The Death of Aereo?

Yesterday, the Supreme Court wisely decided that popular New York startup media company Aereo is violating the law by providing users access to free over-the-air programming from local networks. The 6-3 decision could be the end for the Barry Diller backed startup, and has consumers all over New York City, Baltimore, Atlanta, and 9 other cities outraged and confused. Aereo may not like the verdict, but it is now the law.  Out first reaction is – Aereo fate and its business model does not look good, or does it?

Aereo’s business model is a simple one. You’ve heard of cloud-based email or cloud-based file storage? Aereo is essentially cloud-based television antennae. The company leases out individual antennae and DVR mechanisms to each subscriber. Subscribers simply access the DVR using their phone, tablet, Smart TV, or computer, and they’ve got access to all their local programming in a simple, easy-to-use interface.

Some experts are left dumbfounded by the outcome. After all, I can set up an antenna, connect it to my DVR, and watch shows from that DVR on any device, and continue to be perfectly within the bounds of the law. Simply outsourcing those items to another company, however, was enough to change it from being perfectly legal to a copyright violation.  To some, it seems that something bigger has to be at play here.  On the face of it, Aereo was an interesting and innovative services, but its business plan was fundamental flawed.

Behind the Aereo takedown was the fact that it was money, but none of its dollars were going back to the broadcasters who created or had rights to all of the content being aired. Aereo charges $7 per month for the leasing of their equipment. Broadcasters, however, have successfully convinced the Supreme Court that Aereo is simple repackaging their product and making money by reselling it. The confusion arises because these products are given away for free for over-the-air viewers, but not free for Aereo’s antenna cloud service. So, why would broadcasters be upset by Aereo’s service?

Federal policy has long ago given stations broadcast spectrum in return for free over-the-air television programming. While broadcast television is free to antenna users, it costs them all quite a bit of money to create and the content is copyright protected. Rather than banning cable companies from using their protected product as they have with Aereo, cable companies are subject to mandate known as “must-carry rules” that make companies like Comcast carry all local broadcast networks on all packages.

Alternatively, local networks can opt out of the must-carry mandate and negotiate fees with cable companies to carry their content, known as “retransmission consent.” You might have experienced one of the infamous sports blackouts that result from this legislation. If they’ve opted into retransmission consent, cable companies can only carry their signal if they pay these fees to the broadcasters. And, it’s this rule that broadcasters are citing as the grounds for the Aereo case.

So, let’s recap.  A promising new technology comes around that provides consumer benefits. However, the technology uses copyrighted materials, which means there needs to be payments to broadcasters for its content use, despite the fact that over-the-air broadcast content is provided free to the public.  Some will see this as the death of Aereo, others will see this as an out-of-touch court system that has sided with media conglomerates, and yet others will see this as a victory for owners of intellectual property.

What’s our take?  While it seems that this court ruling is likely the end to Aereo’ s operation, that need not be the case.  For station broadcasters, Aereo could be an alternative way to grow paid viewership as consumers move increasingly toward “over-the-top” services like Netflix and Hulu.  Maybe the broadcasters can use the model to resell their own content?  Whether that means a buyout of Aereo by broadcasters, or Aereo paying new fees to broadcasters, or the bankruptcy of Aereo, it all remains to be seen.

 

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