On Tuesday, April 22, the Supreme Court heard the oral arguments about Aereo, a two-year old NY based startup. At stake is the revenue model of broadcast networks that rely on cable companies to compensate them for the content . Aereo and several broadcast networks (NBC, ABC, CBS, Fox) have been locked in a legal battle for two years and the Supreme Court decision, expected to be handed down in June, will end that.
What is Aereo?
Aereo uses thousands of miniature antennas that it then rents out to subscribers for $8/month. These antennas scoop TV signals over the air, stores the content in the cloud and streams them to subscribers on their compatible devices, on demand. Aereo is limited to these signals from broadcast networks and does not stream content from cable channels.
Why are broadcast networks suing Aereo?
Traditionally, cable and satellite companies (Comcast, Time Warner Cable) pay broadcast networks (CBS, ABC, Fox) re-transmission fees to include content from these networks into their cable bundles. Examples of content are live sports and local news. Aereo does not pay any re-transmission fees to broadcast networks.
More than advertising revenues, retransmission fees are the bread and butter of broadcast networks. According to the Federal Communications Commission, the cable industry paid $2.5B to broadcasters and this figure is forecasted to increase to $7.9B by 2019.
Broadcast networks’ argument
TV content is copyrighted and under the Copyright Act, cannot be distributed in a “public performance.” Individuals are free to scoop airwaves with their rabbit antennas because that is considered “private performance.” The networks argue that Aereo is “publicly performing” content by re-transmitting it over the Internet.
Aereo argues that it is simply acting as an equipment provider. Aereo provides subscribers the antenna and stores the content; similar to storing TV content to a DVR for later viewing. Since subscribers don’t re-distribute the content, there is no copyright infringement involved. This is ensured because each antenna is dedicated to a single subscriber and content can’t be re-distributed to another account.
What are the implications?
If the Supreme Court decides in favor of broadcasters, Aereo will most likely shut down. If the decision is in favor of Aereo, the consumer ultimately wins. It will also shake up the broadcaster’s revenue model and could also mean less leverage against the cable industry as they negotiate those re-transmission fees.
On the part of the Supreme Court, the justices are facing difficulties on the decision not only because of the fine line that Aereo is skirting in terms of copyright infringement but also because of the far-reaching implications for cloud computing in general. The justices are concerned that if Aereo is treated as a content provider and is a “public performer” then online storage providers such as Dropbox and Box may also be considered in a similar way; thus violating the Copyright Act.
So far, the justices have not given a clear indication of how they will decide. It seemed that they are still struggling to understand Aereo’s business model and seem loath to act as technology regulators. Based on their questioning, the court is also concerned of side effects/externalities not only for TV but for cloud computing in general. One thing that is guaranteed, if Aereo wins, they would most likely acquire legions of subscribers just from all these free publicity.
Update: On June 25, 2014, the Supreme Court has ruled that Aereo violates copyright law. In order to avoid regulating a slew of other technological innovations (files and music in the cloud), the ruling states: “And we have not considered whether the public performance right is infringed when the user of a service pays primarily for something other than the transmission of copyrighted works, such as the remote storage of content.“