Aereo loss protects $4 billion in fees for broadcasters

Bloomberg NewsJune 26, 2014 

NEW YORK -- Broadcasters protected their TV turf by convincing the U.S. Supreme Court that Aereo Inc. went too far in converting their programming into a streaming-video service.

Aereo presented a threat because it let customers watch live and recorded TV online for as little as $8 a month without having to subscribe to a cable-TV package. The 6-3 ruling supported broadcasters who said Aereo jeopardized the underpinnings of the TV industry by not paying licensing fees.

Broadcasters get billions of dollars a year from cable providers for the right to air the same programming. An Aereo victory could have endangered that revenue by giving cable providers a blueprint to avoid making such payments.

Instead, Aereo was dealt what's likely to be a fatal blow, and the fees for broadcasters may now reach more than $7 billion by 2018, according to research firm SNL Kagan.

"It's a clear win for the broadcasters, and the status quo remains," said Vijay Jayant, an analyst at ISI Group in New York.

Aereo had roiled an industry already adapting to sweeping changes in how consumers watch video programming. Companies including Netflix and Amazon.com are vying for viewers as more people opt to get their shows over the Internet instead of traditional cable.

Aereo's loss takes away a key product for consumers looking to eliminate their cable or satellite-TV bills. Aereo provided live content only available on broadcast networks, particularly sports such as National Football League games. People looking to cut the cord could have cobbled together a collection

of services -- Netflix, Hulu, Amazon's Prime service and Aereo -- that mimics most of what pay-TV companies offer at a lower cost.

"Now you don't have the Aereo piece of the equation, and that hampers the ability of a consumer to put together their own cheaper package," Jayant said.

The ruling is a triumph for broadcast companies and spells the likely end of Aereo.

Aereo Chief Executive Officer Chet Kanojia has said previously that the startup didn't have a Plan B if the Supreme Court ruled against it.

The court fight centered on a provision in the federal copyright law that gives owners the exclusive right to perform their works "publicly."

Justice Stephen Breyer, who wrote the court's majority opinion, said Aereo violated that provision, operating much like a cable TV provider without paying fees.

"Aereo is not simply an equipment provider," Breyer wrote. "Aereo sells a service that allows subscribers to watch television programs, many of which are copyrighted, almost as they are being broadcast."

The court effectively protected the revenue from cable and satellite providers that 21st Century Fox Co-Chief Operating Officer Chase Carey said is essential to the broadcast-TV industry. The industry's payments are estimated to exceed $4 billion this year, a 30 percent gain from last year, according to research firm SNL Kagan.

CBS' $2.2 billion in affiliate and subscription fees accounted for about 15 percent of its total revenue last year. Comcast's NBCUniversal unit got $1.4 billion in revenue for licensing broadcast content, making up 6.1 percent of NBCUniversal's sales.

"The future of retransmission fees was definitely at stake in this battle," Geetha Ranganathan, an analyst at Bloomberg Industries, said in a phone interview. "This is really a resounding victory for them. It's great for the broadcast networks because they are so heavily reliant on advertising."

Aereo's appearance at the nation's highest court stemmed from its bid to forge a technological route around the TV companies' copyrights. The broadcasters said Aereo was trying to use a technical detail to circumvent well-established legal rights.

Aereo stores thousands of dime-sized antennas on behalf of subscribers and uses them to convert over-the-air broadcasts into a digital stream of video. That lets each customer create a distinct copy of a program for viewing. Customers in 11 cities have been able to watch live and recorded broadcast programs through Aereo.

The court had to decide whether the technology Aereo used to record and deliver programs over the Internet from its offices constituted a public performance of the copyrighted work. Aereo said its system of "one-to-one" transmissions to a customer's screen is legally indistinguishable from the antennas homeowners have placed on their own roofs for decades.

Aereo also distributes Bloomberg TV to subscribers. Bloomberg LP is the parent company of Bloomberg News and Bloomberg Television.

While Aereo may be able to change its business model by paying for the right to distribute broadcast programming or licensing its technology, billionaire backer Barry Diller said in April that a negative ruling means "it's over" for the startup. Diller helped create Fox, the youngest broadcast network, in the late 1980s.

Broadcasters had been contemplating major changes to their businesses if Aereo had won. CBS Chief Executive Officer Les Moonves had said the company would consider creating its own online-streaming television service with other networks. That's no longer necessary.

"It's a terrific victory for us," Moonves said today in a phone interview. "When you think about how our content is delivered -- the world has changed drastically but you can't take our content for free. We're being paid by lots of people to license our content -- cable companies, satellite and telcos and online companies like Netflix. That's the appropriate way."

Justice Antonin Scalia, who wrote the dissenting opinion, said Aereo didn't violate the "public performance" provision because it let subscribers choose which programs they were receiving.

Aereo vowed to keep battling, though it didn't specify how. The company is part of a generation of startups that have been trying to disrupt traditional industries by using new technology -- and challenging regulations.

Uber Technologies Inc., recently valued at about $17 billion, and competitor Lyft Inc. are threatening the taxi industry by letting people order private town cars and other vehicles from their smartphone. Airbnb Inc., which is taking on hotels by providing a marketplace for short-term rentals of homes throughout the world, is facing a probe as to whether it violates New York state laws.

Aereo CEO Kanojia said the decision could send a "chilling message" to the technology industry.

"We've said all along that we worked diligently to create a technology that complies with the law, but today's decision clearly states that how the technology works does not matter," he said in a statement. "We will continue to fight for our consumers and fight to create innovative technologies that have a meaningful and positive impact on our world."

Broadcasters have rejected the notion that they're standing in the way of technological advances.

"This has never been about stifling new video distribution technologies, but has always been about stopping a copyright violator who redistributes television programming without permission or compensation," Fox, Chicago-based broadcaster Tribune Co., Spanish-language TV company Univision Communications Inc., the Public Broadcasting Service and New York public broadcaster WNET said in a joint statement in January.

The majority today said the ruling was a limited one that wouldn't affect cloud computing, the business of storing videos and other content for customers on remote servers and then delivering the content through the Internet.

Aereo had argued that it was simply providing cloud services by letting people record, store and watch programs using equipment that wasn't physically in their homes.

Even if Aereo is unable to continue doing business, the startup's legacy could be inspiring broadcasters and other programming companies to try out offering more Internet video services, said Clay Brockman, an analyst at investment-research firm Height Analytics.

"People really like this Aereo technology," he said in an interview before the ruling was announced. "There's a greater sense of urgency that this technology is out there now."

-- With assistance from Greg Stohr in Washington and Christopher Palmeri in Los Angeles.

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