Aereo’s in a Catch-22 when it comes to cable, rules are rigged against internet TV

Aereo CEO Chet Kanojia leaves the U.S. Supreme Court after oral arguments April 22, 2014 in Washington, DC. (Photo by Alex Wong/Getty Images)

The Supreme Court ruled last month that Aereo, whose service helped subscribers stream TV signals, is like the cable companies that need a license to transmit over-the-air TV. But when Aereo responded by trying to buy such a license, the Copyright Office stated it is not a cable service — leaving the start-up in a legal no-man’s land where it is likely to die.

The situation sums up the surreal world of TV regulation, which is built on an outdated set of rules that serve to entrench the current model of TV distribution. Under this model, broadcasters charge to stick consumers with bloated bundles of channels, and newer internet services like Aereo get frozen out altogether.

The rules that created this mess are complicated but it’s easier to understand them if one starts at the beginning: specifically, 1976, which is when Congress required cable companies to start paying copyright fees to include over-the-air stations like CBS or NBC in the bundles of channels they sold to customers.

Those payments take place through a compulsory licensing system, which require the cable companies to pay around 1 percent of their revenue to the Copyright Office. The office then distributes that money to whoever owns the rights to the shows.

That is exactly what Aereo tried to do after the Supreme Court rejected its argument that it was not a cable service, and that it simply rented equipment for consumers to record TV on their own. The court instead lumped Aereo into what dissenting Justice Antonin Scalia called a “looks-like-cable-TV” category, which is what led Aereo to apply for a license.

So what’s the problem? Why can’t Aereo simply hand over part of its revenue to the Copyright Office, as it has already tried to do, and start serving customers again?

The problem is that Aereo also confronts a second set of rules that arrived via the 1992 Cable Act. Those rules give broadcasters the power to force a cable company to carry their signal, or else require it to obtain “retransmission consent.”

These rules, ironically, were designed to protect broadcasters from the growing power of cable companies, but, in the view of some lawyers, the broadcasters “converted .. a shield into a sword.”

Catch-22

Used as a sword, the rules mean the broadcasters can cause a channel to “go dark’ for months until a cable service agrees to pay a fee. This can create high profile disputes, such as a recent black-out battle between CBS and Time Warner Cable, that leave consumers caught in the middle.

In Aereo’s case, CBS and the rest of the “big 4″ could also use this “consent” process as a way to force Aereo to buy not just the broadcast channel, but a bundle of others as well. Perhaps ABC might agree to sell its signal for $1 — so long as Aereo also agreed to pay for ESPN7 and the Schnauzer Home channel too. The point is that, under the retransmission sword, the economics of Aereo’s business look hopeless.

Even if that were not the case, however, Aereo may not even get a chance to try in the first place. That’s because it’s likely to trip over yet another set of arcane rules that limit who can be considered a cable service. As the New York Times explained in 2012, regulators and the TV industry are choosy about who can call themselves a cable company  — it requires the company to demonstrate that, in TV-industry speak, it is a “multichannel video programming distributor” or MVPD. And for now internet companies are not eligible.

That’s why the Copyright Office wrote this week that it believes Aereo’s service falls outside of the compulsory license category, and that “We do not see anything in the Supreme Court’s recent decision … that would alter this catch-22
conclusion.” (The office’s word is not final, but courts have deferred to its definitions in the past.)

So in other words, the Supreme Court says Aereo falls under a “looks-like-cable-TV” category, but a government office that oversees cable TV says it is not cable TV. It’s the very definition of a Catch-22.

Aereo has one hope, though it’s a slim one. It can try to persuade a federal judge in New York that it should qualify for the compulsory license rules under the 1976 law — and that it can do so without walking into the retransmission sword of the 1992 law.

An earlier TV service, called ivi, tried this before but fell on its face before an appeals court in 2012. Aereo is in a different position, however, in light of the Supreme Court ruling and because the 2012 ivi decision said ivi didn’t qualify because it was transmitting national signals — which is different from Aereo, which only picked up local ones.

This legal argument, however, is barely more than a straw to grasp for Aereo. The company must first ward off a looming imminent injunction and, if successful, survive a protracted court battle which the deep-pocketed broadcasters can fight for years — something that Aereo probably can’t afford to do.

Simply put, the game is rigged against an innovative internet TV service like Aereo no matter how it tries to enter the market. And it will likely stay that way until Congress rewrites the law.

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