Fox’s cable TV business made up the vast majority of News Corp’s profits for the quarter ending March 31, contributing $993 million of the $1.36 billion in operating income for the period. Total revenues were $9.54 billion, up 14 percent over the previous year.

The overall home video market is up five percent and “we’re up a bit more than that,” Carey said. “The driving force is digital…the overall marketplace continues to grow really well, and digital is becoming a growing part of what we do.” He also said that the DVD business has stabilized, “with Blu-Ray offsetting the decline in the older formats,” and that “really low-priced rentals” through services like Redbox  are “becoming less of a force.”

In response to an analyst’s question about the future of Hulu, Carey said that the service has “great momentum,” and “we’re particularly excited about subscriptions” through Hulu Plus. “There’s an important role for Hulu Classic in the marketplace,” he said, but “we need to develop the dual-revenue side of it.” In a few years, he said, “Hulu will look a bit different than it does today,” partly in response to changes in Netflix’s business: “Netflix talks about evolving their business to somewhat different business models” (he didn’t elaborate on what those are).

When asked to offer general advice to the broadcast networks, Carey said they are still the “viewership leaders,” but acknowledged the networks might need to “be a bit more targeted in the types of series [they] invest in…networks have been more about the volume game, stuck in historical practices…Do you need to break some of those rules? The answer is clearly yes.”

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The TV business is still based on an archaic business model that forces customers to buy arbitrary bundles of channels. Fans of arts programming, for instance, often have to shell out $5 a month for football shows — even if they hate football.

This isn’t a technology issue. It’s instead the problem of what media doyen Peter Kafka calls the “TV industrial complex” — a cabal of broadcasters and cable distributors that refuse to surrender their bundled TV business model.

That’s why upstart Aereo, which uses tiny antennas to stream TV signals to mobile devices, is so intriguing to watch. The company is offering a way for people to watch shows where and when they want — and has so far withstood the TV industry’s lawsuits. Yesterday, we showed off photos of Aereo’s tech. Today, we’re exploring the vision and strategy of the man who wants to kick in the door of the TV industrial complex once and for all.

The quest to end an “abusive” system

Chet Kanojia, who is speaking at paidContent Live in April, is a soft-spoken engineer who likes stylish shoes. At 43, he’s already built an advertising company, Navic Networks, and sold it to Microsoft — and presumably made himself a fortune. When we chatted at Aereo’s site in Brooklyn this week, the first thing I wanted to know is why he picked this fight. Why, that is, did he decide put so much energy into Aereo when the TV industry might crush the company in a second like it has done to others before?

“I had the option to be a VC, to do nothing or to do something really really meaningful,” said Kanojia. “In my heart of hearts, I belive that when businesses are created or preserved with analogue mentalities, they’re artificially constrained and ripe to to be recast in a different way.”

He adds that he loves TV content like 60 Minutes, Parenthood and Downton Abbey. But he is exasperated by the TV industry’s ossified pricing model.

“Why can’t there be a simple way to pay for this? It’s just irrational that it should cost hundreds of dollars a month. It’s an abusive system set up in an artificial way.”

Broadcasters like NBC and Fox, of course, would argue that we need a system that provides revenue to produce the content that people like so much. In recent years, these networks have been leaning on distributors to pay them for carrying over-the-air channels — and presumably think Aereo should too.

Kanojia is having none of it, saying the broadcasters are already making money from public spectrum through advertising and that it’s unreasonable for them to ask for more. Also, Aereo is not part of the regulatory regime that requires big TV companies to offer their channels for sale to cable and satellite distributors; this means that, for now, Aereo is unable to sell channels like ESPN (owned by ABC) to its customers.

Kanojia adds that pure “a la carte” TV is not the only solution to the TV muddle. He would also settle for “rational bundles.”

A high stakes bet

Aereo’s disruptive potential lies in the fact that, unlike other forms of pay TV, subscribers can add or drop it without the hassle of set-top boxes or contracts. For now, Aereo is available only in New York City but is about to roll out to 22 new markets across the country for the same price of $1 a day or $8 a month to watch and record shows. Kanojia believes this will change people’s conception of how we get access to television.

“You can come in five or ten times a year and a pay a dollar. We have lots of habitual one dollar buyers. It’s a massive dent in the psyche.”

For Aereo to have a long-term impact, though, it will still have to survive an ongoing legal gauntlet. On this front, it has a decent chance because investors and lawyers designed the company as a high-stakes bet, counting on a 2008 appeals court ruling that said private remote DVRs don’t violate copyright (you can read the legal details here). After broadcasters sued it last year, Aereo won the first round and the case is now on appeal.

The price tag for the loser will be high. On one hand, media mogul Barry Diller and others have put at least $58 million into Aereo, money that could evaporate if Aereo is shut down. On the other hand, GigaOM Pro analyst Paul Sweeting (who has written about Aereo) said the initial court decision was a “disaster” for the networks and that a loss at the appeal level will open the floodgates.

“If the networks don’t win, what it means is that all you have to do is bounce a signal off a cloud-based DVR and you can do what you want,” said Sweeting by phone.

Whatever the outcome of the court case (which could go to the Supreme Court if courts in New York and California continue to disagree), Kanojia thinks he will have made an inexorable dent in the current tv structure. He also thinks the litigation will help other pioneering TV companies.

“The legal situation is unfortunate, but it forces clarity and that’s a good thing.”

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Media attention to the service has focused primarily on the legal dispute between Aereo and TV broadcasters who have tried, and so far failed, to shut it down. The legal controversy is real but also overshadows the implications of the service for TV viewing and the technological wizardry that makes Aereo work. (Aereo founder and CEO Chet Kanojia will be speaking at our paidContent Live event in April.)

To get a better idea of just how Aereo is serving up TV, we went to the company’s plant in Brooklyn to get some up-close photos. Here’s our tour:

From the Empire State Building to your iPhone

Aereo transmits from the top floor of a nondescript government building on Vanderbilt Avenue on the edge of downtown Brooklyn. You can see it on the right: 

Aereo chose this location for a reason. The floor on which it operates has a direct line of sight to the city’s biggest transmission tower. Here’s a picture of the tower and the view from Aereo’s window:

These direct sight lines make it easy for Aereo to pick up the powerful signals emitted from over-the-air broadcast services like ABC, NBC, CBS, Fox and local community stations. Aereo’s technology then transcodes and relays those signals to its customers who can watch TV, change channels and record shows with their phones or iPads:

Tiny antennas for everyone in the city

Aereo works by letting every subscriber rent a pair of tiny antennas. Customers get two antennas so that they can watch live TV while also recording a show or, alternately, to watch live TV on two different devices at the same time. While Aereo created the personal antenna system as a way to comply with copyright rules (you can read about the legal issues here), the antennas themselves are remarkable in that they give Aereo the capacity to serve 1 million New York City customers from the single floor in Brooklyn and an adjoining rooftop.

Here’s a close up look of the dime-sized antennas in action:

Aereo CEO Chet Kanojia explained that the device is a simple copper antenna but that, rather than picking up the entire TV spectrum like a typical cable antenna, it picks up only the 6 megahertz block of spectrum that a viewer wants to see at a given time. He describes it as a “switched antenna” that’s beautiful in its simplicity. The ingenuity, Kanojia said, is that Aereo’s 1.5 inch antenna changes its electrical and magnetic characteristics in order to replicate the tasks of a standard 35 inch UFH or three foot VHF antenna.

The size of the antenna allows Aereo to cram many of them into a small space which is one reason Aereo is able to relay TV to so many people at the same time. Another reason is that the antennas are “multitenant” which means that, when one Aereo subscriber is not using an antenna at a given time, it is available to all other subscribers.

Cheap storage and high-performance fiber

Aereo relies on the antenna system to offer a cheap TV services that subscribers can easily add or drop at any time. But the antenna is only part of the equation. To make the service economically viable, Aereo is also capitalizing on major advances in transcoding technology and cloud storage. It is these advances that now make it affordable for Aereo to translate the over-the-air TV signals into iPhone video streams and to let people store hours of television on remote servers.

According to Kanojia, commercial transcoding costs per stream would have been $8,000 per customer two years ago but now the company can do it for under $20 (these figures relate to capital expenditures, not monthly costs). He also notes that a terabyte of storage, which once cost over $1 million, can now be had for under $100. The new efficiency, he said, is not just in raw storage capacity but better spindle speeds on hard drives that improve transmission times.

Here is a look at Kanojia standing in front of Aereo’s proprietary transcoding devices and a close-up of the servers which act as a private cloud service and on which Aereo customers store thousands of hours of TV to watch later:

To connect the antenna system with the transcoding and recording devices, Aereo relies on multiple 10 gigabit fiber links that look like this:

Aereo also relies on leased fiber networks in different spots around New York City to deliver TV content to its subscribers. This system means it doesn’t have to rely on content delivery networks or other middlemen.

“What’s the point of long-hauling something when you’re already 80 percent there?. There’s no CDN’s. It’s a local to local product,” said Kanojia.

Next: the man who would break the cable industry

Aereo wants to overturn the current TV business model in which viewers shell a hundred dollars for a bundle of channels, many of which they don’t want to watch. Aereo’s challenge comes by way of its technology but also in the form of Kanojia himself, who is picking a fight that many have lost before (iCravetv, ivi, etc) — and is so far holding his own. You can now read our follow-up account of Kanojia’s vision for the future of television.

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Diller, who used to run Paramount and Fox, filed a complaint this week against BarryDriller.com, a new service that offers TV-on-the-go to west coast markets. The complaint notes Diller’s fame based on works like Raiders of the Lost Ark and Grease, and accuses BarryDriller of cyber-squatting, trademark infringement and stepping on Diller’s right to publicity. Diller had initially joked about BarryDriller, telling the Wall Street Journal, “I had hoped that if they steal my name they’d do it for something more provocative.”

Diller’s suit comes on the heels of a Fox lawsuit that says BarryDriller infringes the copyright for shows like The Simpsons and Glee. BarryDriller is run by David Alki, who launched the short-lived FilmON, a TV streaming service that the entertainment industry smothered in 2010. He appears to have named the new venture BarryDriller in an effort to generate publicity and, possibly, to stick a finger in the eye of Diller.

While Fox may be on the same side as Diller against BarryDriller, it is also part of a major effort by broadcasters to shut down his Aereo business, which offers TV and DVR services for around $12 per month. Fox and other broadcasters say Aereo, like BarryDriller, infringes copyright though they have failed so far to win an injunction.

Technology advances lead to legal pile-up

New technology and changing notions of TV is what lies at the heart of the legal pile-up. Specifically, Diller’s Aereo has been relying on a legal loophole that says one-to-one transmission is not broadcasting and therefore shouldn’t be considered copyright infringement. To make the argument hold up, Aereo points to a novel technology that gives every subscriber a dime-size antenna. Each antenna relays a personalized stream of over-the-air TV signals to subscribers’ iPhones.

Aereo also says its service is the legal equivalent of remote DVR recording technology, which courts have said doesn’t infringe copyright. But the broadcasters disagree, and claim Aereo is hiding behind a technicality. They says the “one antenna one user” theory doesn’t change the fact that Aereo is retransmitting shows without permission.

The dispute is about law, but also about money of course. The broadcasters recently won a drawn-out battle to force cable companies to pay them for retransmitting their shows and now, one suspects, they want Aereo to pay too. Diller, for now, says Aereo has no obligation to pay. BarryDriller’s Alki, on the other hand, has offered to pay retransmission fees.

If they build it, will anyone watch?

The legal snafus that have greeted new services like Aereo and FilmOn are part of a long-running pattern in which incumbent broadcasting interests want to control platforms against new disrupters.

In this case, however, copyright and copycats like BarryDriller may not be Aereo’s biggest problem. Instead, there is a question of whether the service will be viable from a business perspective. Aereo, which for now is only available in New York, is experimenting with new pricing incentives to get people to try the service but for now its prospects look uncertain at best.

Dan Rayburn, an analyst with Frost & Sullivan, recently told the LA Times that Aereo was “dead in the water for multiple reasons” even if it can win its court challenge.

Part of Aereo’s problem may be that there simply may not be that many situations where people want to pay to watch broadcast TV on a mobile device.

Here’s the legal complaint, which asks the defendant to hand over the BarryDriller.com name and to pay damages to Diller:

(Ed note: an earlier headline suggested it was Aereo who filed the suit. It is Barry Diller who is suing).

Diller v BarryDriller

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On Friday, Fox Networks filed a new suit against a start-up called BarryDriller.com (a play on the name of TV mogul and Aereo investor Barry Diller).  BarryDriller charges $5.95 a month to supply personal antennas that let subscribers “scan the airwaves and tune the antenna to receive whichever broadcast station signal the subscriber chooses.”

Neither Fox nor Aereo is amused. Fox claims that BarryDriller is infringing the copyright of The Simpsons, Raising Hope and Glee and violating its trademark. The broadcaster adds that the start-ups use of personal antennas is not defense:

“It simply does not matter whether BarryDriller uses one big antenna to receive Plaintiffs’ broadcasts and retransmit them to subscribers, or millions of antennas, “so tiny [one] fits on the tips of your finger,” as Defendants claim it does. No amount of technological gimmickry by Defendants changes the fundamental principle of copyright law ….”

The lawsuit mirrors one that Fox and other broadcasters are pursuing against Aereo. That case also turns on a legal loophole based on whether Aereo’s one-antenna-to-one-person transmission system means it is not broadcasting to the public. In a surprise ruling last month, a New York judge awarded round one to Aereo by refusing to grant the broadcasters a preliminary injunction.

There are a handful of differences between Aereo and BarryDriller:

• BarryDriller is targeting the Los Angeles market unlike Aereo which is for now available only in New York

• BarryDriller says it is willing to offer broadcasters a retransmission fee similar to what cable operators pay

• Its website suggests that BarryDriller viewer need an external antenna to receive TV on any device (Aereo transmits directly to Apple products like Safari, the iPad and iPhone)

[Update: BarryDriller founder David Alki wrote to say that his service is actually in four major markets and that it will add three more next week.

Alki is also the founder of FilmON, a TV streaming service that the entertainment industry smacked with an injunction in 2010.]

Aereo’s Barry Diller responded to his rival’s launch last week by telling the Wall Street Journal, “I had hoped that if they steal my name they’d do it for something more provocative.” Aereo executives said they hadn’t heard of the service and added, “It is unfortunate that they appear determined to try to trade on Aereo and its board members’ successes and reputation.”

Here’s Fox’s complaint:

Fox v BarryDriller

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Also read: Is Fox facing a blackout on iCloud and UltraViolet?

A studio representative confirmed an agreement with Apple to make its films available for iTunes users to re-download previous purchases of Fox films through iCloud.

HBO’s contract rules meant that Fox movies like Prometheus were previously blacked out from clouds while they were in the HBO pay TV window, which starts around six months after DVD release and can extend for up to 18 months.

That means if you purchased the film through iTunes, and you deleted it from your notebook, tablet or smartphone, you couldn’t re-download it from iCloud while it was in HBO’s window.

Earlier in the year, Warner Bros. and Universal negotiated similar terms with HBO.

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“Ultimately, this case is about consumer choice,” said Dish in a complaint filed Thursday in Manhattan federal court. The satellite TV provider wants the court to declare that it is not infringing copyright or breaching the terms of its contracts with Fox, NBC, ABC and CBS. Meanwhile, the Hollywood Reporter reports that Fox has filed a separate suit against Dish to “aggressively defend the future of free, over-the-air television.”

Dish’s ad-skipping device stands out because, unlike other DVRs, viewers can skip an entire set of commercials rather than fast-forwarding or skipping in 30 second jumps.

The so-called “ad eraser” may delight consumers, but the TV networks reacted angrily during a conclave with advertisers in New York last week.

“How does Charlie Ergen expect me to produce ‘CSI’ without commercials?” said chief executive of CBS Corporation, Leslie Moonves, according to the New York Times. (Also, see my colleague Daniel Frankel’s excellent report on the strategy behind Dish’s “Molotov cocktail” at the broadcasters.)

In its complaint, Dish portrays its technology as a natural extension of existing time-shifting practices and points out that Americans have for decades chosen to disregard ads in one way or another.

Dish also claims that its technology does not alter the broadcasters’ signals and that viewers can only skip the ads the day after a show is aired live.

The TV networks are facing significant disruptions despite receiving new fees that oblige cable and satellite providers to pay them for carrying their over-the-air signals. In addition to its legal tussle with Dish over ad skipping, the TV networks are also suing Aereo, a start-up service that uses tiny antennas to broadcast shows directly to viewers’ iPads and iPhones.

Here’s a copy of Dish’s complaint:

Dish v TV Networks

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That latter component is a major infrastructural issue as Netflix continues to aggressively expand its Latin American streaming operation. Only 20 percent of Brazil’s 42 million internet users, for example, have a connection speed above 500 kilobytes per second, according to a report released last year by Ibope Nielsen Online. But it takes a speed of around 800 kilobytes per second to stream movies.

Also read: Why Netflix can still win

Still, despite significant hurdles like this one, Netflix announced yet another major Latin American pay TV content deal, bringing Fox’s series and movies into the region’s streaming portfolio.

Under the agreement, all past seasons of Fox-produced TV shows including  24, Prison Break, The X-Files and Arrested Development will be available for viewing beginning July 15, as well as current and past seasons of How I Met Your Mother, Glee and Bones.

In addition,  Fox films including Gentlemen Prefer Blondes, Wall Street and Office Space will come to Netflix on July 1, with more films and TV series to be added over the next few years.

In its first-quarter conference call with investors on April 23, Netflix CEO Reed Hastings conceded that his company’s expansion into Latin America, Brazil and the Caribbean, which began last September, faces a number of hurdles beyond just broadband development. Consumers in the region are unfamiliar with the concept of over-the-top services, for one thing, and basic tasks such as orchestrating payment through recurring credit/debit card transactions is problematic given the developing states of local banking systems.

Still, despite some pushback from the investor community, Netflix keeps plugging away with content deals. In the first quarter, for example, the company added CBS Corp. TV shows including Dexter and Charmed to its Latin American slate; Disney animated hits Gnomeo & Juliet and The Incredibles also debued on the service, while the Weinstein Company’s Oscar-winning film The Artist is slated to make a second-quarter bow.

For a subscription-based media company like Netflix, which must keep adding customers in order to survive, Latin America could ultimately prove to be salvation. On Tuesday, for example, another U.S. media business facing stagnant U.S. subscriber growth, DirecTV, announced that it had added another 593,000 Latin American subscribers in the first quarter.

But delivering satellite signals to the developing region is one thin,g and broadband is quite another.

Asked about competition from over-the-top services in the region during DirecTV’s earnings call, company chief Michael White said it wasn’t much of a concern given the level of broadband penetration.

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