Can Aereo Disrupt the TV Business?

Can Aereo Disrupt the TV Business?

This is an excerpt from an article by Ken Auletta for The New Yorker

The digital revolution has disrupted most traditional media: newspapers, magazines, books, record companies, radio. And what about television? Before the Internet, cable technology disrupted broadcast television, offering viewers many more channel choices. Today, some believe that the foremost threat comes from a technology that allows viewers to zip past ads (the Dish network’s Hopper technology, for one). Some believe it will come from Netflix and Amazon, which threaten to produce enough original programming to rival pay cable channels like HBO and Showtime, and offer entire seasons that can be watched when the viewer, not the network, chooses.

My TV-disruptor candidate is a silver antenna the size of a dime. The tiny device is produced by Aereo, a technology company that houses thousands of these miniature antennas in data centers. They send TV signals over the air, from conventional broadcast networks like ABC, CBS, NBC, Fox, and PBS. The signals are streamed to customers, either live or to record for later viewing, on mobile phones, tablets, or set-top boxes, like Apple TV. For a monthly charge of eight to twelve dollars, or an annual charge of eighty dollars, a subscriber receives about thirty channels.

The service, which began in New York City last year, menaces television because it subverts their business model. The broadcast networks receive about ten per cent of their revenue from cable companies, which are required to pay them a re-transmission consent fee for displaying their programs. Aereo, however, pays them nothing.

The broadcast networks and many cable companies sought an injunction against Aereo in federal court in New York, claiming that those tiny antennas would steal their copyrighted content. Aereo countered that broadcast TV is free to viewers because it uses the public airwaves, or spectrum; all they’re doing is providing another antenna. The fact that their antennas are jumbled in warehouses, not spread across rooftops, shouldn’t make a difference, Aereo insists.

One might think that the cable companies would support Aereo. After all, if the courts allow Aereo to retransmit broadcast stations for free, then the cable companies could argue that they should be liberated from the costly fees they pay. But those silver antennas are aimed at the cable companies, as well. An annual Aereo subscription is a lot cheaper than most monthly cable bills. Cable companies can persuasively argue that consumers are being denied choices, since thirty channels don’t offer the almost unlimited options provided by cable channels. No ESPN, HBO, Discovery, or CNN. But for consumers, those are expensive choices. Aereo could help sway them. And to wreck a cable or broadcast company’s margins, Aereo just needs to siphon ten or twenty per cent of their revenue flow.

Last July, the New York district court sided with Aereo and dismissed the injunction, accepting the argument that Aereo was just another antenna delivering “free” TV to the home. It was also akin to consumers recording TV programs on their home VCR or video player, which courts have allowed. In December, though, a U.S. district court in Los Angeles sided with broadcasters, and granted a preliminary injunction against a similar service, called Aereokiller. Aereo remains open for business in New York while the case awaits a ruling from a higher federal court.

Why does “old” media, like television, matter? For starters, the average American, according to Nielsen, devotes at least thirty-four hours each week to watching television, plus another three to six hours of recorded programs; less than five hours per week are spent trolling the Internet on a digital device. Poorer people tend to watch more television because they can’t afford other diversions. For those who find cable too expensive, and who live in dense urban areas where roof antennas provide poor TV reception, Aereo may deliver on the promise of “public access” to free, broadcast television (though they would, again, have to pay eighty dollars a year).

Aereo’s founder, Chet Kanojia, understands the stakes. He’s received two rounds of financing totalling nearly sixty million dollars. This year, he plans to roll out a national service by making Aereo available in twenty-two cities, including Boston, Atlanta, and Dallas. Aereo’s investors include FirstMark Capital, First Round Capital, and individual investors. Its foremost financial backer is Barry Diller’s IAC/InterActiveCorp.

This is an excerpt from an article in The New Yorker. Click here for the full article.