Bloomberg News

Aereo Tries to Stay Alive as Cable-Like Service

July 10, 2014

Aero CEO Chet Kanojia

Aereo Chief Executive Officer Chet Kanojia said the compnany remains "committed to building great technologies that create real, meaningful alternatives for customers.” Photographer: Joshua Roberts/Bloomberg

Aereo Inc. said it believes it can survive by operating like a cable-TV provider after the U.S. Supreme Court ruled the streaming-video service violated broadcasters’ copyrights.

After the court said the startup operates much like a cable-TV service, Aereo said it should now be entitled to pay to license programming and its transmissions won’t infringe broadcasters’ rights, according to a letter to U.S. District Judge Alison J. Nathan in Manhattan.

Aereo’s service, which cost as little as $8 a month and was available in 11 cities, gave customers another way to watch live and recorded broadcast TV without paying for cable-TV packages. Reinventing itself would put Aereo in the same category as the companies it set out to replace -- the major cable and satellite providers such as Comcast Corp. and DirecTV that can charge $70 a month for cable and broadcast channels. If successful, it also means Aereo customers are likely to see higher bills.

“The heart of their business model seemed to be blown up by what the Supreme Court did,” Randy Picker, a law professor at the University of Chicago, said in an interview. “Most of us just thought they would just die and go away.”

The court ruled Aereo violated broadcasters’ copyrights by selling programming online without paying licensing fees. Broadcasters said Aereo, which is backed by billionaire media mogul Barry Diller, threatened to create a blueprint that would let cable and satellite providers stop paying billions of dollars in retransmission fees each year to carry local programming.

Aereo used thousands of dime-sized antennas stored at an Aereo facility and connected to the Internet to let users stream over-the-air video.

Plan B

Before the Supreme Court decision, Aereo Chief Executive Officer Chet Kanojia had said the startup had no Plan B in the event of a negative court ruling.

WhileKanojia will have to consider whether Aereo can gain a license and pay retransmission fees as the company maps its next steps, he has said he’s determined to press forward.

“We remain committed to building great technologies that create real, meaningful alternatives for customers,” he said in a statement yesterday.

Officially, the startup’s legal status hasn’t changed yet, though it did halt operations on June 28 after the decision. Under the Supreme Court’s standard practice, the justices won’t return the case to the lower court for another month. Nathan is considering what to require in an order enforcing the top court’s June 25 decision.

CBS Corp. (CBS:US) said in the same letter to the judge yesterday that, in light of the Supreme Court’s ruling, Aereo’s legal bid to reinstate its service should be dismissed. The letter was a joint statement of the dispute by Aereo and the broadcasters.

Compulsory License

To operate as a cable company, Aereo would have to get and pay fees for a compulsory copyright license, which gives permission to transmit broadcast channels. Then the startup would have to negotiate with broadcast companies over retransmission fees, which are paid to broadcasters for the right to air their content.

This would almost guarantee that Aereo would have to charge customers more to gain access to programming, said Neil Begley, an analyst at Moody’s Investors Service. For one, Aereo would most likely have to buy entire channel bundles to gain access to broadcast channels, he said.

Content companies haven’t been keen on selling the rights to transmit individual channels to cable companies, instead favoring bundling offerings like Walt Disney Co. (DIS:US)’s ABC broadcast network with ESPN. Companies like Apple Inc. (AAPL:US) have tried and failed to persuade cable networks to let it sell their channels a la carte.

Google, Amazon

“Can Aereo get them to be a la carte?” Begley said. “The answer is going to be a hard no.”

Even if Aereo isn’t able to survive, getting the company classified as a multi-channel video distributor could open a new door for other technology companies to provide a cable-like service over the Internet, said Rich Greenfield, an analyst at BTIG LLC.

“I don’t know if Aereo has the money to pay retrans, but I’m pretty sure Google and Amazon do,” he said. “Why can’t an Internet company in 2014 be a cable company?”

The industry’s payments are estimated to exceed $4 billion this year, a 30 percent gain from last year, according to SNL Kagan. CBS’s $2.2 billion in affiliate and subscription fees accounted for about 15 percent of its total revenue last year. Comcast (CMCSA:US)’s NBCUniversal unit got $1.4 billion in revenue for licensing broadcast content, making up 6.1 percent of NBCUniversal’s sales.

New Strategy

CBS’s shares (CBS:US) fell 3.3 percent to $61.80 at the close in New York, the biggest drop in three months.

In a separate letter in a related case before Judge Nathan, the broadcasters said it will seek an order, consistent with the Supreme Court decision, blocking Aereo from violating its rights.

Determining other ways in which the litigation can move forward has been “rendered nearly impossible,” the broadcasters wrote, saying Aereo has refused to explain whether it can continue operating or how.

Aereo’s lawyer suggested July 1 that it has “rethought its entire legal strategy,” and will present a new defense, according to the letter. The broadcasters argued that the case should be halted until the Supreme Court’s order blocking Aereo from violating its rights is in place.

‘Irreparable Harm’

“That is the most important next step, given the court’s ruling that Aereo has been violating plaintiffs’ exclusive rights to publicly perform their works for over two years, during which time plaintiffs, as this court held, have suffered irreparable harm,” the broadcasters wrote in the letter.

Aereo agreed that the case should be put on hold until Nathan has “resolved the injunction issues.”

“After the Supreme Court’s decision, Aereo is a cable system with respect” to the near-live transmissions at issue, Aereo said in the joint letter. Aereo’s eligibility for such a license “must be decided on an immediate basis or Aereo’s survival as a company will be in jeopardy,” the company wrote.

Aereo had distributed Bloomberg TV to subscribers. Bloomberg LP is the parent company of Bloomberg News and Bloomberg Television.

The cases are Aereo v. CBS Broadcasting Inc., 13-cv-03013, and American Broadcasting Cos. Inc. v. Aereo Inc., 12-cv-01540, U.S. District, Southern District of New York (Manhattan).

To contact the reporters on this story: Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net; Alex Barinka in New York at abarinka2@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Sarah Rabil at srabil@bloomberg.net Sarah Rabil


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