Media stocks take a hit after judge's ruling lends legitimacy to service

An emboldened Barry Diller expects Aereo to launch in every big U.S. city by sometime next year after a judge opted this week not to shut the service down during litigation with broadcast networks — a decision that hammered media stocks Thursday.

“We’re going to proceed. We don’t care. It will take a year, six months, two years. We’re going to move, we’re going to really start marketing. Within a year and a half, certainly by 2013 at some point, we’ll be in every major American city,” Diller told Bloomberg Television during Allen & Co.’s media retreat in Sun Valley, Idaho.

Broadcasters are trying to shutter Aereo, which enables its subscribers to watch shows online via broadcast signals captured with miniature personal antennas at Aereo’s facilities. Unlike cable and satellite companies, Aereo doesn’t pay the retransmission fees that broadcasters depend on for an increasing chunk of revenue. The venture, which charges $12 per month, so far serves only New York.

“One of my friends who runs a large broadcast company said, ‘You succeeded in dropping my stock by 2%.’ I did not,” Diller said.

CBS stock fell as much as 3.5% Thursday before ending off 1% at $30.61; Comcast, which owns NBC, fell 2.2%. It ended the day off 1.99% at $31.10; Fox parent News Corp. dipped 1.7% during trading, closing down 0.69% at $21.73. Walt Disney closed up 0.30% during the session at $47.41.

Showbiz stocks are feeling the pinch on several fronts. An ongoing cable carriage battle between Viacom and DirecTV knocked both stocks. DirecTV fell 1.25% to $47.55; Viacom eased 0.96% to $46.28.

U.S. District Judge Alison Nathan ruled Wednesday that broadcasters had not shown a “likelihood of success on the merits” of their case and turned down their request for a preliminary injunction. In siding with Aereo, funded by investors including Diller’s IAC/InterActive Corp., she gave some credence to the startup’s legality. Previous efforts to offer digital streams of free broadcast signals to subscribers have been halted in court.

“I really did think we were on the side of the angels. I thought that the ability for a consumer, for an American, to receive broadcast over-the-air signals is their right. And we are simply a technologically advantaged way of doing it, in a modern way. So I really did think we were on the right side of it,” Diller said. “I’m happy that in the first test of it the judge agreed with this.”

Over his long career, Diller has been a Hollywood studio chief as well as head of the Fox Television Network before launching IAC, a collection of online businesses. It faced some initial skepticism but has become a major force in online commerce. IAC also owns the Daily Beast and Newsweek.

“Over my life, I’ve been at different perimeters. I like disrupting things,” Diller said.

A key legal distinction for Aereo lies in its thousands of dime-sized antennas, allowing each subscriber to choose to watch a broadcast show online in real time or to play it back as on a DVR. The networks and New York local stations called it a “gimmick” and argued that Aereo violated the Copyright Act’s right of public performance, specifically its provision barring unauthorized transmission of copyrighted works.

But Nathan concluded that the antennas operate independently, backing Aereo’s contention that it is essentially renting remote equipment to its users that is comparable to what they can install at home.

In her opinion, Nathan drew similarities between Aereo’s technology and a remote-storage DVR introduced several years ago by Cablevision. The latter was the focus of a landmark ruling by the 2nd Circuit Court of Appeals that held that the remote DVR did not infringe on copyrights.

Broadcasters on Thursday wasted little time in filing for an appeal, sending notice to the 2nd Circuit for review of their case.

Steven Werier, attorney with Cowan, DeBaets, Abrahams and Sheppard, said the appellate court “could very well take a broad reading of the facts” and even revisit the Cablevision ruling. In that case, the 2nd Circuit found that because it was an individual consumer who made the individual copy, as he was still in control of the DVR, there was no violation of the right of public performance.

In a written analysis of the Aereo decision, Werier noted that Nathan wrote in the opening paragraph of her opinion that “but for Cablevision’s express holding regarding the meaning of the Copyright Act provision,” the broadcasters otherwise would have prevailed.

Werier said he took Nathan’s comment as “essentially inviting” the appeals court to reconsider the Cablevision ruling.

The Supreme Court declined to review the Cablevision decision in 2009 but ultimately may weigh in on the issue of retransmission consent, he noted. Fox, CBS and NBC are suing Dish Network over its AutoHop feature that allows consumers to more easily skip through commercials. That suit is likely to play out in California, raising the possibility of two circuits issuing divergent opinions where some similar issues are at stake.

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