Aereo TV, the Supreme Court, and the Future of the Internet

Last Tuesday, the Supreme Court began hearing arguments in broadcast TV’s case to shut down Aereo TV. At the heart of the argument is whether the streaming service’s business model is based on pirating creative content. It’s a debate that’s been brewing for over two years, and if Aereo wins, their victory could have significant ramifications on the way broadcast networks, and cable and satellite TV companies, do business.

But if they lose, the the New York-based startup – with $100 million in investment – will likely fold. The loss could mean something much bigger, though – it could have significant widespread ramifications for the internet.

Until recently, Aereo hasn’t been a familiar name. The $8 – $12 a month broadcast TV streaming service is currently available in only 11 major cities – among them Boston, New York, Baltimore, Atlanta, Houston, and Dallas. If the Supreme Court decision goes its way though, Aereo plans to quickly expand into at least another dozen.

Here’s how it works: Aereo sets up farms of tiny, dime-sized antennas throughout its subscriber areas, with each subscriber assigned his or her own antenna. These antennas pick up free, over-the-air network broadcast signals – from CBS, NBC, ABC (who’re behind the Supreme Case), FOX, Univision, and public access channels. The signals are then delivered via the internet to subscribers’ computers, tablets, phones, and internet-enabled TVs. An on-screen guide allows viewers to select programming and watch it as it streams, or store it in the cloud for later viewing. As the company says in its advertising, “It’s live broadcast TV… Off the air… Wherever you are… Whenever you want.

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“What we’re providing is exactly what you can get with an antenna, just done in a way that’s modernized, so you’re not sitting there tuning your rabbit ears,” says Aereo’s founder and CEO, Chet Kanojia.

Aereo programming doesn’t include cable content, since that isn’t delivered over the air. But it allows subscribers to pick and choose what they want to watch, when they want to watch it. And they can watch it on all their mobile devices.

The networks say Aereo’s practice amounts to piracy, arguing that the service qualifies as a “public performance” of the TV shows they distribute, and as such are prohibited under the 1976 Copyright Act. Says a CBS spokesman, “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.” The broadcasters first filed suit a few weeks after Aereo was introduced in New York City on Valentine’s Day, 2012.

Complicating the case, and of further concern to broadcasters, is the matter of “re-transmission fees”. As mandated by the Federal government, broadcast networks essentially give away their content over public airways. Their income comes from commercials in their programming. But as most Americans now receive broadcast TV through cable and satellite subscriptions – not over the air – the networks have another income stream in the fees they charge to those companies to re-transmit their programming. Those fees have become critical, as they offset ad revenues that have tumbled due to declining broadcast viewership – declines ironically resulting from the cable/satellite-TV competition.

The broadcasters argue that if the Aereo model is upheld, then cable companies might stop paying those fees. If Aereo doesn’t pay, why should the cable and satellite providers?

But the cable and satellite companies are concerned too, as an Aereo subscription augmented with other streaming services like Netflix, Amazon Instant Video, or Hulu will undermine their expensive bundled programming packages.

Aereo’s Kanojia acknowledges the copyright concern at the heart of the broadcasters’ case. But he argues that his antenna-to-internet system is no different than installing an antenna on a subscriber’s roof and running a wire down to his/her TV – it’s just that in Aereo’s case, the “wire” is the internet. And while he agrees that the cable companies are “constrained by what’s called retransmission consent,” he warns that if Aereo’s model is not upheld, then any cloud-based service storing videos, music, and other files on remote servers and then streaming them to subscribers will be subject to a comparable suit. Similar innovations in entertainment content will be stifled, and networks, cable and satellite companies will retain their lock on content.

Says Aereo attorney David Frederick, “And that’s why the cloud computing industry is freaked out about this case.”

The Obama administration has sided with the broadcasters, but has encouraged the Court to rule narrowly, saying it doesn’t want to see a ruling which could undermine startups that give consumers “new ways … to store, hear, and view their own lawfully acquired copies of copyrighted works.”

So far, it’s not looking good for Aereo. In this week’s hearings, Justice Stephen Breyer said of the service, “It looks as if somehow you are escaping a constraint that’s imposed upon [other companies]. That’s what disturbs everyone.”

Justice Ruth Bader Ginsburg had a similar view: “You are the only player so far that doesn’t pay any royalties at any stage.”

Chief Justice John Roberts also agreed, but was appreciative: “I’m just saying your technological model is based solely on circumventing legal prohibitions that you don’t want to comply with, which is fine. I mean, that’s – you know, lawyers do that.”

Justices Scalia, Ginsburg, and Roberts questioned whether Aereo’s tens of thousands of antennas served a technical purpose. “There’s no technological reason for you to have 10,000 dime-sized antennas, other than to get around the copyright laws,” Roberts said.

In a press conference outside the courthouse following the arguments, Frederick said he remained “cautiously optimistic” that Aereo would prevail.

A decision is expected in June.