Aereo fights for future before the Supreme Court

It is about the size of a dime and light as a feather.

But in the eyes of the broadcast television industry, an Aereo antenna might as well be a hundred feet tall and weigh a thousand pounds. The big networks claim it is illegal and could destroy everything they hold dear.

On Tuesday, the Supreme Court will hear arguments from both sides, and the results could have major implications for the future of television.

Launched in 2012 by Chaitanya “Chet” Kanojia, an Indian-born engineer with 14 patents, Aereo enables consumers to stream and record on the Internet the over-the-air signals of local broadcasters via remotely stored antennas. They can then watch on their televisions, tablets, phones or computers.

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Subscribers pay $8 to $12 a month for Aereo, and that includes a cloud-based digital video recorder that can hold up to 60 hours of content. Aereo is currently available in 11 cities including New York, Boston, Detroit and Dallas.

Broadcasters — led by CBS and Fox, which have been most vocal in their attacks on Aereo — argue that the subscription service violates copyright law. Other broadcasters taking on Aereo include NBC, ABC, Spanish-language broadcaster Univision, PBS and Tribune, parent of the Los Angeles Times.

The fear is that Aereo and similar services have the potential to undermine key revenue streams for broadcasters and hinder their ability to pay for expensive programming such as National Football League games. Pay-TV distributors shell out billions annually to carry local TV stations.

Those so-called retransmission consent fees have become crucial for broadcasters since increased competition for eyeballs from cable channels and digital services such as Netflix have eaten away at their ratings and shrunk their piece of the advertising pie.

Kanojia came up with the idea for Aereo when he was chief executive of Navic Networks, a data firm that he later sold to Microsoft Corp. that collected viewing patterns from cable boxes in real time. Looking at the numbers, he was struck by what he saw.

“It was pretty clear to me that nobody cares about all these channels. Most watch seven or eight channels, and half of them tended to be broadcast,” Kanojia said in an interview.

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So he came up with a way to distribute local TV signals to consumers who didn’t want to spend money on a full package of pay channels.

“Decades of monopoly practices has created a bad sentiment in the consumer’s mind,” Kanojia said.

Aereo’s backers include former Fox and ABC executive Barry Diller, whose IAC/InterActive Corp. owns more than 10% of Aereo’s stock. Gordon Crawford, the well-regarded former Capital Research and Management executive who oversaw the firm’s entertainment and media investments for decades, is also an Aereo investor.

Kanojia declines to say how many subscribers Aereo has. Diller has said he thinks the service could eventually have 20 million to 30 million subscribers.

But first it will have to survive the case of American Broadcasting Cos. Inc. vs. Aereo Inc.

If Aereo loses, “it may mean the end of our company,” Kanojia said.

That would be a perfectly fine outcome as far as broadcasters are concerned.

“We believe that Aereo’s business model, and similar offerings that operate on the same principle, are built on stealing the creative content of others,” CBS said this year.

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To be sure, anyone can still go to RadioShack and buy an antenna to receive over-the-air television signals. Broadcasters argue that Aereo is not the same thing because it is retransmitting their content for profit, altering the format for streaming and not getting their approval.

Aereo has countered that its remote antenna and DVR is just part of evolution and that broadcasters are trying to crush a promising service.

“This case simply concerns the next technological step: allowing a consumer to access broadcast programming using an Internet-connected device coupled with a remotely located, individually assigned antenna and segregated video storage,” Aereo said in its Supreme Court filing.

As for the copyright theft claims, Aereo argues that its use of individual antennas and recordings for each subscriber means there is no violation of copyright law.

“A consumer using Aereo’s system captures a signal through an antenna available only to a particular user and enables that user to make an individual copy from a unique data stream that can be viewed solely by that user at the user’s direction. That technology does not cause infringement because Aereo does not engage in any performance ‘to the public,’” Aereo told the Supreme Court.

Broadcasters disagree.

“Congress could hardly have been clearer that it did not want technological advances (or, in Aereo’s case, gimmicks) to undermine its basic policy judgment that a third party should not be able to build a business model out of supplying performances of the copyrighted works of others to the public without authorization,” they told the Supreme Court.

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The Obama administration has also come out against Aereo. The U.S. solicitor general’s office filed a brief saying Aereo’s unique copy argument “does not alter the conclusion that it is retransmitting broadcast content ‘to the public,’” and added that the company “must obtain licenses to perform the copyrighted content on which its business relies.” The office will also argue against Aereo on Tuesday alongside broadcasters.

TV station owners are worried that if Aereo were found legal it could undercut the retransmission consent fees that distributors such as Time Warner Cable and DirecTV pay to carry their stations. According to SNL Kagan, an industry consulting firm, those fees will hit $4 billion this year and are projected to reach $7.6 billion by 2019.

CBS and Fox have warned that if Aereo wins, they would have to consider getting out of the broadcasting business. Last year, 21st Century Fox Chief Operating Officer Chase Carey said Fox Broadcasting could be converted to a cable channel if its distribution fees were in jeopardy.

CBS Chief Executive Leslie Moonves has also floated the going-cable scenario and more recently suggested the network could launch its own Internet-delivered version of its network should the high court side with Aereo.

“You know, if people want to steal our signal, if the government wants to give them permission to steal our signal, then we will come up with some other way to get them our content and still get paid for it,” Moonves said last month at the Deutsche Bank Media, Internet and Telecom conference.

Some Wall Street analysts think Aereo is not the danger broadcasters make it out to be.

“We’re not sure there are many would-be subscribers clamoring for the solution Aereo provides,” wrote Bernstein Research Senior Analyst Todd Juenger.

At the same time, he said the real fear for broadcasters is the “slippery-slope problem of perhaps Aereo (or a copycat) becoming something bigger” that could upset the business model of pay TV.

Kanojia thinks that rude awakening is coming regardless of whether Aereo survives.

“It does not matter if Aereo succeeds or dies,” he said. “They are going to suffer the same fate everyone else has. There is nothing in the Constitution that protects people from change.”

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