What is Behind the Aereo Controversy?

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The Aereo ruling on April 1 certainly has the cable industry in an uproar. In that ruling a federal appeals court upheld a lower court ruling that Aereo’s wireless streams to customers are not a ‘public performance’ and thus do not constitute copyright infringement. On Friday Glenn Britt, the CEO of Time Warner, said that his company was considering pulling the broadcast networks off of his cable TV systems and sending them to customers over a radio in the same way that is being done by Aereo. And recently, in response to the Aereo ruling the broadcast networks threatened to pull all of their content off the air and move their programming to cable TV. So what is up with Aereo, and can these companies do what they have threatened?

Aereo has an interesting product that seems to have found a market niche, at least in New York City where it is now operating. Aereo sets up a radio link to each customer and sends them a 28 channel packagethat includes the major networks, some other low-cost networks and some spanish and asian-language channels. Aereo can be installed on any Windows or Mac computer and can then be streamed to iOS devices like the iPhone, iPad or Apple TV. It can also be made to work with a Roku box. And one would imagine it will soon be made to work with other pads and tablets. The service also lets a consumer record some programming for later playback. The pricing is cheap compared to cable TV with a $1 per day plan, monthly or annual plans, including a monthly plan for $8 that lets a customer watch everything live plus record and play back 20 hours of programming per month.

Why does this controversy even exist? Can’t people just receive the broadcast networks over the air? On June 12, 2009 all full-power analog television transmissions ended and starting with that date the full-power television stations, which include all of the major networks like ABC, CBS, NBC and Fox could only broadcast in digital. Customer now need a Digital Television Adapter (DTA) to receive the signals and any home that is near to a station can receive it for free. But it is not easy for the average consumer to get these signals from the TV to mobile devices, and Aereo’s real marketing niche is providing signals to computers, iPhones and iPads.

Why are Time Warner and the cable companies so stirred up over Aereo? Aereo seems to have found the niche of people who want to watch mainstream programming without being tethered to their TV. If Aereo was limited to New York City this probably wouldn’t be a huge deal, but they have announced that the service is coming to 22 other major markets in 2013.

As is the case with all big business controversies it all comes down to money. In the 1992 Cable Television Consumer Protection and Competition Act, Congress required that all cable operators obtain the permission from broadcasters before carrying their signals on their cable systems. For a while this permission was granted for free, but in recent years the broadcasters have asked for significant fees and it is not unusual to see each local broadcast network charging $1 or more per customer per month for retransmission consent. So a cable system now has to pay that much each for ABC, CBS, NBC and Fox, and in some markets multiple stations of some of these. This has driven large increases in cable rates and is now a point of huge contention between broadcasters and the cable companies.

The broadcasters are angry that Aereo is able to bypass their fees since retransmission fees currently make up as much as 10% of their revenue. And the cable companies are angry that Aereo has gotten out of paying the same fees that they must pay. And they are worried that Aereo will accelerate the trend of customers who are ditching traditional cable TV in favor of programming from the web and elsewhere, the trend referred to as the cord-cutters.

Can Time Warner really do the same thing that Aereo is doing? Certainly Time Warner or anybody could form a company that does the same thing as Aereo and compete with them. Such a company could sell the same sort of line-up and do it using radios like Aereo has done. But they first must recognize that it’s important that Aereo is using radios because this is what allows them to not be a cable TV company, which is defined as somebody who delivers cable content using cables. So Time Warner would have to use radios also. And Time Warner is still hoping that the Supreme Court will look at the issue so it’s not entirely certain that Aereo, or anybody, has the legal last word that this is okay.

So Time Warner could establish an Aereo-clone company and do exactly what Aereo is doing. But they could not do this as an alternative to putting the network channels onto their cable system. In the aforementioned 1992 Cable Act, Congress set forth the rules for cable systems to carry broadcast channels, referred to as the must-carry rules. Congress said that a cable system with 12 or fewer channels must carry at least three local broadcast channels. Larger cable systems must carry all local broadcast channels, up to a maximum of 1/3 of their system. This means that Time Warner could not pull the local broadcast networks off of their cable and deliver it in a different way. But Time Warner could probably sell an Aereo-like product to somebody if that is the only product they sell to that customer.

Finally, can the broadcast networks pull their signals off the air and move them to be cable only? I can’t think of any reason why not. At that point they would no longer be a broadcaster and they would avoid all of the FCC rules applicable to over-the-air broadcasters. But if they do this they would become like any other cable network, and so ABC would be treated the same as HBO or TBS or any other cable network. It is likely that such a change would infuriate Congress since around 15% of the people in cities still receive free TV over the air. There would certainly be political repercussions from a broadcast network deciding to become just another cable network. For instance, might they lose their ability to carry professional football?

At the bottom of this controversy are huge dollars and also the underlying fear of the cable industry that Aereo is one more factor that is accelerating the bypass of their systems. It seems like Aereo might be in a similar position to MCI back when they broke the long distance monopoly. Aereo has stuck a sharp stick in the eyes of both the cable companies and the broadcasters and there is one hell of an interesting fight yet to come.