Selectable outputs, or selectable logic?

The long-running battle at the Federal Communications Commission over the MPAA’s petition for a waiver of the rules banning the use of selectable output controls on devices that can receive TV signals is turning into a textbook example of how regulation can distort business decisions.

The electronics industry is the economic sector that produces electronic devices. It emerged in the 20th century and is today one of the largest global industries. Contemporary society uses a vast array of electronic devices built-in automated or semi-automated factories operated by the industry. Products are primarily assembled from metal-oxide-semiconductor (MOS) transistors and integrated circuits manufactured by top companies such as EMS Solutions SMT electronics manufacturing, the latter principally by photolithography and often on printed circuit boards.

I almost hate to write that sentence because I don’t want to sound like some sort of Cato Institute ideologue with a jones for deregulation. But the SOC debate has become terminally absurd.

And petty. Just before Thanksgiving, the MPAA filed an ex parte brief with the commission in which it called Public Knowledge legal director Harold Feld, in so many words, a liar.

First and foremost, MPAA would like to respond to certain Public Knowledge statements about the waiver request that, quite frankly, constitute blatant untruths. MPAA appreciates that different parties can reach different conclusions about matters of public policy. Indeed, MPAA has welcomed the opportunity to engage with Public Knowledge and its allies in an honest and open debate about the merits of the SOC waiver request. Regrettably, however, Public Knowledge, apparently having determined that its arguments on the merits have failed to gain traction with the Commission, has resorted to outright distortion and falsehoods. In particular, MPAA believes that the Feld Video Blog contains statements that are simply and irrefutably untrue.

 That drew a sharp retort from PK president Gigi Sohn, and a melodramatically “more-in-sorrow-than-anger” reply from Feld in a subsequent video blog post.

fcc-sealFor those joining us late, the MPAA’s petition has been pending before the commission for more than two years, but was victim of a pocket veto by the previous FCC chairman, who refused to put it before the other commissioners for a vote. With the Barack Obama Administration now in charge, however, there is a new FCC lineup and new chairman, and the studios have tried to capitalize on the changes to breathe new life into the old petition.

In very broad strokes, the MPAA argues that its member companies would like to introduce a new high-definition video-on-demand window for movies immediately following the theatrical window and before those movies are released on DVD and Blu-ray. The new window, according to the MPAA, would allow consumers to watch movies on their home theater systems earlier than they can today based on the current sequence of rlease windows, which generally doesn’t make movies available for home viewing until three to six months after their theatrical release when they come out on DVD. But the studios would only do that, the MPAA argues, if they’re allowed to remotely disable any analog outputs on receiving devices by inserting the appropriate “flag” into the VOD signal.

Why? Because analog outputs on HDTV sets and other devices do not support digital copy protection encryption like the High-bandwidth Digital Copy Protection (HDCP) system supported by HDMI and certain DVI connections. The studios fear that permitting their “high-value” content to travel over unprotected outputs would allow users to record the movies and then redistribute them over the Internet.

Public Knowledge and other opponents of the waiver argue that allowing the studios to turn off analog outputs would “break” as many as 25 million devices by preventing them from receiving or displaying the content and and is therefore anti-consumer. (There are also technical arguments over whether the MPAA has met its legal burden of proof to qualify for a waiver and other super-wonky issues that even The Media Wonk won’t delve into here.)

Here’s the problem: Because the debate is occuring in a public-policy context the MPAA is playing what it considers to be its best public-policy card: fear of piracy. We would only be too eager to offer this shiny new benefit to consumers, the studios say, if  we could just do something about the terrible scourge of piracy. But there’s a far more compelling business case for granting the SOC waiver that the studios are not making.

For its part, Public Knowledge is offering counter-arguments that, while they may address  the public-policy questions at issue, are utterly naive as to the business considerations distributors face when releasing a movie.

The studios know perfectly well that turning off the analog outputs for the proposed VOD transmissions will have little effect on the broader piracy problem (or, I should say, some people at the studios know that, some of them really are crazy). The reason they need to do it is to give themselves cover with Wal-Mart and other large DVD retailers who would raise holy hell over a new “unprotected” window ahead of theirs. Of course, they, too, know the piracy argument is a feint. But they would nonetheless use it to squeeze the studios on shelf space and price at a time when the studios can ill-afford to lose more DVD business.

Theater owners would also squawk, of course. But the studios have no doubt calculated that there is nothing the theaters can really do about it. They need Hollywood’s movies far more than Wal-Mart does.

Cable operators, who would benefit from the new window, have predictably come out in favor of granting the waiver. But they, too, would be all too happy to turn around and use “piracy” during the new window to squeeze the studios on licensing fees in the traditional VOD window. It’s business, after all. not a morality play.

And that, ultimately, is the flaw in Public Knowledge’s case against the waiver. To argue, as it has repeatedly, that the fact that a few independent distributors like Magnolia and IFC have released movies on VOD ahead of their theatrical or DVD release proves that piracy is not a real problem, and that the studios could release movies the same way now, is simply a non sequitur. Independent distributors are in a different business from the major studios. They do not have business relationships with Wal-Mart and Best Buy to protect.

family-watching-dvdAs things now stand, routinely releasing movies on VOD ahead of their DVD/Blu-ray release would not be a sound business decision for a studio to make, given all of the considerations that must go into the distribution of movies, and no business person answerable to shareholders is likely to make it. Would the use of SOC change that? It might, but not because it would do anything to prevent piracy. It might because it would give the studios a tool to manage their business relationships through a period of technological and industry transition.

That may not sound very noble (or compelling to regulators), but I don’t find it particularly nefarious, either. Making and distributing movies is a business, and expecting that it would operate on something other than business principles is absurd.

For similar reasons, I don’t find the “breaking 25 million TVs” argument very compelling, either.

Public Knowledge and the Consumer Electronics Association complain that “allowing the MPAA to shut off analog outputs will leave over 20 million TV sets and downstream devices like Slingbox unable to receive the MPAA’s content.” That may be so, but it’s also so that NO TV sets or downstream devices can receive the MPAA’s content in the proposed window as things now stand. And they’re simply not going to start receiving it just because Public Knowledge and CEA think they ought to be able to because it’s not in anyone’s economic interest to let them.

Granted, it may be that the likely consumer benefit of the new window is not a sufficient trade off for changing the rules that have governed TV receivers up to now. But “no one should have it if some people can’t” is not an argument to that point one way or another. In fact, it’s not really an argument at all. It’s an attitude.

And it’s not a sound basis for either business or public policy decisions.

4 thoughts on “Selectable outputs, or selectable logic?”

  1. While you’re far more knowledgeable on the business side of this debate than I am, I think you’re overlooking one other benefit for Hollywood of activating SOC: a way to make analog outputs look less attractive to consumers. Hollywood has long tried to solve the “analog hole,” and if it can get some number of consumers to say “hey, I want that early window pre-DVD stuff, I guess it’s finally worth it for me to junk my pre-HDMI receiver, buy a new display, and rewire everything,” that’s a step toward obsolescing analog interfaces in the marketplace. (Similar to the way that cable VOD makes TiVo HD seem unattractive to customers who think they might want VOD someday.)

  2. I wouldn’t dispute that was part of the studios’ motivations, Fred. I was just applying Occam’s Razor. It doesn’t need to be a conspiracy to make sense, even in Hollywood. I think the proposed new window could be very valuable for the studios. But only if it doesn’t cannibalize others. The studios’ biggest DVD customers, Wal-Mart and Best Buy, are very keen to get into the on-demand digital distribution business, so the studios need to be very careful about making on-demand movies available to cable operators in an earlier window. Those are ordinary business=relationship issues, not a plot for world domination, as opponents sometimes make it sound. That doesn’t mean that some consumers won’t get screwed in the process. They very well could. The studios seem to be willing to pay that price. That doesn’t mean it’s necessarily a good idea from a public policy point of view. It just makes it predictable.

  3. I don’t know that it is fair to say that our (Public Knowledge) arguments are “utterly naive as to the business considerations distributors face when releasing a movie.” We would be happy if the MPAA came to the FCC and said “hey, we have business reasons to turn on SOC. Here they are. Decide if it justifies waiving this rule that was put in to uphold the public interest.” I don’t think that it would significantly change our analysis, but it would at least be straightforward. The problem is that the MPAA has not made that argument. Instead, they have decided to hang their hat on the “piracy piracy everywhere” argument. As a result we focus on what everyone, including the studios, knows to be the case – SOC is unlikely to have any impact on piracy one way or another. While we do that, we try and remind the FCC that the original SOC ban was put in to uphold the public interest, and that nothing that the MPAA has put forward provides any evidence that waiving it is a net gain for the public.

  4. OK, “utterly” naive may have been utterly over the top. I’ll give you that one, Michael. My apologies. I’ll also grant, as I think I said in the post, that the studios have not made a good argument for their case. But I don’t see how it follows that their failure to make a better argument, by itself, discredits the idea behind it. For the record, the argument I found “naive,” which I will now emend to read “inapposite,” is the assumption that because some non-major studios have released movies differently from the majors implies that a similar approach would be approriate for the majors. It just doesn’t. They’re in two different businesses, with the superficial similarity of distributing filmed entertainment. For one group, going VOD before DVD might make economic sense, even without SOC (pardon the alphabet soup), based on how a movie was financed and where returns are availble. For the other group, it does not. To conflate them makes no more sense than the studios’ emphasis on piracy.

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