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The genie is out of the bottle: Aereo’s court victory and what it means for the TV business

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A federal appeals court has ruled that Aereo’s TV-anywhere service doesn’t violate copyright law, opening the door for the startup to expand a service that lets consumers watch television on their mobile device for as low as $1 a day. The decision amounts to a major victory for cord cutters and could hasten the end of a pay TV model that forces consumers to buy expensive bundles of channels they don’t want to watch.

Here’s a plain English explanation of the decision (embedded below), in which the US Court of Appeals for the Second Circuit ruled that Aereo’s technology is legal, and why it’s so significant for the TV industry. (Note that Aereo CEO Chet Kanojia will be speaking at paidContent Live).

Aereo captures over-the-air TV signals by means of tiny antennas and streams them to subscribers who watch and record shows on their mobile devices or computer browsers. Aereo’s antennas are not just a marvel of technology (see photos here) — they’re also the key to a legal strategy that helps the company avoid copyright infringement.

To get a better idea of both Aereo’s technology and its legal strategy, it’s helpful to consider how it works for consumers. According to the Second Aereo antennasCircuit, “Aereo functions much like a television with a remote Digital Video Recorder (“DVR”) and Slingbox” — allowing subscribers to use internet technology to capture live broadcasts on stations like CBS (S CBS) or Fox (S NWS) and and watch them later.

Aereo argues that its “one antenna for one subscriber” operation means it’s just like a personal recording tool.  The country’s broadcasters disagreed and sued Aereo, arguing that it’s illegally retransmitting their signals to the public.

Aereo won the first round last year when a US District Court in New York refused to grant the broadcasters  a preliminary injunction, saying that Aereo’s service was on all-fours with a previous Second Circuit ruling that found Cablevision’s remote DVR’s to be legal because they involved one copy of a show being transmitted to one subscriber.

On appeal, the broadcasters repeated their argument that Aereo’s mini-antenna system was built specifically to get around copyright law and that Aereo was different than the situation in Cablevision because Aereo offers live TV without a license.

The Second Circuit, however, ruled on Monday in a two-to-one decision that each Aereo subscriber controls the TV stream they receive — including the ability to pause, rewind or record any given show. This means that Aereo is not transmitting to the public and that the service is consistent with the Cablevision decision. The court added that it didn’t matter if Aereo didn’t have a license to show the original programming or that it had created the mini-antenna service specifically to take advantage of the copyright loophole.

The decision was not unanimous, however. In a lengthy dissent, Judge Denny Chin blasted Aereo’s service as a “sham” and “a Rube Goldberg-like contrivance, over-engineered in an attempt to avoid the reach of the Copyright Act and to take advantage of a perceived loophole in the law.”

A major blow for the TV industry

The TV business has long been based on selling customers large bundles of channels at ever-increasing prices. Unlike the music industry, which has been thoroughly disintermediated by services like iTunes, (s AAPL) the television incumbents have so far been able to resist the forces of digital disruption.

The arrival of Aereo thus represented a major threat to the TV business because it offered consumers a way to get broadcast channels where and when they wanted. And unlike other would-be disruptors, Aereo arrived well-funded and prepared to fight: it has top-notch lawyers and has already received at least $58 million in backing from media mogul Barry Diller and others.

Aereo devices in actionAereo alarms the TV industry not only because it encourages subscribers to watch shows where and when they want to, but also because it refuses to pay “retransmission” fees that cable and satellite companies give broadcast networks to retransmit over-the-air shows. At the same time, Aereo is promising to upend the cable industry by training users to come and go as they please — without expensive set-top boxes or installation fees or contracts. Instead, Aereo users can simply $1 a day or $8 a month.

For now, the broadcasters still have the upper hand in one way in that they own many popular cable channels such as ESPN that they can withhold from Aereo. This may help them in the short term but it does not address the bigger problem of changing TV-watching behavior of the sort that Aereo is ushering in. And in the meantime, Aereo has added one speciality channel (Bloomberg TV) and is likely to add others soon.

In the long run, Aereo’s CEO, Chet Kanojia, has vowed to break the current system which he has described as “an abusive system set up in an artificial way” and instead offer “rational bundles.”

Is the genie out of the bottle?

The significance of Aereo’s win at the Second Circuit is not just that can it continue operating. It’s also a big symbolic boost from the country’s most influential appeals court.

This symbolic support is likely to draw in more investment money and to facilitate Aereo’s expansion. Right now, the service is only available in New York City with plans to open soon in 22 more cities — Aereo is likely to treat the court ruling as a greenlight to open shop in the new cities sooner than later. At the same time, the new legal legitimacy is likely to speed Aereo’s existing partnership discussions with distributors like AT&T and Dish Networks.

Things aren’t all smooth sailing for Aereo, of course. The ruling only addresses a preliminary injunction, and the broadcasters will almost certainly appeal to a full panel of the Second Circuit and to the Supreme Court. At the same time, a California court has already ruled that a service offered by a would-be Aereo competitor amounts to copyright infringement — meaning that Aereo has no hope of coast-to-coast distribution for the foreseeable future. (The California case is at an earlier stage and could still be overturned; if not, it could set up a circuit split to be resolved by the Supreme Court).

But while it’s legal status remains uncertain, Aereo now has time on its side. Any future court decisions are likely to occur a year or more from now, providing the company with ample time to further ramp up its service. As it does so, consumers will become more familiar with Aereo and other over-the-top TV options — meaning it will be harder than ever for the traditional TV industry to persuade consumers to stick with an expensive bundle-of-channels model.

AEREO Decision

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18 Responses to “The genie is out of the bottle: Aereo’s court victory and what it means for the TV business”

  1. dslrvideostudio

    Its interesting how tech companies are causing the disruption with traditional models just like Apple did with iTunes and the iPod. Youtube with online viewing video forcing many broadcasters to develop content or show content via Youtube.

    Netflix & Amazon\Lovefilm providing VOD / Streaming content as opposed to the Blockbuster stores setup of physical video or dvd rentals.

  2. Bruce A Johnson

    This article, while factually pretty correct, keep undercutting itself by conflating the “broadcasting industry” and cable systems. Up there it says:

    “The TV business has long been based on selling customers large bundles of channels at ever-increasing prices.”

    The CABLE industry, yes. TV, as in broadcasters? Not so. You have to keep these separate, since at this time Aereo has *nothing* to do with cable channels.

    On the other hand, I think the broadcasters (and I work for one) have gotten this deal exactly backwards. Right now the NAB is pushing for cellphones and iPads to receive over-the-air broadcast content by adding on ridiculous dongles with whip antennas – and at the same time, to have broadcasters give up as much as 25% of their bandwidth to support this service. This approach is doomed to fail; do you really want to add an 18″ antenna to your iPad just to watch “Dancing With The Stars”? What the NAB should do is cut a deal with Aereo to make it the defacto “mobile broadcaster” that Dyle (Google it) will never be, and at essentially no cost to the networks and little to the consumer. At least, that’s how I see it. What am I missing here?

    • Thanks for the thoughtful and informative comment, Bruce. Yes, broadcasters and cable (and satellite companies) are distinct entities but I would argue they form part of the same eco-system that some style the “TV industrial complex” — and while they are frequently antagonists, the relationship is also symbiotic and serves to preserve the same unwanted bundle of channels system that is foisted on viewers.

      It will be interesting to see how Aereo — which is for now here to stay — is pulled into the larger financial and regulatory structure of the TV business. I suspect that, like cable and satellite before them, there will eventually be some sort of fee-for-carriage arrangement but one based on Kanojia’s call for “rational bundles.” Note Aereo is already in partnership talks with Dish and ATT; it will be interesting if the broadcasters try to wrest it away with, as you propose, a deal that lets if be “the defacto mobile broadcaster.”

  3. Sjs Wilton

    Of course if you don’t have to pay for content it’s a great business model. That’s also known by the common name of “piracy”. Aereo will not prevail when the main issue is before the courts, i.e. public performance. The argument that this is just like a consumer going into a Radio Shack and buying an antenna for use in their home — except in this case the antenna is at a NOC — is so laughably bogus I’m stunned that Diller’s lawyers are still trying to sell it.

    Aereo is reselling local broadcast signals in the same time-honored tradition of CATV when “back in the day” when it was literally Community Antenna Television — put a stick up on the hill and bring the signals down into the valley so people could watch the broadcast nets. The CATV Operator entered into a license deal with the local broadcast affiliate (barter back in the “good old days”), the CATV Operator got some nickels and dimes from the folks who wanted to watch…all good.

    When I read rumors about AT&T or DISH talking deals with Aereo I almost fall off my chair laughing. I’ll hand it to Diller — he’s really doing a great Wizard of Oz shtick here…but he won’t get away for long with the old “ignore the guy behind the curtain” line.

  4. Poor reporting…
    “A federal appeals court has ruled that Aereo’s TV-anywhere service doesn’t violate copyright law”
    No… they didn’t. A federal appeals court refused to issue an INJUNCTION to force aereo to shut down while this case moves towards trial.
    This will not be resolved for a while… but a little preliminary to call this a major step towards the end of the TV bundle.

    • In addition, Zediva lost a very similar case in California two years ago. I understand that there’s an interest in making the PaidContent conference speakers seem important and not embarrass them, but there’s a very real possibility that Aereo ends up forgotten in the scrapheap with Zediva and AereoKiller.

      Even in the unlikely event that Aereo were to win this case through to the Supremes, the broadcasters would most certainly provide native, measurable access to their signals on mobile and digital devices. Broadcasters can afford to give their stuff away for free if it can be measured – there is simply no way that Aereo will be able to charge for its services long-term.

  5. This article doesn’t seem to clearly point out that Aereo only delivers over-the-air signals that one could receive anyways, i.e. you have to live in the area where their service is offered. That’s why, for example, you can’t sign up for their service unless you live in New York. They haven’t set up their antenna farms anywhere else.

    Aereo simply offers you an “antenna service” for OTA broadcasts already landing on your home.

    • George95662

      Consider this, the FOUR major TV networks are suing Aereo and want them gone now. This IS a big deal, even though Aereo is only providing over-the-air signals. I personally wish them all the luck in the world. And to think this was all started by a lawsuit that Comcast won. lol

  6. JoePlumber

    $85 a month for 15 years and I’m happy to have some better TV options. Being chained to my personal wifi to stream channels via my cable provider is unfair and offensive.

  7. The only reason Aereo has been able to follow their current path is that they don’t have enough customers to be a real threat to the big media companies. If Aereo ever gets big enough to actually threaten those companies, the hammer will come down. Or Aereo will start paying retransmission fees like the cable companies do.

    Aereo’s claim that they’re not doing retransmission of copyrighted material is the same as me saying you’re not really reading this comment…you just *think* you are.

    I’m not a fan of the broadcasters. But I really resent a company shoveling out bull**** to the public and hoping we’ll believe it.

      • When you sell thousands of opportunities to anyone who wants them with no restrictions, you’re open to the public and you’re running a public operation.

        For Aereo to claim that they’re not public because each customer can rewind what they’re watching is like American or Delta airlines claiming they’re not public because each passenger can adjust the tilt of their seat.

      • Tetracycloide

        Offering services to members of the public is not the same thing as a public retransmission.

        For your inane carlike analogy to work every passenger would have to have their own plane.

  8. Dan Rayburn

    “..could hasten the end of a pay TV model that forces consumers to buy expensive bundles of channels they don’t want to watch.”

    How’s that? Aereo doesn’t have any of the channels I want to subscribe to. It has almost no choice. So how is this an alternative to bundles of channels when Aereo has so few channels to choose from?

    In reality, the court ruling doesn’t matter as Aereo is not a service a large percentage of consumers are asking for, as proven by the fact that Aereo won’t talk adoption rates, revenue, number of streams served, number of hours viewed etc.

    Meanwhile, MSOs like Comcast and others are making $1B a quarter in PROFIT, something Aereo has no shot at “disrupting”. Also, I find it interesting so many members of the media are writing about Aereo, yet don’t have any reviews up of the service. It’s not very good. Video quality does not even come close to cable TV, or work as reliability as cable TV.

    • Michael Wolf

      Dan – let’s be realistic. Aereo is only available in NYC today. They’re rolling out to a number of cities in the first half of 2013. You can’t say exactly how consumers will react until they start to see the product. The reality is – no consumers no about it because it’s not available in their market.

      I know that Aereo’s been talking to over-the-top service providers. Imagine a Aereo/Netflix bundle for example – this is just pure speculation – but to say that Aereo won’t have any chance of disrupting a % of the cable business is a bit premature, don’t you think?