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Court Says Yes to Network DVR

In a decision that could have a profound impact on the commercial television landscape, a federal appeals court overturned a lower-court ruling that barred cable operator Cablevision Systems from providing digital-video-recorder functionality to its customers by using massive servers at its headends to record programming instead of giving them expensive set-top boxes with hard-disk recorders.

Cablevision’s plan to implement so-called network-DVR technology was first unveiled in 2006 but was opposed by programmers and studios, which quickly filed suit to prevent Cablevision from launching such a service on the grounds that it would infringe their copyrights by making unauthorized reproductions of their work.

The initial suit was filed by Turner Broadcasting System’s Cartoon Network and CNN, with additional plaintiffs being Fox, NBC, Disney, CBS and ABC.

Programmers’ larger motive, according to most analysts and industry insiders, was to prevent the further erosion of ad-supported TV programming by making it easier for consumers to skip commercials. Cablevision argued that the network-DVR service wouldn’t differ in functionality from the set-top DVRs it was already supplying and that by apportioning part of its server storage to individual subscribers, any time-shifting or ad-skipping that they did would be considered “fair use” of TV content.

Judge Denny Chin of the United States District Court for the Southern District of New York sided with the programmers and enjoined Cablevision from operating the network-DVR system without securing licenses from its content providers. Since then, network-DVR-like services that other cable operators have launched using headend servers -- such as Time Warner Cable’s “Start Over” and “Look Back” and Cox Communications’ offering of ABC primetime shows through its video-on-demand service -- have been based on removing subscribers’ ability to fast-forward through commercials in that programming.

But Monday, the U.S. Court of Appeals for the Second Circuit in New York reversed that ruling, saying that such a service “would not directly infringe plaintiffs’ exclusive rights to reproduce and publicly perform their copyrighted works.” The court lifted the U.S. District Court’s injunction against Cablevision and remanded the case back to that lower court for further proceedings.

If the legal process -- which could potentially include taking the dispute to the Supreme Court -- were to eventually permit network DVRs, the ramifications for the TV business could be significant, noted Sanford C. Bernstein analyst Craig Moffett, who called Monday’s decision a “huge win for cable operators.”

Moffett said using headend servers for a network-DVR service instead of set-tops could potentially reduce cable operators’ capital expenditures, while giving them a competitive advantage over satellite services. He added that the decision, if upheld, could have a negative impact on programmers due to the major increase in ad-skipping that it would probably enable.

“In short order, effective DVR penetration could now jump to north of 60% of cable households, with an even larger increase in DVR outlets per home,” Moffett wrote in a report issued shortly after the ruling. “That means a huge increase in the number of viewing hours per day potentially subject to ad-skipping.”

The real-world implementation of network-DVR services could also give a significant boost to the the "tru2way" initiative being pushed by cable operators and consumer-electronics manufacturers to incorporate set-top functions, such as the ability to watch premium channels and video-on-demand programming, into digital-television sets and other CE devices.

While the notion of eliminating the set-top has aesthetic appeal to consumers, set-makers and retailers said, most expect that tech-savvy cable subscribers will still want at least one set-top with DVR functionality in order to time-shift their programming. A network-DVR service, of course, would provide time-shifting functionality without the clutter of a set-top and potentialy make tru2way devices more attractive at retail.

Public Knowledge, which lobbies for "fair-use" recording of copyrighted content, hailed the decision. President Gigi Sohn called it a "great victory for innovation."

“The Appeals Court properly found that copies of material buffered for a mere 1.2 seconds do not constitute a copy over which a customer or cable company could be sued," she said in a statement Monday.

She also took the opportunity to point out that the U.S. Copyright Office proposed subjecting bufffered copies to copyright licenses, suggesting that it should back off that proposal in light of the court decision.

John Eggerton contributed to this story.