Why The Diller-Backed Aereo Will Need Some Fancy Lawyers

Broadcasters have a history of squashing disruptive technologies in court — and the new cord-cutting service Aereo could well be their next target.

New York-based Aereo, which has received the bulk of its $25 million in funding from Barry Diller’s IAC (NSDQ: IACI), believes it has found a legal way to channel broadcast-network signals to its users without having to pay the same costly re-transmission fees cable, satellite and telco TV service providers do.

Since each subscriber will use his or her own dedicated dime-sized antenna, located at Aereo’s Brooklyn, N.Y., head end, to receive their signal, the company says it is not subject to the same retransmission responsibilities as say, Comcast (NSDQ: CMCSA) or DirecTV (NYSE: DTV).

Officials for representative body the National Association of Broadcasters have yet to issue a statement about Aereo. But speaking to reporters at a Manhattan press conference Tuesday, Aereo founder and CEO Chet Kanojia said, “We understand there will be challenges.”

Just within the last few years, broadcast networks including ABC (NYSE: DIS), CBS (NYSE: CBS), Fox (NSDQ: NWS) and NBC have begun demanding fees from cable, satellite and telco service providers to re-transmit their signals. With cable networks commanding millions of dollars to have their feeds carried, broadcasters successfully argued that it’s only fair that the networks running TV’s most popular content should be compensated for carriage, too.

These retransmission fees have quickly become vital pieces of the networks’ bottom line, with CBS expected to take in more than $250 million in retrans compensation this year. According to SNL Kagan, so-called retransmission consent fees are expected to total around $3.6 billion by 2017. That’s not quite the $9.3 billion in advertising revenue that broadcasters secured at last spring’s record upfront market, but it’s an increasing portion of the total revenue pie nonetheless.

Even with retransmission fees at that level, CBS Corp. president and CEO Les Moonves told investors last year that his company is “vastly underpaid,” given the huge audiences and big programming events found on CBS relative to even the biggest cable networks.

What’s more, broadcasters have a history of fighting disruptive technologies like Aereo. Just last year, for example, they won a U.S. District Court injunction against Ivi TV, which was also streaming the signals of broadcast stations without gaining consent or paying re-transmission fees.

The legality of Aereo, which provides its subscribers with the ability to record local broadcast signals on a virtual dual-tuner DVR for $12 a month, is unclear. (Aereo was formerly named Bamboom.) For example, last year the studios were able to stop Zediva from operating a streaming service that let subscribers access their own virtual DVD player. But on the other hand, Cablevision (NYSE: CVC) was able to defend its remote-storage DVR when it was challenged in court by a host of cable networks.

In fact, that appeals-court ruling – which said it doesn’t matter where a DVR is located, as long as its for personal subscriber use — could have special relevance for Aereo’s claims to legitimacy.

“Each RS-DVR playback transmission is made to a single subscriber using a single unique copy produced by that subscriber,” read a federal appeals court ruling. “We conclude that such transmissions are not performances ‘to the public,’ and therefore do not infringe any exclusive right of public performance.”