(CBS) Can Aereo Change the Broadcast Game?

The signal’s still green for Aereo. Despite several legal challenges, the company which streams over-the-air TV programs from the cloud continues to grow its services. The brainchild of CEO Chaitanya (Chet) Kanojia, Aereo has worked its way around existing legislation which requires cable and satellite providers to pay license fees to broadcasters. These laws were enacted by Congress in 1992 and 1999 and fees are paid in lieu of these service providers retransmitting signals.

Meanwhile, CBS Corporation (CBS), The Walt Disney Company (DIS), Fox – owned by News Corp. (NWSA), NBCUniversal – owned by Comcast Corporation (CMCSA) and ABC are seeing red. So are Telemundo, also owned by Comcast and Univision. Last month, the 2nd Circuit Court of Appeals in New York ruled in favor of the internet start-up. The court said the company’s transmissions and recordings of major free-to-air networks were not “public performances” of copyrighted material. Broadcasters have appealed that ruling in the full 2nd Circuit Court.

Aereo’s modus operandi is a unique one. Somewhere in Brooklyn, the company has a warehouse with several large “antenna arrays” connected to the requisite hardware. These in turn in are fitted with thousands of TV antennas, each about the size of an adult fingernail. The arrays pick up local over-the-air TV broadcasts and stream it to subscribers through their Aereo accounts.

These broadcasts, live or recorded can then be viewed on iPhone and iPads from Apple Inc. (AAPL) and Roku boxes. Next up is support for Kindle Fire devices from Amazon.com Inc. (AMZN). You can view these broadcasts using popular internet browsers like Internet Explorer from Microsoft Corporation (MSFT)and Chrome from Google Inc (GOOG), since Aereo’s interface is simply a HTML5 Web page. Subscribing to Aereo also gives users several hours of storage, which varies from 20 to 40 hours from a monthly to yearly subscription.

At first glance, the plethora of mini antennas seems to be unnecessary. However, there is more than meets the eye here. Each subscriber is assigned an individual mini antenna. Areo’s major backer, Barry Diller of IAC/InterActiveCorp (IACI) describes the situation as “every little antenna having someone’s name on it.” Of course, that’s not entirely true because if you decide not to stop using Aereo, the antenna may be assigned to someone else.

There are several other artificial restrictions which Aereo imposes on users. Currently, available only in New York, the service is accessible only within the city’s designated market area. If a user moves out of that zone, the phone’s GPS or wi-fi will be used to ascertain this fact and Aereo will switch off reception. This ensures that the service mimics normal TV reception, where it is impossible to view over-the-air signals beyond a specific distance.

And now Aereo has decided to expand its services beyond New York to Boston. CBS, one of the litigants in New York, has immediately said it will sue in Boston as well, leading to Aereo taking preemptive action. A CBS company spokesman has tweeted saying: “Stealing our signal will be found to be illegal in Boston, just as it will be everywhere else”. Aereo has responded by filing a declamatory judgment action in the New York federal court. This is aimed at preventing CBS from suing Aereo in every jurisdiction where the company decides to offer its services.

Till now, Aero has successfully circumvented license fees which the likes of Comcast and DIRECTV (DTV) have to pay free-to-air broadcasters. But the real challenge to broadcasters comes from the fact that the nature of the TV industry is possibly in for a change. Currently, Aereo’s yearly subscription is priced at $80. A viewer who subscribes to Aereo and other Web based video services like Netflix, Inc. (NFLX) or Amazon’s Instant Video Service would end up paying only about $20 a month. This is far lower than the $100 or more which subscribers pay for cable TV services.

This would result in a ruinous situation for the networks, who receive billions of dollars from cable companies as license fees. The networks have responded in a variety of ways. CBS boss Les Moonves said on Monday that the company would focus on content creation and viewed the likes of Netflix as partners. This was because such over the top providers paid for content. Moonves believes that streaming companies would bring in a large amount of incremental revenue.

Moonves believes Aereo is “not a serious threat.” However, NewsCorp said in April that it may morph into a subscription service if it loses the legal battle with Aereo. This is the most radical measure which any broadcaster has threatened to undertake. Even CBS believes that if the courts do not rule in favor of the broadcasters, it may have to move over to cable. It is clear that the television industry is watching this legal battle with keen interest, since it could threaten its existing model. Clearly, until a resolution to this legal battle is reached, the future of free-to-air television remains under a cloud.
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