The Economy Hub
8:00 AM EST, January 19, 2014
The big television networks have faced all number of challenges in recent years. But they could be done in by something called Aereo.
Most people probably haven't heard of Aereo, which has been rolling out its video service for just over a year and still serves only 10 cities, none further west than Salt Lake. But millions will be hearing about it now, because on Jan. 10, the Supreme Court agreed to hear the broadcasters' complaints that Aereo's business dramatically breaches telecommunications and copyright law.
The New York start-up offers its subscribers signals from their local over-the-air broadcasters in a way that is either a minor tweak of how they can get those signals on their own (that's Aereo's version), or a novel business model that will destroy civilization, or at least the TV industry (the broadcasters' version).
What's not debatable is that Aereo dramatically alters the balance of power between broadcasters and cable companies, which have been fighting each other to a draw over broadcast fees — the most recent example being this summer's standoff between Time Warner Cable and CBS that resulted in CBS programming getting blacked out for 3 million Time Warner subscribers for a month. Nor is there any secret about who stands to lose if Aereo wins. Here's a clue: The plaintiffs suing Aereo include ABC, CBS, NBC, Fox and PBS.
In the never-ending war between cable and broadcasters, "both sides have had a way of inflicting punishment on the other," observes Blair Levin, a telecommunications expert at the Aspen Institute. "But the amount of punishment cable can inflict on broadcasters will be greater if Aereo wins the case."
Here's how Aereo works. The company uses tiny antennas, each about the size of a dime, to pull in local broadcast stations in the cities where it operates. (Los Angeles might see service later this year, the company says.) The antennas, each assigned to a subscriber, are centrally located at an Aereo facility. For $8 a month the subscriber can tune in to any of the stations and watch it on a computer, tablet or smartphone, or direct it onto a TV screen via a Roku or AppleTV box. The content streams through a DVR-like device at Aereo, so the programming also can be recorded, paused, rewound or fast-forwarded.
Aereo's prime market is what its founder, Chet Kanojia, calls cord cutters or "cord shavers." Some have replaced their cable subscriptions with a patchwork of streaming video services like Netflix, Hulu and Amazon Prime, and need a reliable source of local TV programming. Others are cable subscribers who don't want to pay for multiple cable boxes for their multiple TVs. They can save money by paying their cable firm for one box and servicing the others with Aereo.
"It's for people whose usage pattern is changing," Kanojia told me. A private company, Aereo doesn't release its customer statistics.
Broadcasters have sued Aereo everywhere it offers service, asserting that Aereo's business model amounts to copyright infringement. The broadcasters say Aereo's service is a "public performance" of copyrighted material without a license, which is illegal.
The company's defense is that it merely enables private performances of broadcast programming for each of its thousands of customers — after all, it's nothing the subscribers couldn't do for themselves with a DVR and a digital antenna from Radio Shack.
You'd be mistaken, however, to think that this is a copyright issue. It's really a much broader fight in a war that has been going on for years, and will go on for years more. The business models of broadcasting and cable are inexorably changing, and every tiny tweak that shifts the wind in one direction or another means the redirection of billions of dollars from someone's pocket to someone else's. Aereo isn't the first service to try driving a wedge between the broadcasters and cable firms. But unlike its predecessors, it has run up an unbroken string of victories in lower courts.
As Levin suggested, until Aereo arrived, the cable and broadcasting companies had reached an uneasy equilibrium. Under federal law, two rules govern how local TV stations get to your cable grid. One is "must-carry," which requires a cable company to transmit virtually all local over-the-air stations for free. The other is "retransmission," which allows those local stations to waive must-carry and instead demand a fee from the cable firm to carry their signals.
For network affiliates, retransmission is more important, for they typically offer programming that cable subscribers insist on having. That's the cause of all blackouts such as the Time Warner/CBS affair — they're about how big a retrans fee the network stations can mulct out of the cable systems. If Aereo gives cable subscribers a way to get their programs without cable, the broadcasters lose leverage. Hence, the lawsuit.
There's even more at issue, as Kanojia points out. "The real issue is disaggregation," he says — allowing consumers to pick and choose which channels they buy, rather than their having to accept their cable service's all-or-nothing menu.
Kanojia says broadcast channels produce 50% of the value proposition for cable subscribers; much of the rest is programming filler they'll never watch. (As I write, Time Warner is trying to distract me with "The Waltons" on the Hallmark Channel and "Here Comes Honey Boo Boo" on TLC — and you wonder why I'm still at my desk?)
"Aereo allows those customers to have that 50% value proposition for 10% of the price," Kanojia says. "When customers start bundling themselves with Netflix and Amazon Prime, then the bundle is under pressure. Aereo is the first technology that offers a different way to skin this cat."
The broadcasters have lined up support in court from the National Football League, which claims its carefully calibrated web of locally broadcast games and national, all-you-can-watch packages — NFL Sunday Ticket for DirecTV subscribers, NFL Game Pass for viewers in foreign countries, etc. — will come apart if Aereo can stream games carried by all local broadcast stations to all its subscribers.
That could be true, theoretically, but it isn't actually the service Aereo offers now or is planning for the future, Kanojia says. Aereo provides local broadcasts to subscribers only in those local communities. Detroit customers don't get Boston stations while they're in Detroit (though they get the local stations in Aereo-served communities while they're located in those places.) The NFL, which is joined in its brief by Major League Baseball, is really trying to keep Aereo from wounding its golden geese, the broadcasters who use the league's unique appeal to male TV viewers to squeeze retrans fees from the cable firms, some of which they funnel in turn via huge broadcast deals back to the leagues.
The broadcasters and their partners may have another motive in this case. They'd love to invalidate the so-called Cablevision appeals court ruling of 2008, which legalized cable companies' centralized recording video programming and, arguably, their streaming of the content to PCs and tablets without paying the originators a fee. The Supreme Court declined to review that appellate ruling, but the Aereo case gives it another crack at the issue.
The real question, however, is whether there isn't more to be gained by embracing a technology that expands the customer's control over content. The Aereo lawsuit strongly resembles the Betamax case (decided 30 years ago last week), in which the Supreme Court ruled that consumer time-shifting of TV programs via home recording was legal under copyright law.
Studios and broadcasters argued then that the technology would end civilization as we know it. Instead, it opened up a universe of new opportunities. Just last week, my colleague Ryan Faughnder reported that the Fox comedy "Enlisted" may be saved from low-ratings death by a surprising surge in DVR and on-demand viewing.
It's certainly conceivable that Aereo presents new challenges for copyright law that the Supreme Court will have to sort out. But in the long run, the trend toward placing more choice in viewers' hands can't be stopped.
Michael Hiltzik's column appears Sundays and Wednesdays. Read his blog, the Economy Hub, at latimes.com/business/hiltzik, reach him at email@example.com, check out facebook.com/hiltzik and follow @hiltzikm on Twitter.
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