With an increasing number of Americans looking to reduce their pay-TV profiles in favor of watching more online programming, the over-the-top (OTT) opportunity is one that players of all stripes have begun chasing. That’s driving innovation in terms of business models, but also high-profile failures. To that point, two startups, Aereo and FilmOn, have unwillingly shone a spotlight in the difficulty in replicating the local broadcast aspect of the TV experience online by losing big court challenges. Now though, the FCC may be offering a lifeline, by putting OTT providers in the same regulatory category as cable, satellite and telco operators.

We’re Not a Cable Company—Oh Wait, Yes We Are

It has been a long and winding road for both Alki David-backed FilmOn and Barry Diller’s Aereo, which have business models that started out by offering local TV feeds via the Internet for a monthly, under-$10 subscription. The problem is that they weren’t paying broadcasters retransmission fees for the right to do so.

Both promptly drew lawsuits that argued that because the companies broadcast local feeds via the Internet without paying retransmission fees, they are essentially stealing content. Aereo counter-argued that because it provides dime-sized antennae to its subscribers — who pay $8 per month for access to a couple dozen channels — it constitutes an over-the-air, rabbit ears-based service, which is exempt from retrans fees. It has also argued that its content is delivered to a single cloud-based DVR device for one subscriber and can therefore not be categorized as a public broadcast service, subject to fees and regulations.

FOX and CBS brought a copyright infringement suit against FilmOn last year and won, but after the Second Circuit Court of Appeals in New York overturned an injunction against Aereo, FilmOn took it to be precedent that supported its continued operation.

The Aereo case went to the Supreme Court, which ruled against it and vacated the lower court's finding, making FilmOn once again vulnerable. But it continued to operate, prompting broadcasters bring a contempt complaint.

Local New York District Judge Naomi Reice Buchwald then over the summer found FilmOn in contempt of court for continuing to operate, despite an injunction against it, and ordered it to pay $10,000 for each day of 'illegal' service.

Both companies, ironically, subsequently applied for cable provider status at the US Copyright Office as a last-ditch effort. Gaining that distinction would allow them to be subject to must-carry regulations; they would be guaranteed access to local feeds, but would be subject to retransmission fees.

But, the office said that it won't process the application for a compulsory license, at least for now. Aereo got an identical assessment from the office.

"We understand FilmOn to be an Internet-based service that retransmits broadcast television programming. In the view of the Copyright Office, such a service falls outside the scope of the [compulsory] license," Jacqueline Charlesworth, associate register of copyrights, said in a letter to the company.

The office’s position has had a significant effect on court attitudes. "FilmOn is not entitled to a license under Section 111, and its retransmissions clearly and unambiguously fall under the scope of conduct barred by the injunction," Buchwald said in the opinion. "We also reiterate that while it appears that defendant has ceased streaming plaintiffs' programming, such conduct is covered by the Injunction and future retransmission of plaintiffs' copyrighted content without a license will subject defendant to significant penalties per day of non-compliance."

FilmOn has continued to add non-broadcast, licensed content to its lineup; but Aereo has limped to a state of non-existence.

FCC Offers a Lifeline

It’s obviously been a long and winding road so far—and it seemed to have ended. But, while the courts blocked the bids by Aereo and FilmOn to gain cable rights, the FCC said earlier this month that it is considering reclassifying OTT operators to put them on parity with cable MSOs and satellite companies.

According to reports, the commission is considering extending its program access rules to online providers that provide linear video streams, and allow them to negotiate retransmission deals with broadcasters.

An FCC spokesperson told Multichannel News that the idea is to create a technology-neutral definition of an MVPD, thus eliminating the requirement of having facilities-based transmission path in order to be guaranteed access to TV stations via must-carry rules and retransmission.

The move would clearly have far-ranging implications.

In its submission to the FCC, FilmOn laid out a scheme to support authenticated subscribers in local markets consistent with FCC rules: "FilmOn intends to offer TV stations the right to elect must-carry or retransmission consent. FilmOn will also provide program exclusivity, emergency alerts and information, closed captioning, equal employment opportunity and to otherwise comply in good faith with all of the rules and regulations that govern MVPD service."

A Growth Opportunity

While residential broadband penetration will soon top 100 million US households, legacy pay-TV subscription services have peaked and are in decline. According to The Diffusion Group (TDG), during the next few months, and for the first time in history, the number of home broadband subscriptions will surpass the number of home pay-TV subscriptions. That’s a huge opportunity for FCC, needless to say.

Although asserting a causal relationship between these two trends still fuels debate, the correlation is certainly there: According to TDG’s latest report, Pay-TV Refugees, 2014, 14% of adult broadband users said that they do not use a legacy pay-TV service, up from 9% in 2011, the 36-month period during which home pay-TV subscriptions began to decline.

“Today, residential broadband services are used in 75 percent of U.S. households, meaning 13 million broadband households are currently doing without a traditional pay-TV service,” noted Michael Greeson, TDG president and author of the report.

Regarding the prospects for companies like Aereo and FilmOn, he added that these consumers pose an obvious and growing challenge for incumbents, and an excellent opportunity for new video purveyors, whether pure-play online ventures like Netflix or the growing list of television networks going direct-to-consumer.

However, as Greeson said, “Minimizing damage and maximizing opportunity presupposes an understanding of who these consumers are, what drives their decisions, and what they expect from a pay-TV service, be it legacy or online.”