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Getting With the Program

Washington— Like cable operators who dig trenches and pull in signals from satellite transponders, Virtual Digital Cable is providing cable-TV programming to subscribers. Consistent with the name on its corporate letterhead, it is delivering that content without laying a single strand of fiber or coaxial cable, without securing a local franchise and without paying a nickel in franchise fees.

How’s that?

VDC doesn’t need to tangle with local governments or line up billions for capital improvement projects, as Comcast or Time Warner Cable do, because its place of business — the Internet — is not bound by geography.

Since last April, Northbrook, Ill.-based VDC has been streaming a few dozen conventional TV channels over the Web in a quest to find profits in a pay-video world dominated by cable and satellite TV providers.

Charging $8.95 a month, VDC so far has not been a raging success, attracting just 1,000 paying customers. At this point, its subscribers have access to ShopNBC and the Pentagon Channel, but not to any of cable’s powerhouse brands, such as ESPN, Discovery Channel, USA Network or Lifetime. QVC had been part of its offering, but that network's parent, Liberty Media, ordered that the shopping channel's signal be pulled last Friday.

VDC would like to change that. It’s trying, through the Federal Communications Commission now and perhaps the court system later, to force big-name programmers to sell their wares to online distributors of even a couple of channels worth of television content. Within the last month, it has filed complaints at the FCC which could wind up giving the company the right to license the vast majority of cable programming controlled by Comcast, Time Warner, Cox and Cablevision Systems. VDC also has a complaint pending that asks the FCC to force TV stations to negotiate carriage terms with the streamer.

Like many an Internet startup, VDC believes it should not be judged on what it is today but on what it might be in a year or two. After all, a year ago, the “smart” money was figuring Google Video was the next big thing on TV on the ’Net. It turned out to be an unknown venture called YouTube.

Virtually unknown today, VDC wants to become the cable company for an estimated 60 million U.S. broadband subscribers. By exploiting broadband networks built by others, VDC claims that one of its strengths is its ability to provide cable programming to more viewers in more locations than Comcast and Time Warner Cable can over their own facilities combined.

“There is a huge amount of people who could subscribe to the VDC service,” said the company’s chief scientist, Scott Wolf, who founded VDC four years ago with Michael Wolf, his father and company chairman.

Wolf compared VDC’s cable service to Vonage’s voice-over-Internet Protocol telephone service in that they both promise a nomadic, available-anywhere-broadband-is convenience.

“It’s a portable subscription,” Wolf added. “Instead of subscribing to cable television at your home, you’re subscribing to a cable television service where you are. You can sit in an airport, you can sit in a hotel room or you can sit in your office.”

Except for the Chicago-area address, VDC has all the indicia of a digital age start-up: Three of its four top employees are 24-year-old workaholics with big dreams, including Wolf and VDC president and CEO Melissa Skolnick. On occasion, the youthful Skolnick has to show an ID to enter R-rated movies.

As it turns out, calling itself a virtual cable company doesn’t make the law recognize it as such. So far, it has not been able to sign deals that allow it to actually replicate the standard suite of networks that viewers have come to expect on their local cable system. No Fox News Channel. No Travel Channel. No Comedy Central. No MTV. No ABC, CBS or NBC affiliates.

Getting a hold of desirable programming is critical to VDC’s future. But VDC has failed to secure deals with cable networks or local broadcasters. Acquiring programming is not easy for an entity with a subscriber count measured in the hundreds and beset by uncertainty about its legal standing to access cable and broadcast programming without running afoul of communications and copyright law.

A day after it launched last April, Michael and Scott Wolf paid calls on programmers at the National Show in Atlanta, with disappointing results: Signing deals with VDC, the programmers related, might anger their cable and satellite distributors.

“There were program providers who told us right up front, 'We can’t put $2 billion worth of business at risk by giving you content. Period,’ ” Michael Wolf recalled.

To break the logjam, VDC hired lawyers and began filing complaints with the FCC. VDC is demanding access to several Time Warner Inc.-owned networks, including TNT, TBS, CNN and CNN Headline News. In general, satellite-delivered cable networks owned by a cable operator may not be legally withheld from pay TV competitors.

In a second complaint, VDC alleged that two cable operators agreed to carry an unaffiliated cable network if the contracts stipulated that the network wouldn’t ink a carriage deal with a VDC-type entity. The complaint listed each cable operator as John Doe and didn’t identify the network.

“The FCC knows who the network is,” said Scott Wolf, who promised to file more complaints if talks with Comcast and Cablevision Systems founder.

Comcast operates Versus and a variety of other programming networks; Cablevision owns the Rainbow Media Holdings family of networks, including AMC, IFC, music channel Fuse and the Voom HD channels.

In a third complaint, VDC has asked the FCC to order WBBM-TV, the CBS-owned station in Chicago, to enter retransmission-consent negotiations and to bargain in good faith. VDC claims its technology would prevent the CBS station’s programming from escaping the Chicago market into the territory of the network’s other affiliates.

Even if the FCC ruled against CBS, VDC may not be entitled to rely on cable’s compulsory copyright license, a legal device which is designed to promote cable carriage of TV stations without securing copyright approval from Hollywood studios and sports leagues on an individual program basis. In 1997 and again in 1999, the U.S. Copyright Office held that the cable’s compulsory license was unavailable to Internet retransmission of local broadcast signals.

“There are a lot of questions related to territorial exclusivity that this company would have to resolve before their claim would have merit,” said Dennis Wharton, executive vice president of communications for the National Association of Broadcasters.

In general, the FCC can’t force companies like Viacom and The Walt Disney Co. to sell cable programming to VDC because neither has ownership ties with a cable operator. But if the FCC rules in favor of VDC against Time Warner, then VDC would have a legal right to license every satellite-delivered cable network affiliated with a cable operator.

And that’s not just a couple of channels. According to the FCC’s most recent cable competition report, 57 national and 44 regional networks are both satellite delivered and MSO-owned in whole or in part.

Before any of that happens, VDC has to persuade the FCC that a Web site that streams more than one channel of video programming is a “multichannel video programming distributor” with the meaning of federal communications law. On its face, the definition is broad, describing an MVPD as “a person such as, but not limited to, a cable operator, a multichannel multipoint distribution service, a direct-broadcast satellite service, or a television receive-only satellite-program distributor, who makes available for purchase, by subscribers or customers, multiple channels of video programming.”

The MVPD definition, crafted in 1992 before the Internet explosion, wasn’t intended to benefit Web sites, said Misty Skedgell, vice president of corporate communications for Turner Broadcasting System, a Time Warner company which operates such services as Cartoon Network and Court TV.

“We do not believe that the FCC’s program-access rules are intended to apply to distribution of linear programming over the Internet, and we are prepared to vigorously defend against VDC’s claim,” she said. Time Warner is expected to file an answer at the FCC on or before Feb. 8.

Gigi Sohn, president of Public Knowledge, a group that favors the imposition of network neutrality regulations on cable operators, said VDC should be entitled to rely on the program-access rules.

“I just don’t see anything in the law that would prohibit them from filing a complaint or being successful if the FCC finds that there’s discrimination. It clearly applies to them,” Sohn said.

VDC’s complaints to the FCC could have a downside, said Harold Feld, senior vice president with Media Access Project, a public-interest law firm.

If the FCC finds that VDC is an MVPD under the program access rules, Feld explained, the agency might have to conclude that VDC is an MVPD under other cable laws — a result which might not be to VDC’s liking, or to the liking of other IPTV providers.

“If they are going to be an MVPD for purposes of program access, you have to ask if they would be required to get a video franchise, the same way that local franchising authorities are saying AT&T’s IPTV needs a franchise,” Feld said.

But unlike AT&T, there’s also the question of financial wherewithal: VDC still would have to pay for the programming — like conventional cable operators. VDC officials said the company is financed by family and friends. Michael Wolf is a wealthy publisher of daily and weekly newsletters on office furnishings.

An FCC ruling siding with VDC would likely mean that any Web site that streams more than one channel of video programming could rely on the VDC precedent to demand access to cable networks covered by the program-access rules.

“If they win, then there’s going to be a run on program access complaints against every programmer that doesn’t want to let VDC or any other 'MVPD’ on the Internet distribute their programming,” John Seiver, a cable attorney with Davis Wright Tremaine in Washington, D.C., said.

In theory, Time Warner might have to sell CNN to porn sites.

“The porn site wanting to stream and some of the other ones are kind of a worst-case scenario that I can’t imagine would be the outcome,” Seiver added. “Everybody wants competition but people who own content clearly have the right to maintain the quality of the content.”

That won’t stop VDC. Scott Wolf called the forced sale to porn sites an “an extreme example,” but then added that cable and satellite companies haven’t exactly been squeamish about selling adult services.

VDC officials remain convinced that cable television will migrate to the Internet and that they will eventually license many big-name cable networks.

“We know it’s a service people want. We know it’s tough. But we’re going to stick around as long as it takes to finally get the programming,” Scott Wolf said.