TV providers to meet consumer demand for online TV, rather than allow them to resist the demand by tying online programming to what is being perceived as “inflated” cable TV subscriptions.

On the other hand, some say that TV Everywhere is not only good for consumers, who can choose to legally access high quality video content they are already paying for on the Internet, but is also good for program distributors because it opens up a gateway for new content that wasn’t previously (legally) available online, and ultimately that it represents a promising initiative for bridging old and new media.

Competition

Public interest groups also claim that TV Everywhere could be a threat to competition for video start-ups such as Vuze, Roku and Hulu.  However, this may not necessarily be a true apples-to-apples comparison since these video start-ups are not traditionally considered direct competitors of major cable operators, nor would it be possible to determine that the success or failure of non-TV Everywhere online television content providers is directly attributable to the business models of the major cable providers.  Ultimately, content providers, without whom both cable providers and on-line video providers wouldn’t have much of a business, still remain free to make their content available wherever they want.  Even before TV Everywhere initiatives were rolled out, those providers sought to distribute their content on competing cable, satellite, telephone and online platforms.  TV Everywhere appears to be an extension and evolution of those existing platform distribution models.

It is unclear at this stage whether or not the assertions made by the public interest groups will gain traction with DOJ or lead to further scrutiny or regulation.  It is clear, however, that the TV Everywhere initiative reflects a “dynamic and rapidly-changing market in which  no one knows the ultimate outcome”.   As the model evolves, it is likely that we will see its impact throughout the legal and regulatory landscape, including antitrust law, policies for an open Internet (i.e., net neutrality), content providers’ and distributors’ rights and interests and demand/consumption of online and traditional television content by consumers.

On March 11, 2010, the Digital HHR team is presenting “TV Everywhere–Is It Everywhere You Want to Be?”, a live, CLE-accredited Webinar exploring the legal and business issues surrounding TV Everywhere, including the antitrust issues we’ve discussed here.  We will also continue to stay abreast of these developments as an on-going effort to provide our clients with guidance to enable them to take advantage of the rapidly-changing environment in which they operate.

• Methodologies to authenticate subscribers and the technological burdens of implementing such authentication methodologies;
• Protection of personally identifiable information (PII) of subscribers and controlling access to such subscriber PII;
• Impact of the FCC’s proposed “net neutrality” rules on TV Everywhere initiatives; and
• Potential business models and revenue opportunities for stakeholders, including revenue streams from enhanced subscription fees, premium advertising fees, etc.

The one-hour Webinar will also feature “live chat” functionality to enable viewers to ask questions and comment on the presentation in real-time. Presentation materials will be available for download.

The Webinar will be held on Thursday, March 11th, 2010 from 12:30 p.m. to 1:30 p.m. EST. To register, click here.

If adopted, the new Act would bar government employees and contractors from downloading, installing or even using P2P file sharing software, such as LimeWire, without official approval.  In response to the most recent leak, the bill would also require the White House to develop rules for employees working on home or personal computers.  In order to use file sharing networks, an agency head or CIO would have to make a special request to use the P2P software.  Furthermore, agencies would be obliged to establish P2P use policies, require that employees and contractors comply with them, and then create security mechanisms to detect and remove prohibited software. 

In 2004, the White House Office of Management and Budget advised federal agencies simply not to use any P2P software.  As evidenced by the most recent embarrassment, this “advice” was not sufficient and now hopes that putting the prohibition into federal law will grant it much greater weight.  Critics of P2P software complain that personal data including social security numbers, medical records and tax returns are being shared because users are unaware of how the software operates, primarily because inadvertent filing sharing occurs (for example, when a user wants to share music or video files from a specific location or folder on his/her PC, a variety of other personal data and files, in all different formats, may also be shared). 

Security industry experts appearing at Congressional hearings earlier this year testified that file sharing software has resulted in the release of personally identifiable information associated with members of the U.S. Military, including social security number of master sergeants, medical records and even surveillance photos.  In addition, information accidentally released from a Fortune 100 company included thousands of e-mails, contact addresses, phone numbers and passcodes.  Rep. Towns’ goal is to “put a referee on the field” in terms of regulating use of such software in response to what he deems as the file-sharing industry’s unwillingness and/or inability to ensure user safety.  It appears he will also dedicate resources to encourage the government to launch a national consumer education campaign about the dangers associated with the use file-sharing software. 

Rep. Towns also proposed that the Federal Communications Commission and Federal Trade Commission look to aid in preventing this growing problem.  Right now, however, it is unclear what kind of influence is statutorily granted to the FCC, if any at all. 

Regardless, it will also be very interesting to see if or when the specter of enacting this new bill into law will affect future P2P file sharing program use in the commercial sector, or lead to additional policy and regulatory initiatives in the area.

*  Kari Hirsch, who recently joined the DigitalHHR team, contributed to the preparation of this post.

The initiative is, in many ways, the product of a “perfect storm” of the realities, opportunities and challenges facing not just the cable/satellite tv industry and content owners, but the advertising industry and advertisers themselves. Here’s what is at play:

• Cable, satellite and telco TV is one of the few sources of subscription content that people are willing to pay for.

• That fact keeps most video content and programming off the Web as cable networks fight to preserve the 50% of revenue that comes from subscribers. Their fear is that, with content freely available on the Web, many viewers may decide to simply terminate their pay TV service.

• The content owners are often reluctant to put content directly online for fear that the value of their respective offerings to the cable/satellite companies will be diminished, thereby undermining the traditional cable/satellite subscription model.

• Yet the content owners and Web publishers recognize that there are ad dollars to be made by placing more and more content and programming on the Web.

TV Everywhere is based on a fairly simple premise:  since consumers are already paying for the content they are watching at home on their TVs, why not let them watch the same content wherever they have a screen that is web-enabled? 

But even as TV Everywhere seeks to gain traction, and by doing so strengthen the hand of pay TV providers, “Over The Top” (OTT) distributors continue to pull an end around these providers by enabling consumers to watch Internet video content (a sizable portion of which is free or provided at no additional charge) on their TVs.  OTT refers to video being delivered to homes over a broadband network that isn’t owned by the distributor itself.  For example, if you watch Hulu video in your home via a Verizon FiOS broadband connection, Hulu is going “over the top” of Verizon.  Hulu doesn’t own the broadband network, it simply rides on top of the one that’s there, essentially competing with the broadband provider’s own video service. 

Unlike TVE, OTT video services come in several different models from providers as diverse as Apple (Apple TV), Microsoft (Xbox Live), Sony (PlayStation Network), and Netflix.  OTT providers are looking to extend the Web beyond the computer screen and onto TV sets in living rooms using a mix of subscription, pay-per-view and ad-supported models.  

While enabling viewers to watch YouTube videos of cats jumping on trampolines on a giant plasma screen may not be of concern to pay TV providers, giving them the ability to watch movies on-demand and free and premium cable content (the bread and butter content for pay TV providers) through an OTT service surely is cause for alarm.  In what might be a pay TV providers worst nightmare, some OTT services could lead consumers to contemplate ditching their pay TV subscriptions altogether. 

For content owners, both TVE and OTT provide both opportunity and concern.  In the case of TVE, the implementation of authentication technologies–to ensure that only paid-up subscribers have access to video content–is a significant advance in preventing piracy, one of the highest priorities of content owners. In addition, content owners receive payments from pay TV providers, based on revenue those providers receive from their subscribers.  By making pay TV providers’ revenue pie larger, content owners may ultimately receive a larger slice of that revenue. 

However, by merely extending access, TVE may not provide enough of an economic benefit to content owners, even if TVE deals are non-exclusive.  For years those owners have been entering into agreements for the online distribution and syndication of their content, including deals for OTT services.  These agreements provide for a variety of revenue streams, including up-front advances and substantial participation in advertising revenue.  And although one of the future promises of TVE is the ability to serve targeted advertising to viewers–which could conceivably provide higher revenues–it is still too early to determine if that promise can or will be fulfilled. 

The situation is obviously very fluid, with the stakeholders (including pay TV providers, content owners, broadcast and cable networks, hardware and software providers, and yes, consumers) having multiple intersecting and conflicting interests.  Our upcoming webinar will take a closer look at TVE and some of these questions.  We will also keep abreast of developments and undoubtedly provide additional insight here in the future.

*  Kari Hirsch, who recently joined the Digitalhhr team, assisted in the preparation of this post.

The FCC’s inquiry involves Google’s call-blocking policy.  In June, Google began noticing extremely high-cost calls to a concentrated number of rural destinations which generated vastly disproportionate costs.  Its internal investigations, using data filters to sort out call patterns, revealed that the top 10 telephone prefixes (the area code plus the first three digits of a seven digit number) to US destinations generated more than 160 times the expected amount and accounted for 26.2 percent of its monthly U.S. costs.  By August, Google began restricting calls to certain high-cost destinations.  Google’s response letter to the FCC describes the Google Voice service and explains Google’s investigation into and rationale behind its call blocking policy.  It claims that its engineers developed a “tailored solution” so that Google Voice currently restricts calls to fewer than 100 specific phone numbers, a practice which Google’s counsel believes is necessary to “prevent these schemes from exploiting the free nature of Google Voice.” 

While Google has only recently began blocking costly calls, the practice whereby rural telecoms charge long distance carriers exorbitant rates to connect and terminate calls from their networks is not new.  In may cases these telecoms partner and share revenue with adult chat service, conference calling centers and others to attract traffic to their networks.  AT&T, and other long-distance carriers, have long complained and sued over these so-called traffic pumping schemes.  However, as common carriers subject to FCC regulations, they were banned in 2007 from blocking calls and are required to deliver phone calls without discrimination to all numbers dialed.  AT&T’s complaint to the FCC is rooted in its contention that Google’s call blocking policy is enabling it to dance around this ban that applies to other carriers.

However, this recent skirmish over Google Voice is really part of a larger debate currently playing out in the regulatory stage over “network neutrality” rules being reexamined by the FCC and AT&T has framed Google’s actions as part of the debate. 

In its Statement on Google Voice and Net Neutrality, AT&T stated that “By openly flaunting the call blocking prohibition that applies to its competitors, Google is acting in a manner inconsistent with the spirit, if not the letter, of the FCC’s fourth principle contained in its Internet Policy Statement.“   The FCC’s fourth principle on net neutrality states that “consumers are entitled to competition among network providers, applications, and service providers, and content providers.“  

Some members of Congress are also concerned about the adverse impact on the market and support for universal service if Google is allowed to operate its telephone services outside of the rules that govern carriers.  As they stated in their letter to the FCC “[I]t is our opinion that a company should not be able to evade compliance with important principles of access and competition set forth by the FCC by simply self-declaring it is not subject to them without further investigation.”

Google responded to these charges by stating that “The FCC’s open Internet principles apply only to the behavior of broadband carriers – not the creators of Web-based software applications.” Google claims that AT&T is attempting to blur the distinction between Google Voice and traditional phone service but maintains that web applications like Google Voice and Skype shouldn’t be treated like traditional phone service.

Google distinguishes Google Voice from traditional phone carriers by explaining that unlike traditional carriers which charge users for their services, Google Voice is a free, web-based software application similar to e-mail rather than a telecom service designed to “supplement and enhance existing phone lines, not replace them” and should therefore be exempt from common carrier rules.   The service is currently available to a limited number of users on an invitation-only basis.  Users are still required to have an existing land or wireless line in order to use Google Voice and are still able to make outbound calls on any other phone device.  Therefore, because Google Voice is a software application, not a telephone company, Google believes that its service is not and should not be subject to common carrier laws or the FCC’s jurisdiction.

Distinctions aside, with nearly 1.5 million users, the increasingly popular service is viewed by some as running a rival service to traditional phone companies.  The heart of the FCC’s inquiry is whether Google Voice is a telecom service or an online software application and whether this distinction really matters.  How different is a call traveling directly over carrier lines from one that goes through software applications?  As of now, the difference appears to be the ability to block less than 100 calls, an option not available to AT&T and other carriers.

Whether the FCC agrees with Google’s characterization of its service and its interpretation of the current open Internet principles may have a dramatic impact on both the telecom and internet marketplaces.  And the FCC’s newly proposed rules on network neutrality may also play a prominent role in this debate.  We will continue to monitor the proceedings and keep you posted.