a la carteCall it the summer of the entertainment industry’s diss — more discontent, disintermediation or disruptive, technology-based change. For legal counsel, based on various reports, the details matter more than ever: how agreements get put together, what they spell out and how they’re enforced.

But with yet more options available to them, consumers are roiling markets by making choices and their selectivity about content, their a la carte picks in music and television broadcasting, are threatening some industry players while rewarding others.

Much ado has been made about the latest question in music: Is Apple ready to put its market-devouring bite on online radio by snacking on Pandora and Spotify with  iTunes Radio? A recent, leaked copy of Apple’s contract with independent record labels has surfaced, detailing the functions and royalty payment deals that may put the Cupertino company, known for its tech innovations, ahead of its competition with its attention not to design but finance.

And what’s going on with television, as cable and satellite subscription-based services see increasing costs, consolidation and confront huge change in the form of technology and “cable cutters?”

The disruption of digital radio: Apple v. Spotify, Pandora

Like Pandora, with its personalized stations based on the artist, track or genre entered by users, iTunes Radio provides “pre-programmed playlists” as well as offerings or stations with user-created playlists. But iRadio, unlike other online radio stations, also features a “buy now” link to the iTunes store for songs it plays.

appleApple, equally key, has carved out for itself a potential ten- to fourteen-percent savings on royalty payments.  It will pay independent labels for the first year a 0.13 cents fee for every “royalty based performance,” plus fifteen percent of net advertising revenue; that’s more than the 0.12 cents fee per stream that Pandora pays.  How Apple defines “royalty based performances” differs because it excludes the 120-day beta period, Heat-seeker promotions, “Complete My Album” plays and “Listener Matched Content.” Reports say that, assuming users listen to channels playing music they already own, the “Listener Matched Content” exception will be biggest saver for Apple.

Apple’s entry into online radio, analysts say, will spread this type of music consumption to the mainstream, similar to how it made digital-music mainstream ten years ago. It’s also worth underscoring that after a decade, Apple remains the undisputed King of Downloads, with its iTunes service dominating the market with a 60-plus percent of share; to keep up with the ever-changing consumer, however, analysts say the tech- and content-giant had little choice but to get into burgeoning digital radio.

Big shifts in television

If consumers are jumping on a different business model for how they choose and get their music, just how soon before they demand ala carte cable and satellite television ever become available?

607282-john_mccainIf Sen. John McCain (R-Ariz.) had his way, the big shift for television would have occurred yesterday. In May, he introduced a bill in Congress to use regulatory incentives to encourage programmers and distributors to un-bundle their channels and offer a la carte programming. This legislation is based on this idea:  if consumers can’t be forced anymore to buy entire albums but can cherry pick to get individual songs they like, why can’t they follow that same practice and get just the television content channels they want? And why must they pay sizable monthly fees for hundreds of channels they don’t want to get those they do?

“I believe … consumers are at a tipping point when it comes to their monthly pay-TV bill,” McCain told a Senate subcommittee, USA Today has reported. “In my view, the a la carte option is a non-regulatory and consumer-friendly way to provide consumers with the freedom to lower their bills and pay only for what they watch.”

Even if the notoriously do-nothing Congress fails to act, however, technology may pave an alternative: DISH Network, for example, already has provoked plenty of industry ire with its “Hopper” DVR, which both allows customers to get programming where they want it, as well as to record it and to be selective about it, especially by zipping past the commercials that traditionally have paid for broadcast content.

Then, of course, Aereo — the upstart streaming service backed by mogul Barry Diller — also not only has fueled the un-bundling movement, it has created a whole new stream of legal business with litigation over its methods and approach, coast-to-coast. Aereo, it says, employs tiny antennas to stream and record television shows and, the industry contends, directly challenges the business model of major broadcasters. They sued Aereo in April to block it from providing its services, which start at a cost of $8 a month. But the U.S. Court of Appeals for the Second Circuit ruled in the firm’s favor, saying, “Aereo functions much like a television with a remote Digital Video Recorder (“DVR”) and Slingbox.”

Aereo immediately announced aggressive expansion plans and has sought further court clearance and clarification, in advance, of the legality of its offerings.

Meantime, streaming service has been stymied in swaths of the country because of a differing, adverse ruling from the U.S. Court of Appeals for the Ninth Circuit, which barred the technology’s deployment of others’ broadcast content because of copyright infringment. The court in that case considered the approach of  Alkiviades David, founder of “Aereokiller” and “BarryDriller,” who also challenged broadcasters with his tiny antenna-streaming service.

Subscription-based providers, most notably advocates for cable television, argue that a la carte pricing might actually cost consumers, resulting in their paying a lot more for fewer channels and curtailing the range of content by killing off less-popular programming that can’t pay its own way but is, effectively, supported by others in bundled packages.

As prices climb, consumers flee to alternatives

But, clearly, consumers — who are forking over on average $90 a month for pay-TV — may be hitting their price -breaking point with cable- and satellite-based subscription services and their big bills for broad content packages. Even as the television industry grapples with a new wave of consolidation, in part to achieve size and scale to better negotiate over programming, Critics note, for example, that cable bills have increased thirty-three percent in the last eight years, even as the Consumer Price Index went up just fifteen percent in the same time.

 

grimesThe cable industry has pushed back hard on it but a study by Professor Warren Grimes of Southwestern Law School argues that U.S. customers pay an extra $34 billion for bundled cable services. Grimes argues for un-bundling cable channels; he was a legal consultant with plaintiffs in a 2007 class-action anti-trust lawsuit against television programmers. That case was dismissed. Though consumers may be getting hit in their pocketbooks, there was no proof of harm to competition among cable companies, the judge in the case said.  Grimes, in his article, The Cable Television Case: A Giant Step Toward Irrelevancy?  notes that Canada does just fine with unbundled cable and consumers up north pay $342 less per year for service comparable to what their American counterparts get.

U.S. providers, like Disney and Viacom, of course, put together less-popular channels with their prime offerings when negotiating agreements with cable companies. And arguably a major cost-driver for subscription-based services  is sports programming, which can, by some estimates, account for half the cost of pay television. As Los Angeles subscribers have learned, the option to view Dodger and Laker games can come at premium, this even though an estimate sixty percent of all viewers have no interest in sports; many still must pay $3.99 and $4.99 monthly to see elite MLB, NBA or NFL teams play and more than $5 a month for ESPN alone.

What may prove a faster un-doing of bundled services, however, may be the rise of the savvy customer many dub “cord cutters.” They’re already paying for internet service and have upgraded their technology with “smart” televisions and DVRs, so they can tap into an increasingly robust selection of content plays, including individualized programming provided by Netflix, Hulu, iTunes and Amazon. Each is significantly cheaper than most available bundled subscription service via satellite or cable; consumers can search for programming they like on each and put together their own tailored packages, still at less cost than traditional cable or satellite. These services also are showing — and traditional outlets also are catching on, too — that audiences increasingly are mobile and they want content delivered on an array of devices.

This option clearly has proponents and, especially in the case of Hulu, has shown economic muscle, with investors showing strong interest in the companies involved. And, of course, Netflix is stretching industry defintions by leaping into production of original content.

As they grow in popularity, however, the services so dear to cord-cutters face challenges of their own, especially in their agreements with content providers such as the major studios. Netflix, for example, has seen tough negotiations with Hollywood over terms for thousands of the movies and TV shows it offers. And much of the bidding war on Hulu, some analysts note, will turn on its licensing agreements for the content it carries.

Sounds as if those in Entertainment Law, if they keep pace with the changes, will see plenty busy times ahead.