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Monday, February 24, 2014

Even if Aereo Wins Supreme Court Case, Can the Company Compete?

The Supreme Court recently decided to hear the Aereo case, which centers on whether Aereo is essentially another cable company that will be regulated as one (and pay retransmission fees) or whether it is an individualized service such as a home VCR that is exempt from transmission fees and cable regulation. 

Aereo took a risk with this all or nothing strategy. The company wanted to consolidate its court challenges to save on litigation cost and accelerate its expansion, but if Aero loses it will be quite calamitous for them. The outcome will likely hinge on whether the Court defines the services on a strict technological basis or more on a functional basis. 

Technologically, the company offers each subscriber an antenna, which is like having a virtual pair of rabbit ears for receiving over the air broadcasts.  Many lower courts have taken this view and have ruled in favor of Aereo. Most likely, the Supreme Court will look at the technology more broadly, and will consider the role of shared equipment: transcoders, servers, software, storage, routing and switching, network access.  Since not all of these can be neatly or efficiently cordoned off and dedicated to each customer, does that make Aereo a type of common carrier? What happens if the location of the antenna is positioned so that the stations available to the customers are different from what they can receive in their home, even if slightly? Does this change the classification of the service as an over the air antenna rental? What about renting an antenna in a different metro area, does that change the nature of the service? Does it change the regulations that are applied?

If the Court takes a more functional view, will it consider Aereo’s service functionally equivalent to cable service and, therefore, subject to the same regulations? While there are differences, it seems to me that Aereo’s service is indistinguishable from basic cable service. It is interesting to note that cable originated as community antenna TV, which is functionally quite similar to Aereo. 

Given these issues, the outcome of the court case is far from certain for Aereo, and even if the company wins, can it scale the technology? I suspect that adding a new antenna (actually two according to the web site) for each new customer eliminates the possibility of economies of scale and the costs for space, power and storage could become burdensome as subscriber numbers get into the millions. 

Regardless of how the Supreme Court rules, the decision will be momentous in how it shapes the industry. If Aereo prevails, consumer choice will increase, and the industry economics will be changed dramatically. Content owners will lose substantial leverage and probably significant revenue from retransmission fees. MSOs will face new, stiff competition that when combined with OTT streaming will be a formidable low-cost alternative to cable. On the plus side for MSOs, they might gain additional leverage in negotiating retransmission fees. If Aereo loses, expect to see further consolidation as incumbents seek to strengthen and protect their positions.

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David Dines

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