What the Aereo Supreme Court Case Means for the Future of TV

The high court's decision will have far-reaching consequences for Internet video, cloud computing, and the television business

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Bebeto Matthews / AP

Chet Kanojia, founder and CEO of Aereo, Inc., stands next to a server array of antennas in New York, Dec. 20, 2012.

The U.S. Supreme Court’s decision to consider a lawsuit brought by the nation’s largest TV broadcasters against Aereo, the upstart streaming video service, lays the foundation for a landmark verdict that could have important implications for Internet streaming, cloud computing, and the future of the TV industry itself. Aereo has infuriated the major broadcasters because the two-year-old startup pays nothing to pick up their free, over-the-air TV signals, which it then sends to its customers over the Internet.

If the high court rules that Aereo’s service is legal, the decision could one day upend the highly lucrative broadcast TV business model, which is based on cable and satellite companies paying billions for the right to broadcast popular programming. That could prompt the broadcasters to yank their most-watched shows and sporting events from free TV and move them to pay TV channels like Showtime or ESPN. Late last year, the National Football League and Major League Baseball warned that if Aereo prevails, the leagues might move high-profile broadcasts like the Super Bowl and World Series to cable.

“The Aereo case could blow up the economics of the broadcast TV business,” says John K. Hane, a D.C.-based partner at the law firm Pillsbury, where he specializes in technology and telecommunications policy. Hane, who has represented the big broadcasters in the past, compares an Aereo victory to a “neutron bomb” that kills human beings but leaves basic infrastructure around them unaffected. “You’ll still have network television, but all the good programming will be on cable.”

If Aereo wins, the big cable companies might develop similar services to avoid paying an estimated $4 billion in annual “retransmission consent” fees to the broadcasters. “An Aereo victory has far-reaching consequences tied to retransmission consent and the profitability of over-the-air broadcasting, while a loss cements retrans fees and imperils cloud computing and storage,” Rich Greenfield, a technology and media analyst at BTIG Research, wrote in a recent note to clients. Greenfield believes that Aereo will ultimately prevail.

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Aereo, which launched in February 2012 after raising more than $20 million from media mogul Barry Diller’s Internet conglomerate IAC, uses thousands of tiny, dime-sized antennas to pick up free, over-the-air TV signals, which it sends to customers via the Internet for $8 to $12 per month. Aereo’s users technically lease the tiny antennas, which are housed in nearby “antenna farms.” In New York, Aereo’s antennas are located in a warehouse in Brooklyn with a direct line of sight to the Empire State Building, the city’s tallest broadcast transmission tower.

Shortly after it launched, Aereo was sued by the major broadcasting titans, including NBC, FOX, ABC and CBS. The broadcasters say that Aereo’s service amounts to blatant theft, because the company doesn’t pay retransmission fees. Federal courts in New York and Boston, however, have thus far agreed with Aereo’s argument that it is transmitting “private performances” to individual users over their own leased antennas, not copyright-protected “public performances.”

Those rulings have relied on principles of federal copyright law affirmed by the U.S. Court of Appeals for the Second Circuit in its 2008 Cablevision remote-storage DVR decision. That verdict established the legal basis for remote, or “cloud-based,” video storage and playback systems. BTIG tech analyst Rich Greenfield predicts that the lower court rulings will be upheld. “Similar to our view in the Cablevision remote storage-DVR case several years ago, we believe the court will side with innovation that complies with copyright law.”

Last October, the broadcasters asked the Supreme Court to step in. “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,” a CBS spokesperson said Friday in an emailed statement. A FOX spokesperson said: “We are confident the Court will recognize that this has never been about stifling new video distribution technologies, but has always been about stopping a copyright violator who redistributes television programming without permission or compensation.” (TIME parent Time Warner has filed a brief supporting the broadcasters.)

(MOREAereo CEO to Broadcasters: Go Ahead, Make My Day)

In December, Aereo asked the high court to grant the broadcasters’ petition. “We said from the beginning that it was our hope that this case would be decided on the merits and not through a wasteful war of attrition,” Aereo CEO and Founder Chet Kanojia said in a statement. “We look forward to presenting our case to the Supreme Court and we have every confidence that the Court will validate and preserve a consumer’s right to access local over-the-air television with an individual antenna, make a personal recording with a DVR, and watch that recording on a device of their choice.”

Last April, Chase Carey, a top FOX executive, warned that his network might yank “The Simpsons,” “Glee” and “American Idol” off the U.S. public airwaves and move the shows to cable if Aereo’s technology is ruled legal. Many analysts saw those comments as saber-rattling, because FOX makes so much money off retransmission fees, but the fact that Carey even floated the possibility illustrates how annoyed the broadcasters are by Aereo. Those fees were at the heart of a recent spat between CBS and Time Warner Cable that led to an unprecedented, monthlong CBS blackout for more than 3 million Time Warner Cable subscribers. Not surprisingly, some of the largest cable and satellite companies are reportedly considering building their own Aereo-like services to avoid paying such fees.

The battle over Aereo underscores larger changes transforming the TV industry, as consumers increasingly have access to programming over the Internet and on their mobile devices. Last week, Aereo announced that it has raised $34 million in new funding, which should help it expand beyond the ten cities where it currently offers service. Now, Aereo is headed to the Supreme Court, where Justice Samuel Alito has recused himself from the case. No reason was given, per Supreme Court rules. If the high court’s deliberation ends in a 4-4 tie, the Second Circuit ruling in favor of Aereo would automatically be affirmed.