Why Aereo’s Free Ride Will Ultimately Crash

Aereo Judge
Oliver Munday

The startup has stayed alive exploiting loopholes, but broadcasters will protect the biz at all costs

Broadcast TV execs are apoplectic that Aereo — the Internet streaming-video startup they see as blatantly stealing their content — has received several stays of execution and continues to expand to new markets.

But one way or another, the road for Aereo will come to an end, at least with respect to getting its hands on valuable TV programming without paying for it.

Last week, a federal appeals court turned down broadcasters’ request to reconsider a decision that continued to allow Aereo to stream their TV stations online. It was the third legal victory for the startup.

How can that be? By any common-sense standard, Aereo is retransmitting local TV signals to devices over the Internet, reselling them to subscribers for a monthly fee. In that sense, it’s identical to cable or satellite TV operators, which under federal law must pay a fee to the broadcaster (unless the latter opts for “must-carry” designation).

SEE ALSO: Fox May Pursue Aereo Case to U.S. Supreme Court

Aereo crafted a clever legal defense, around which it carefully designed the entire service. The company claims it isn’t itself pulling down the TV signals or recording them — instead, its customers are the ones performing these actions, albeit remotely and using equipment owned and operated by Aereo.

Aereo has successfully relied on a ruling upholding the legality of Cablevision Systems’ RS-DVR network service, and has prevailed by arguing that a consumer could jury-rig a home antenna, DVR and Slingbox to get content in the same way Aereo enables access to it.

So Aereo has been deemed to meet the letter of law, if not the spirit.

But Fox Broadcasting said it may appeal the latest decision to the U.S. Supreme Court. The high court may be left to choose between the most recent Aereo judgment and a ruling in December 2012 by a California federal court that found the charmingly named Aereokiller — which was offering a service identical to Aereo’s — was illegally rebroadcasting copyrighted TV signals.

SEE ALSO: Broadcasters Challenge Aereokiller in D.C.

However, even if Aereo were to win in the Supreme Court, broadcasters won’t give up the fight. With billions of dollars at stake, they see the real threat not necessarily in customers who sign up for Aereo’s service, but in the potential loss of retransmission-consent dollars: In the U.S., TV broadcasters generated $2.36 billion in retrans fees in 2012 — a figure projected to nearly triple to $6 billion by 2018, according to SNL Kagan.

If Aereo’s approach gets the Supremes’ blessing, those retrans fees could evaporate. You can bet pay TV operators would quickly try to emulate the Aereo fee-dodging system.

Broadcasters could try to modify the law to explicitly cover services like Aereo’s (which could take years). They also have threatened to shift their most popular TV shows and sports programming to pay TV, or even convert broadcast stations to cable channels. Those are moves rife with political risk, given that the basic bargain of the government’s spectrum licenses to broadcasters is that they make TV free over the air.

But if push comes to shove and Aereo and others are permitted to redistribute “free TV” at no cost, CBS or Fox would certainly put NFL games or popular primetime dramas on cable nets instead. On cable, they could get a higher return on their investment from subscriber fees as well as advertising. Broadcast TV schedules would gravitate toward cheaper programming.

In press coverage, Aereo often is portrayed as David to the broadcasters’ Goliath. But count on the giants to strike back. The scrappy startup may be a compelling storyline, but building a content-distribution business by thumbing your nose at your most important content sources isn’t a recipe for long-term success.

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  1. On the contrary, cable companies are balking at the ever-increasing retransmission fees the network TV local affiliates have been demanding because their product has little to no value. In the long run Aereo may very well be the only saving grace the affiliates have to rely on as TV per se continues to be carried using Internet Protocols.

    In our markets Time Warner has let an affiliate go dark for nearly a week now and most of us hope it stays that way. Time Warner caved in to affiliates twice already and finally it appears they are ready to stand their ground and do what their customers indicate is their preference.

    Let the affiliates go back to their free over the air transmission line of business and we’ll see how much demand remains for subsidizing their fake laugh track sitcoms, soap operas and their cookie cutter cops and robber shows which is basically all the affiliates have to offer anymore: b-o-r-i-n-g. Tune in to any of their so-called news programs and each one is exactly the same: token Negro female sitting next to the white guy taking turns reading the same prepared teleprompter babble.

    Finally, the cable companies have to cut costs even more to retain their customers and the tea leaves suggest they are going to be compellled to play some hardball with ESPN and such as the sports networks have become greedy pigs too.

    When it comes to subsidizing $10 million basketball and football players or paying for cable that provides cuistomers with Food Channel and other such meaningful and quality programming from a company that also provides us with our broadband Internet connectivity guess who wins the day?

  2. Harlon Katz says:

    Aereo is not getting a “free ride” and this article reads like it was written by someone from the broadcast industry. When you get Aereo service, you are renting an antenna in a location that has optimal signal reception, plus a DVR. Aereo is not inserting their own commercials into the content are they, like some cable companies do. Aereo does not get a direct feed via satellite like the Cable and Satellite companies. The Cable and Satellite companies are not just picking up their signal from a big antenna on the roof either.

    The broadcasters wanted the airwaves (and have not given back all that was promised when given the new spectrum for digital) and that was for FREE OTA television. If the broadcasters continue this effort, the FCC should just take back the spectrum for we the people and give it to someone who is willing to abide by the rules – if anything, the broadcasters are the ones not living within the spirit of their contracts.

    I am very much a free market person, but the broadcasters are being rediculous.

  3. David Hoffman says:

    The big networks like ABC, CBS, and NBC had a great business model based on ads run on a national basis. These ads would run during nationally televised content that the big networks created or purchased. Getting money from cable or satellite subscribers was not in the original business plan. It came about due to some local broadcast station owners ability to get per subscriber fees from the local cable company. That is not a great idea either. All this re-transmission fee greed is unnecessary. Go back to an advertising only supported business model.

    The threat to take live action sports away from OTA TV existed before Aereo. The team owners and venue owners want a per subscriber fee system. They would make you pay for every viewer, if they could find out how many people are watching an event on any specific viewing device.

    The threat to take popular prime time shows to cable and satellite existed before Aereo. The reason was to allow the use of cable’s and satellite’s less restrictive regulations on the type of content that can be seen or heard. Many of the content creators are not willing to produce great content for OTA with its much tighter restrictions. The biggest issue is what words are allowed to be spoken, followed by what sexual situations are allowed to be shown. This is trailed by the amount and type of graphic violence that is allowed. Cable and satellite allow more freedom to fail in those areas. The show may flop with audiences, but the content creators, for the most part, cannot blame that on content restrictions.

    I admit that Aereo is devious. Those tiny Aereo antennas would be worth billions if they actually could do what Aereo claims. We all know the device is really part of a big antenna array. The larger array will be what picks up the OTA signal in some cases. Designed correctly, an Aereo type service could be completely legal and be seen as non infringing on the “rights” of the big networks content creators. Having each antenna wired to hard drives that are only leased to only one subscriber would help.

  4. Dan Schneider says:

    Is it me or is the “free tv” mandate for using the public airways exclusively, something that’s not being discussed?

    How did these broadcasters get the rights to airwaves in the first place?

    Do they have an obligation to the public for using our airwaves for private gains?

    Retransmission fees for pay cable

    And

    Free to air for antenna and Internet

    The outrage is growing against CBS and the other media oligarchs

    Change is coming

  5. Aereo is the solution not the problem.The free tv model went away when the Digital transmission happened. This is the greatest threat to cable in years. What is Cable? Answer: a distribution hub for content. When the internet becomes the last mile transmission source cable loses all power. Aereo is a great service but the tip of the iceberg makes the local stations nervous. TV On The Go® is an app which when combined with Chrome creates a new cable head end. The release of Chromecast is the scariest moment in TV History. Cable killed Satellite Big DISHes and Aereo is about to kill cable real soon. Be Afraid be very afraid Aereo is the solution not the problem. UIHIA and John Malone created the first phase now its Aereo’s turn.

  6. George says:

    The broadcasters want the spectrum for free, get paid for their signals (retrans fees) AND colllect big dollars from commercials while also innundating us with a large number of self-promotions. It will come to an end for sure. The significance that the broadcasters are putting on Aereo makes me laugh. If it is not such a big deal, then why are they all making such a big deal out of it. Go ahead and move more of your content to cable where I won’t ever see it or the associated commercials.

  7. So Mr. Spangler is doubling down on a system that gives away its signal to the ten percent who still have an antenna? Aereo may not succeed, but that hardly means broadcasting giants will rule forever. Didn’t the newspapers rule the planet fifty years ago?

    • David Hoffman says:

      The primary content signal is not truly “free” to the OTA viewer. We must look at or deal with commercials. That is our cost.

  8. Ed Walket says:

    I find it amazing that broadcasters are up in arms over this service that merely retransmit an over-the-air signal to the same area this free over-the-air signal serves. And then to think they’ll shift ‘premium’ programming to cable just because of it even more ridiculous. That would do nothing to serve their broadcast station audiences and I can only imagine an affiliate revolt outside the O&O stations.

    Aereo is providing a service to broadcasters by enhancing over the air signals in the markets it operates.

    • Chuck says:

      How does Aereo “enhance” the signals? Is the picture clearer, sharper.? We all know regular cable provides an inferior signal to that transmitted by stations. How is an “enhanced” signal better?

      • Harlon Katz says:

        Well, for one, if you live in a valley, or more than 30 miles away from the broadcast antenna, or if there is a building in the way of a specific signal, you now will get a clear picture. You may also only be able to put up poor rabbit ears instead of some big antenna on a roof to get clear signals from a distance.

      • Ed Walket says:

        Enhance perhaps not the right term. Supplement is far better. My bad.

  9. Carl LaFong says:

    How about Aereo will fail, not because of regulatory issues, but because it’s a bad business model. For those tech savvy enough to watch TV on a computer (yes, it requires a bit of lean-forwardness), I think those people would be smart enough to be able to hook up an antenna to their existing TV and watch over the air for free.

    • Max says:

      It is simple, it is about paying to watch ad free. HBO, Netflix, etc shows us that money can be made. Commercial television is a dinosaur. It is heading in the same direction the music and newspapers. Not to worry, the networks will live on, just as a pay model. Ad companies will suffer and it’s starting to show (two of the largest ad companies merged – the wagons are starting to circle )

      • David Hoffman says:

        Aereo has a lot to do with mobile internet connected devices and areas with lousy OTA signal reception that are internet connected.

  10. Aardvark says:

    “In the U.S., TV broadcasters generated $2.36 billion in retrans fees in 2012 — a figure projected to nearly triple to $6 billion by 2018, according to SNL Kagan.”

    Remember, that tripling in income is coming right out of the pockets of the TV viewer, not the cable or satellite companies. How wonderful to see fees tripled so I can continue to watch a thirty minute show consisting of 20 minutes of programming laced with 10+ minutes of commercials. No thank you. If the broadcasters decide to stop broadcasting their programs over the air then the FCC should pull the licenses they got for free decades ago and auction them off to media companies that want to use them. Otherwise I suspect the broadcast channels will simply wind up being 24×7 infomercials.

    • Chuck says:

      If a station stops broadcasting their programs free over-the-air they no longer need a license. The money that cable and satellite pay to acquire and resell programming comes from those who subscribe to pay TV programming–local stations and networks like ESPN, etc. As a TV viewer who receives programming over-the-air I do not pay a monthly bill to my local TV stations. They provide it free as part of their broadcast service. If Aereo succeeds I, like millions of others, will have to start paying.

      • David Hoffman says:

        Your statement may only apply in areas where ABC, CBS, and NBC actually own the OTA broadcast station. In areas where affiliate owned transmission antennas send the content OTA, that may not be true. OTAs that are “must carry” do not get re-trans fees, thus the big networks would probably not get any retrans fees.

  11. thatonegeekguy says:

    No company wants to lose a revenue stream. I mean, the whole point of a business is to make as much money with you’re product/service as the market will bear, correct? That said, it would be in broadcasters best interests if they kept an eye on Aereo’s subscription rates. If s large enough segment decides to use Aereo, then the broadcasters may want to make a more-than-superficial (here’s lookin’ at you, Hulu) attempt at a unified streaming video portal of their own, rather than the limited and divided system which exists today. Perhaps have a free tier which only allows viewing of material in the time segment as it broadcasts, with “DVR” a feature for a paid, premium tier! Either way, streaming video on demand is the future (especially on mobile!), and if you get ahead of this curve, you might just be able avoid getting caught with your pants down like this in the future.

  12. If I follow the logic of the boradcasters, companies that manufacture antennas should also have to start paying retransmission fees, right?

    • Chuck says:

      Huh? The antenna manufacturers do not resell the programming of TV stations like cable and satellite including Aereo. If the antenna manufacturers owed stations money so would the power company, the manufacturers of TV sets, home amplifiers and coax manufacturers. The antenna makers certainly are not selling programming. Aereo says they use a separate “antenna” for each subscribers (I can’t see how this works). Does the producer of these antenna pay a retransmission fee? I find no logic in your argument.

      • Harlon Katz says:

        Chuck – in your comment to Vince, did you miss the part about Aereo basically providing a service that combines and antenna, a DVR, and a sling box. Yes, Vince could purchase all of the items, and configure and maintain them, or he could rent the preconfigured Aereo solution. He chose to do the latter.

      • Chuck says:

        Vince. Would you still rent the antenna if you received no programming? You are paying to get TV programs. Have you seen your antenna? If you took it somewhere and connected it to a TV with a tuner would it actually work? Would you get all of the stations you get with that antenna via Aereo? Since you pay Aereo to rent their antenna why don’t you just buy an antenna and do without the monthly charge? You could pay for your antenna quickly by using the money you are now sending to Aereo.

      • Vince says:

        I don’t pay Aereo anything for programming. I pay them to rent an antenna so that I can watch TV on my tablet. If the local TV stations were smart enough to rent me the antenna themselves, or even stream their content, there would not be in issue at all as Aereo would have no reason to exist. They fill a void and their model is legal.

  13. BC says:

    >>>The scrappy startup may be a compelling storyline, but building a content-distribution business by thumbing your nose at your most important content sources isn’t a recipe for long-term success.<<<

    Aereo isn't the one thumbing its nose. That service only exists because the TV networks and their corporate parents, with the assistance of a blind( or maybe another word beginning with the same letter) FCC and Congress, have been thumbing their nose at the consumer for over 30 years. With the advent of cable, the TV networks saw a way to double their fun (read "money") with no increase in costs. Now we were not only watching advertising, which was supposed to keep TV free, but we were paying them for the privilege of watching those ads. What a deal! For them.

    And with all that extra revenue coming in, you would think they would be able to hold costs down and maybe decrease the amount of commercials. But no. Where a typical show before cable had 8-10 minutes of commercials per hour, the Networks took full advantage of their captive audience and their forced bundling deals to the rebroadcasters, and gradually doubled that commercial load, and even more than doubled it on some networks. Add to that the ever increasing costs of paying for channels you never watch, and it's no wonder people are looking for alternatives. And the market is responding.

    All this increasing cost alone was enough for me to cancel cable in 2009. I'm lucky enough to be in a good location to get OTA channels in nice HD, and for the rest I use Roku and occasional Redbox rental, so I won't be needing Aereo. But the real reason I cut the cord was because of the commercial load, and those annoying network logos on the screen all the time. Neither is much of a bother when watching a 1/2 hour comedy or a reality show, but for a one hour drama or movie, they literally suck the entertainment value, the immersion, right out of the show.

    That said, I agree that Aereo's loophole may not last. Some of that 2.3 billion dollars the networks take in each year will find its way, via plain brown envelope, into the right hands, and laws will change.

  14. Philo Farnsworth Jr says:

    Maybe this is a good time to revisit the whole retransmission consent issue. This has never made sense. The broadcaster clowns are giving it away. If it were scrambled I could understand the fees. But why should cable/satellite companies pay for something that’s given away intentionally for free? It’s stupid.

    • Chuck says:

      Does that mean a broadcaster should be able to record the program from another station which is “free” and rebroadcast it? I don’t think that is the case and Aereo should not be able to take a station’s signal and sell it to their subscribers.

      • Harlon Katz says:

        They are not “rebroadcasting” – Aereo is leasing an antenna to a consumer that may not have an option to get a decent signal with rabbit ears.

    • Ed Walket says:

      Agree entirely. There should no retransmission fees by cable, satellite or Internet for merely retransmitted a free broadcast signal to the same area the free signal serves. There is no real ‘misuse’ of the programming since there is no ad insertion by the companies retransmitted. If anything, they contribute to the came and AQH the advertisers on those over-the-air signals are seeking.

    • Chuck says:

      The cable/satellite companies are reselling the TV station programming and making a profit from the selling of that product. It is not unfair for them to expect to pay for what they are reselling. I

      • Peter Litman says:

        Chuck: The “reselling” is part of the story, but not all of it. The free-to-air nature of the broadcast signal is another part. The cable operator could also build an off-air tuner and small antenna into its set-top box and integrate those feeds of the broadcast stations into their electronic program guides and DVRs. DBS used to use such a solution in their receivers. This sort of solution is subject to the vagaries of the broadcasters’ signals, so it would work better in some places than others, but it would have the same impact on the broadcast business and I can’t imagine anyone would say the law needs to change to stop it or that a cable operator employing this type of solution would still need to negotiate retransmission consent.

      • Chuck’s got it right.

  15. Jim Reynolds says:

    Why is “free tv” in quotes towards the end of the article? It is free, unless you’re a cable subscriber. That’s the part that really doesn’t seem fair.

    Also, there is zero chance of the networks moving big sports events to cable. The leagues wouldn’t permit it to happen. It’s not just the on-air advertising, it’s the in stadium as well. Those deals are based partly on tv visibility.

    Really, the headline was rather misleading.

    • Chuck says:

      Unfortunately many major sporting events are already only on cable or satellite. As a non pay TV viewer I can chose to pay for this programming or not watch. If a cable subscriber does not want to pay for the programming from ABC, NBC, Fox, etc. they can cut the cord and watch free over-the-air. They have chosen to pay for TV programming. The pay TV provider including Aereo makes a profit reselling that programming and rightfully should pay for that product.

  16. Dave ODell says:

    Looks like Variety is hawking as a network shrill. Bottom line … Aereo is legal … they have won three times in court … the Supreme Court will most likely not hear the case. Networks will have to deal with losing rebroadcast fees, which are bogus.

    • steve smith says:

      they won 3 times in the court – a) the judges are dense b) judges are corrupt c) judges are under threat d) the plaintiff lawyers are idiots e) stars are in favor of aereo- not because aereo is right -as the law stands -specially coming on heels of ivi – walks like a duck – quacks like a duck -it is a duck – if the antenna and viewer are not in the same address then it is retransmission – retransmission is public performance – you need compulsory license – but u r not one of the approved types to get compulsory license – ie cable/satellite/telco – ergo aereo is illegal – did u see the logic – and u r telling me these guys won 3 times -because the plaintiff lawyers couldnt make this argument.
      if aereo wins – then primetime programming consists of reruns of xena the warrior -as sienfields dad said.

      • steve smith says:

        Jim,

        if antenna and viewer not in the same address -then it is retrans – and for retrans you need compulsory license – and for compulsory – you have to be a mvpd – other wiseit is copyright violation
        i dont understand the renting of antennal – probably you can rent a antenna – but the wire from antenna to the tv set – cannot cross a right of way
        i can be a apartment building and may be i can rent a antenna to my tenant – but that is not the same as aereo

      • Jim Reynolds says:

        Steve, vast differences between IVI and Aereo, to not understand that really makes your agruments pointless. This ain’t about quacking ducks. Let me ‘splain.

        When you break the shrinkwrap seal on a DVD you get physical posession of the plastic disc, not it’s contents. Those contents are provided under a license with specific prohibitions. That’s why IVI lost. There is no other law involved than that contractual agreement between provider and consumer.

        Conversely, the Broadcasters have no such agreement with the consumer. The license is between the federal government, administered through the FCC, and each individual call-sign station. In exhange for the license the Broadcasters are compelled to provide mandated forms, and quantities, of content to the public at large, for free.

        The reception of that signal, which is performed via an antenna, is up to the consumer. That is why there are 800 different kinds of antennas on the market, all perfectly legal. In fact, it is also perfectly legal to rent antennas. There are statutes on the books and it’s a common practice in NYC…that’s why the plaintiffs didn’t go that direction.

        As you rightly point out, retransmission only applies to MVPD. It should be pointed out that the broadcasters helped define the term so they are getting caught up in their own web. In fact, retrans was a counter-punch to Must Carry…something else the broadcasters whined about until they got their way. Aereo does not meet the MVPD specs. That’s why the Plaintiffs can’t go that way.

        The only path the Broadcasters can follow is copyright infringement by attacking the DVR. This is a double edged sword. Destroy the Cablevision precedent and you cut off a major revenue stream for the MVPD…their partners. Up to now the cable guys have been relatively silent on the issue (last week notwithstanding). If you killed off DVR, that is billions of current revenue and billions of still depreciating CAPEX that would go up in smoke, plus the added CAPEX of having to replace all that gear. If you think that TWC would pony up a 600x increase in retrans after all that…

        So, in a Turducken (nutshell didn’t seem to be the right word), the Broadcasters can’t possibly win and that’s why they are apoplectic.

  17. SusieQ says:

    No, legally, the broadcasters are pretty much f’ed unless Aereo makes the mistake of re-selling ad time and inserting new ads over the existing ones. The broadcast nets are not going to get more money by putting their content on cable, because they’ll lose a large percentage of their audiences (leading to declining ad revenue and subscription fees that won’t make up for it). Barry Diller has them right where he wants them. They may not like it, but there’s little they can do, realistically. The case for re-transmission fees for broadcast has always been shaky anyways (the practice is what, barely a decade old?).

    That the channels haven’t more aggressively pursued their own digital solutions to cater to cord-cutters is really their own fault.

  18. David says:

    Best of luck to Aereos! The broadcasters have been raping the public for decades by charging ‘retransmission’ fees. They are given the frequency spectrum by the public. If they don’t want to be in the free TV business, then switch to cable/sat. only.

    • steve smith says:

      David – you want free tv -put a 100 ft antenna and you will get it – you want the convenience of avoiding antenna -get cable – for that convenience you pay cable guy and he needs to pay upstream -ie the broadcsasters – and that is called retrans –
      no body is stopping you from putting an antenna

      • steve smith says:

        Jim
        even the cable subscriber – can put a antenna and get channels – every household that is 115M HH of america get it – i dont know where you got 60M
        dhdhdjdsdd – the same has your wife vs – pay$10 to your neighbor for services of his wife –

      • Jim Reynolds says:

        Ummm, upstream is the consumer. With every increase in Retrans, it goes straight to the consumer. Why are 60million people getting it for free and every cable sub has to pay? Something isn’t right.

      • djhdiklga says:

        what is the difference if I put the antenna up at my house…or I give my neighbor 10 dollars to put it up at his house because he has perfect Line Of Sight to the towers while I am blocked by 3 apt complexes?

        Physical location of MY antenna should not be an issue no matter where I put it.

        Funny how they made these digital channels, replaced the old ones…wanted to give them away free but then when its finally being used the networks are crying about it?

        sounds like they never intended for the digital upgrades to actually work

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