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Why Aereo Didn’t Try to Exploit CBS-Time Warner Cable Fight

Internet TV startup Aereo sat on the sidelines during the monthlong blackout of CBS on Time Warner Cable instead of trying to win over disgruntled cable customers because it didn’t want to build capacity that would go unused after the dust had settled, according to Aereo CEO and founder Chet Kanojia.

Aereo’s business is similar to that of a hotel, according to Kanojia, speaking Tuesday at Goldman Sachs’ Communacopia conference in New York: The company installs capacity and rents that out to consumers.

“If I get a million people who want rooms for one night, and I know you are going back to your boyfriend or girlfriend the next night, I’m left with all these empty rooms,” he said to explain why Aereo didn’t actively market the service during the CBS-TW Cable feud. “We very purposefully ignored the debate.”

To extend the hotel metaphor, major TV broadcasters would contend Aereo is illegally outfitting those hotel rooms with their furniture.

Broadcasters including CBS, ABC, NBC, Fox, Univision and Hearst Television are suing the company for copyright infringement. Aereo so far has successfully defended itself from legal challenges seeking to shut it down, but lawsuits against it are pending.

A similar service, FilmOn X, was ordered to shut down last week; FilmOn is appealing that decision.

Aereo has repeatedly tried to argue that its service and legal situation is different from FilmOn, which previously called itself “Aereokiller.” Kanojia took issue with the comparison between the two companies, saying in the FilmOn cases “there’s never been discovery, there’s never been an establishment of facts.”

It could take another year to have Aereo’s legal issues resolved, according to Kanojia. Fox, for one, has said it willing to appeal the case to the U.S. Supreme Court.

Kanojia claimed that the legal precedent Aereo is basing its defense on — a ruling upholding Cablevision’s network-based DVR service, which had also been challenged by content owners on copyright grounds — has implications for other industries. The Google Drive file-storage service, he claimed, relies on the Cablevision ruling.

“To stop Aereo, you’d be stopping entire industries,” he said.

For now, because Aereo isn’t paying TV broadcasters for programming, the company is able to build a very high-margin business.

Kanojia said it costs Aereo less than $2 per month per subscriber in infrastructure costs to deliver the service, which provide live and recorded TV. Aereo charges $8 or $12 monthly for the service, with 20 or 60 hours of DVR recording space, respectively.

“If the (subscriber) trajectory today continues to hold or accelerate… it’s  a very, very good business,” Kanojia said.

At the conference, Kanojia said Aereo plans to expand to four more cities — Columbus and Cincinnati, Ohio; Indianapolis, Indiana; and San Antonio, Texas — with launch dates to be announced.

Those are in addition to the 22 markets the startup has been targeting for deployment in 2013 and 2014. Aereo to date has launched the service in New York City, Boston, Atlanta, Salt Lake City, Miami, Houston and Dallas.

In the last three to four months, Aereo has grown its subscriber base tenfold, Kanojia said, although he declined to provide specific numbers. In addition, he claimed that nearly 4% of visitors to Aereo’s website convert into paying customers.

Aereo’s customers are typically between 25 and 45, and 65% are men. The median income of Aereo subscribers is around $100,000 annually, Kanojia said, and half of them have pay-TV subscriptions.

About half Aereo’s users primarily access the service on a TV, via a Roku set-top or Apple TV box via AirPlay with another iOS device. Almost 80% of the service’s video consumption is indoors.

Aereo, which has just over 100 employees, has raised $63 million from investors including IAC, FirstMark Capital, First Round Capital, Highland Capital Partners and High Line Venture Partners.

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