How a New York start-up outsmarted Fox

In 1984 Barry Diller helped create what was then the most disruptive competitor in the US television market, the upstart Fox TV network. Almost three decades on Diller is once again in the driver’s seat of another disruptive upstart, the US based cord-cutting TV enabler Aereo.

Put simply, Aereo is a way for users to watch live broadcast TV on their mobile, table, computer or other internet enabled device. Using what it dubs a remote antenna, users can watch stations broadcast over public spectrum. To access the service they pay a fee ranging from $8 to $12 a month, which not only allows them to access these broadcast signals on their devices, but also pause and rewind live TV as well as offering DVR storage space.

Right now Aereo only operates in the New York City metropolitan area, with planned expansion within the month into Boston, Miami, Austin, Atlanta, Chicago, Dallas, Houston as well as 16 other US markets. Aereo isn’t a brand new concept; it has been around for the past two years (it launched to users 12 months ago) and in that time has taken $US63 million of investment with plans for more to fund market expansion. Diller is involved in the venture via his Interactive Corporation vehicle.

The technology behind Aereo and the means by which it allows users to receive broadcast signals via their internet enabled devices is highly technical and complex, however in a nutshell what Aereo does is capture broadcast signals using a tiny antenna (so small it can fit on the tip of a finger), store hundreds of thousands of these antennas within a data centre, and use the internet to connect each Aereo user with their individual antenna. The user then controls their individual antenna via the internet.

The means of receiving the signal are very important here. Many argue that Aereo is simply illegally rebroadcasting other companies content via the internet – taking the over the air broadcast signals of Fox, CBS and other free to air providers and repackaging it into digital data that can be streamed in real time over the internet. Aereo argues it isn’t doing this due to its system of antennas, and is simply offering a service which allows users to access freely available broadcast signals that have been broadcast to their specific antenna.

Regardless of the technological details, the system is a real threat to US broadcasters, whose position in the business of retransmission is big – seriously big. Currently the largest US Free to Air TV networks are seeing around $1 billion annually from retransmission fees, with predictions from SNL Kagan that within five years this will increase to around $6 billion. Retransmission fees are paid to the networks by cable providers in exchange for the cable providers being allowed access to rebroadcast their copyrighted material. Unlike the cable providers, Aereo is not paying the networks any form of fee whatsoever as it argues that what it is doing doesn’t amount to retransmission.

It’s for this reason broadcasters including Walt Disney Co, ABC and Comcast Corp took legal action against Aereo and another similar business, the Californian based Aereokiller, arguing Aereo was unlawfully transmitting their signals publicly, which they claimed was was damaging advertiser and retransmission revenue.

Ultimately, the courts agreed with Aereo. “Its transmissions are not public performances,” the court said, and “if they are not public performances, it needs no such license.” This means, for the time being, Aereo is free to use its technology to enable its users to access broadcast television signal content via their internet enabled device. The case against Aereokiller is currently still being held but is based on the same defence, however Aereokiller has not been permitted to move forward with its business until the case is resolved. The loophole is based on the premise that the antenna system Aereo uses means that content is not publicly broadcast but broadcast only to the individual to whom the antenna is assigned. (There is more detail on the technicalities and how they apply to the legal ruling here.)

Broadcasters will fight this with all their might. At its heart, it’s about protecting retransmission revenues rather than anything specifically to do with Aereo. Aereo is a niche product operating in a single market with minimal revenue and any retransmission revenue from Aereo’s current operations would be minimal if indeed Aereo was obliged to pay these transmission costs. However, if Aereo can use technology to create a loophole that allows the legal retransmission of the broadcast signal without payment to the broadcaster then that puts the entire retransmission concept and its multi-billion dollar revenue streams in jeopardy.

News Corporation chief operating officer Chase Carey isn’t a fan of services like Aereo. So much so that he has threatened that if the legal system can’t protect his Fox broadcast signal then he will yank it off the air and transmit exclusively via cable. "We have no choice but to develop business solutions that ensure we continue to remain in the driver's seat of our own destiny” he told the audience gathered at the National Association of Broadcaster convention. By broadcasting Fox solely via cable, Fox would cut off Aereo’s supply of its content as Aereo has no current legally allowable means of transmitting a cable signal.

If other main free to air channels, such as NBC, ABC and CBS, followed suit, it could mean the concept of free to air TV in the US would be an extinct one, as the only means of accessing these stations would be via a cable subscription. It would also cut off oxygen for businesses like Aereo as there would be no broadcast content for it to distribute. Carey in the past has shown he is not afraid of bold moves.

Barry Diller may have been the central player in establishing the Fox network back three decades ago, but Carey is damned if Diller will play a similar central role in eroding its current position.

Ben Shepherd is a media and technology consultant. He blogs at Talking Digital, and can be found on Twitter @shepherd and LinkedIn.