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Why Aereo’s Free Ride Will Ultimately Crash

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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