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The long-awaited marriage of television and the Internet is rapidly approaching. The goal of interactive television (ITV) is to enable television viewers — i.e., potential consumers — to react immediately to the programs and advertisements they see. Initially, ITV services seek to promote commerce through formats which encourage impulse purchases by providing instant “buy” buttons, “shopping mall” type functions and detailed product information. Eventually, as ITV services become more sophisticated, they will enable viewers to play along with their favorite game shows, participate in opinion polls, customize their news delivery service, and eventually, select the movies they watch from vast film libraries. To be successful, ITV services will have to combine new hardware, upgraded network functions and various software applications into a seamless, easy-to-use, inexpensive consumer product which performs at a high level of reliability. This already daunting standard is made more difficult by the fact that each provider in the complex chain necessary to provide ITV services has different goals, different business plans and an intense desire not to become a commodity to other providers in the chain. Each of these providers can expect to enforce its legal rights as a means of establishing its position in the ITV service chain. Thus, the practitioner representing one of these providers must be aware of the particular provider’s legal rights, as well as its leverage within the service chain, in order to provide value to the client. To a viewer, ITV systems require two things. The first is content which has been customized so as to elicit viewer responses. This may be accomplished with specialized content which is only applicable to ITV services, regular programming which is customized or enhanced in a way to make it applicable to ITV services and content which is added to basic programming in order to give it interactive functions. The second element necessary for ITV services is a return path to get the viewer response to someone capable of doing something with it. Currently, this return path is often a dialup modem and phone line, but over time is expected to be through a two-way cable network providing real-time responsiveness. Although many cable systems have already been upgraded to provide two-way communications functions, hardware issues have slowed the deployment of real-time two-way communications capability. WHAT’S AVAILABLE NOW Several different variations of ITV services are currently available. Microsoft’s Web TV� enables viewers to access information relating to the ordinary programming they are viewing by adding content delivered to the WebTV� device over a telephone line. The information is essentially added to the programming without being truly integrated into it. Although this puts it at the forefront of the ITV service providers, it is not the fully developed realtime experience many feel will be necessary in order to make ITV a success. Limited ITV services are available from some cable operators. Availability depends upon the level to which the physical plant of the cable system has been upgraded and the availability of advanced set-top box devices. Current set-top boxes can provide limited interactivity through “store and forward” techniques. In this system, a viewer may click on a “buy” button, leading the viewer to believe he or she has purchased the item. In actuality, the viewer’s response is stored in the set-top box and is downloaded through the telephone line when the device initiates its scheduled update call to a control center. Advanced set-top boxes, when available, will process the viewer response in realtime, thus enabling the instantaneous buy order as well as other advanced functions, such as responding to information retrieval requests, through the cable line and without using the phone line or requiring the viewer to obtain a second phone line. Most observers expect that ITV will not reach its full potential until this realtime capability is widely available. LEGAL AND BUSINESS ISSUES ITV presents enormous opportunities for advertisers and sellers of goods and services. Suppose the viewer is interested in taking a vacation in Hawaii and decides to research the idea by tuning in to a travel-related show on an ITV service. By using a remote keypad, the viewer will be able to call up information about specific islands, view hotels (including 360� views from various hotel rooms), book the airplane tickets and the hotel and reserve a rental car — all over the TV. Similarly, a viewer watching a music video on an ITV system will be able to call up information about the artist or buy the latest CD — all by clicking a few buttons. All this appears to the viewer to occur seamlessly. In reality, these transactions require the occurrence of a complex group of functions that must happen quickly and reliably. The commerce-generating potential of ITV applications is clear. Determining who is responsible for facilitating such commerce — and who shall be compensated for it — is not. Each provider in the ITV chain will have different responsibilities and different legal rights, all of which must be resolved in order to operate the service. THE CONTENT PROVIDER A creator of content owns the rights to such content and will be entitled to stop others from changing and manipulating that content. Thus the artist creating a music video may prevent others from using the copyrighted product or changing that product. Allowing another to surround the video with an overlay including “buy” or “more information” buttons may be deemed to interfere with or change the copyright owner’s product. Thus the artist’s consent would most likely be sought — and potentially paid for. Similarly, the person packaging music videos into a network — such as MTV — may believe it is entitled to insert the necessary overlay and codes into the music video in order to sell the artist’s CDs, or the network operator may solicit specialists to insert the proper coding and fulfill orders taken. In this case MTV and the artist (and/or the record company) may both feel entitled to the proceeds of such sales. THE CABLE PROVIDER The cable provider has often been viewed as a gatekeeper controlling the content made available to television viewers. Regardless of how good a particular programming network is perceived to be, it is unlikely many people will ever see or hear it unless it is carried by the largest cable operators. The same will most likely continue into the ITV era, although the prevalence of digital cable will at least allow available bandwidths to be maximized. The cable operator will perform many integral functions within the ITV service. First, it will be the supplier of advanced set-top boxes, most likely by selling or leasing the device to subscribers. Thus the cable operator will have a higher interest in making sure that the hardware and software in the set-top box work correctly and that the boxes are successfully integrated into the cable network. The cable operator may also assume the obligation of integrating video content with interactive functions at the cable headend, processing the viewer-initiated responses and forwarding these responses to others for fulfillment. The cable operator is additionally likely to be the entity that arranges for the creation of “shopping mall” type functions, which may be unique to its systems. And, the cable operator may seek to protect its relationship with the subscriber by asserting that it “owns” the subscriber. This could lead to the cable operator seeking to control the billing functions on behalf of the provider of ITV services provided over its network. Thus the cable operator will have a position of strength versus other entities in the ITV service chain. This potential was acknowledged by the government in connection with the recent AOL-Time Warner merger and the various restrictions imposed upon the merged company by the government. Many have suggested that the cable operators be classified as “common carriers” like the local telephone companies and thereby be required to open their systems to all providers. The cable operators, not surprisingly, have vigorously opposed this proposal. THE PRACTITIONER’S ROLE In advising a client which is or aspires to be included in the ITV service chain, a practitioner must be cognizant of various areas of the law while also having knowledge of its client’s business and relationships. Because the ITV services and functions are new, it is unlikely that they have been specifically dealt with in prior agreements. Alternatively, those agreements may be stated in such broad terms that control over an ITV service may have already been ceded to another. For example, many cable operator affiliation agreements seek to provide the cable operator with rights over the entire signal output by the content provider. This may lead the cable operator to assert control over all the digital add-ons and ITV functions and enhancements a content provider may seek to insert around its program. A practitioner must also be cognizant of the various intellectual property issues that will arise in connection with the negotiation of an ITV service arrangement. The content provider’s copyright on its material as well as the scope of any consent granted with respect to the addition of ITV services will be critical issues in the negotiation of these arrangements. Thus, the content provider may assert that its copyright is being infringed to the extent a cable operator seeks to overlay ITV functions over such programming without consent. Obviously, a thorough review of these agreements must be made prior to the addition of interactive functions. In addition, various governmental rights may be implicated in the creation of an ITV service. Cable providers collect a monthly fee from their subscribers. Because the cable operator will be responsible for installing the equipment, upgrading its plant and maintaining the network, the cable operator could view an ITV service as an added or “upgraded” service for which it could charge subscribers an additional “premium” fee. If cable providers seek to impose additional charges on subscribers for ITV services, or seek a percentage of the revenues from goods sold over its service, issues could arise concerning the franchise agreements with the municipalities they serve. Municipal franchise laws, which typically grant the cable operator a right to provide its cable service over a specific geographic area, often vary from one community to the next in terms of what they classify as “cable service.” A city, for example, may derive revenue from the cable operator by taking a fixed percentage of the “basic” subscription price multiplied by the number of subscribers. Under some contracts, the city does not get a share of the revenue from “premium” services that a cable operator provides or ancillary revenues, such as a share of the profit on goods sold. In that case, the cable operator may choose to market its interactive services to subscribers as a premium service, rather than as a basic service, or as a separate service entirely, or to classify sales revenues in a way that exempts these revenues from the franchise fee structure. The city, however, might view an ITV service as part of the basic cable service and demand its revenue share. GOVERNMENT REGULATION The power of interactive television is its ability to move information in two directions, but how does one get that information to the right place, and whose cooperation is needed? In the United States, physically moving voice, video or information could require regulatory approval from the Federal Communications Commission. While deregulation of the telecommunications industry has helped spark interest in interactive television, it has also left many legal issues open to new interpretation. As ITV technology enters the marketplace, regulators will wield considerable power over the development of different ITV functions, including the power to rule in favor of one technology over another. Government regulators may also seek to intervene with regard to the privacy rights of subscribers. One of the functions of an ITV service necessary for success is simplicity. Buying a product or requesting additional information about a product must be done with “one click.” Thus, private information regarding the consumer must be embedded in the service in order to enable a single click to provide the information or fulfillment provider with the name, address, credit card and other information regarding the subscriber. Because it has the relationship with the subscriber, the cable operator is likely to be the entity in the best position to solicit the subscriber’s consent to the disclosure of this information. Therefore, the potential exists for various governmental agencies to step in and regulate how the consent is obtained as well as how the information may be used based upon such consent. CONCLUSION Changes are coming that can make television a richer medium than ever before, but before they do, fundamental legal and business questions must be resolved to make it all work. To participate in this dynamic arena requires a multidisciplinary approach involving several legal areas, including corporate, intellectual property and government regulation. In addition, the practitioner must have a basic understanding of how an ITV system works in order to assess its clients’ rights within the system and the potential legal issues confronting its client at each level of the service chain. Frederick H. McGrath and Lee D. Charles are corporate partners in the New York office of Baker Botts .

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