A tiny startup you've probably never heard of is heading to the US Supreme Court, and it could change how the entire country watches TV.
The top court in the country on Friday agreed to hear the case pitting television broadcasters against Aereo, an online subscription service with arrays of miniature antennas that grab over-the-air programming, stream it online to paying members, and store it for them in a remote DVR.
The big media companies, riled by lost revenue, say that Aereo is guilty of infringing their copyrights. But this is more than an arcane dispute about broadcast technology. Because of rapid shifts in video viewing spurred by tech, the Aereo case has broader implications, and it could affect sectors far removed from your living room. How the court rules could affect what professional sports you watch free, whether you can access your cable operator's DVR remotely, even what kind of data you can store in locker services like Dropbox.
Aereo, a service backed by IAC Chairman Barry Diller, launched less than two years ago with promises of shaking up how we watch broadcast television. The startup has a subscriber base numbering, judging by CEO comments, just in the tens of thousands. Even among the companies eager to quash it, one top executive dismisses it as getting more buzz than actual subscribers. But as the Supreme Court taking the case shows, this small startup is raising big questions.
Over-the-air broadcasts -- those from the likes of ABC, NBC, Fox and CBS (the parent company of CNET) -- are free, so what's the problem with Aereo?
Copyright law distinguishes between private performances and a public ones. Pulling up "The Walking Dead" on your DVR and watching it on your couch -- that's a private performance, and kosher with copyright law. Your cable company providing you with AMC so you and millions of others can watch "The Walking Dead," that's public performance.
On the surface, Aereo's business seems akin to the latter example, a public performance. But Aereo has an individual antenna for every subscriber, and an individual copy of the content for each user. It's setting up each member's antenna of his or her behalf, connecting it to the Web, and letting that member use the antenna however they see fit, as though it were an antenna in their own home. Aereo calls that private.
"We've got here a narrow loophole created for broadcast programming in the copyright act," said Andrew Goldstein, an intellectual property attorney at Freeborn & Peters in Chicago. "Credit Aereo for taking that loophole and driving a Mack truck through it."
--Andrew Goldstein, Freeborn & Peters attorney
Strictly speaking, retransmission fees are the reason broadcasters are suing Aereo. Today, nearly all US viewers watch TV via a paid distributor like cable -- estimates put it at more than 90 percent. You pay the cable company to watch free broadcast shows, and as a result, the cable company must pay the networks for retransmitting their content.
Aereo's model circumvents these big payments, and broadcast networks are incensed.
Networks relish their retransmission fees. Though most of their sales still comes from advertising, retransmission fees are a revenue innovation and are growing fast. Where retransmission fees didn't exist a few years ago, they've grown to an estimated $3.3 billion last year and may be worth more than $7 billion a few years from now.
Aereo is tiny, however. The retransmission fees networks are missing out on are a drop in the bucket. The networks' bigger fear is their giant distributors will do the same.
"Broadcasters are worried not so much about Aereo but the Aereo principle applying to their big retrans consent accounts," like cable, satellite and fiber-optic TV companies, said David Wittenstein, a media and information technology lawyer at Cooley in Washington DC.
In other words, the networks aren't worried about the drop in the bucket. They're worried Aereo will kick the whole bucket over.
An Aereo Supreme Court win could also doom sports on free TV, as Major League Baseball and the National Football League argued in an amicus -- or "friend of the court" -- brief.
Copyright owners like them collect about $100 million a year from the licensing charges distributors pay when they retransmit broadcast programming, the brief said. If retransmission fees disappear, pro leagues risk losing those millions too. That could force rights holders to move to paid cable networks, "where Aereo-like services cannot hijack and exploit their programming."
That would mean no more no more Sunday Night Football on NBC, no more "NFL on CBS."
Maidie Oliveau, counsel at law firm Arent Fox, said whether that actually happens will depend on the market's reaction to the decision. "The current system...makes a lot of money for everybody," she said, and the market would likely work to protect that. But sports programming is at higher risk of fleeing to cable than other kinds of content, she added, because its appeal is watching live.
Critics could argue media companies and sports license holders are already turning this doomsday scenario into reality. Most of MLB's games have been moved off broadcast television to cable channels, and Disney -- owner of both ABC and ESPN -- has moved most of its pro football off broadcast and behind the paywall of cable, to ESPN.
Pay-TV operators, meanwhile, are loathe to keep paying skyrocketing retransmission fees. Time Warner Cable's willingness to temporarily remove CBS channels from its lineup during their fee negotiations this summer illustrated that. But most cable clients of Wittenstein don't want Aereo to win, he said, because Aereo offers a low-cost alternative to their video service, and they're worried about generational viewing shift.
"Cord cutters," people who forsake traditional pay-TV service for Internet-based alternatives, are still a rare breed, but those who cut the cord are young. If today's kids become accustomed to Internet-based TV, tomorrow's households will turn to the Internet rather than cable or satellite.
Adding another wrinkle for pay TV, the Aereo case could imperil a precedent known as the Cablevision case. In 2008, the cable provider Cablevision won its court battles against media companies to offer network DVR, a cloud-based recording system that doesn't require recording hardware in the home. Without network DVR, you can't access your recorded shows on the go, and the content is locked to the box attached to your TV. The Supreme Court declined to hear an appeal of the Cablevision case in 2009, and pay-TV operators have been rolling out the cloud-based services ever since.
If the Supreme Court rules against Aereo, it could do so by striking down the Cablevision decision.
Aereo has said the broadcasters are using Aereo as a proxy attack on the Cablevision precedent. Cablevision itself has called broadcasters' arguments an "overreaching and damaging" attempt to overturn the remote DVR principles of the Cablevision decision.
Dark clouds elsewhere
The worries about cloud storage don't stop with remote DVR. Cablevision, Aereo, and others have argued that the broadcasters are challenging the legal underpinning of all cloud-based services. That means Dropbox, or your Amazon cloud-storage locker.
Most cloud-locker companies don't hold any licenses for the content. Why would they? If customers store their own movies or MP3s and stream them from the lockers, those are private performances.
Aereo's single-antenna, single-copy setup is the basis for its claim of being a private transmission too, but "the broadcasters say that's stupid. Clearly overall Aereo is making a public performance," said John Bergmayer, senior staff attorney at consumer advocate Public Knowledge.
He said that if Aereo loses, a music label theoretically could protest people storing its music in a locker and streaming from there: It's no longer a private performance when it happens en masse.
"This copyright law doesn't even talk about that," he said.
It's uncharted territory, so Bergmayer said it's hard to know how legitimate the fear is. Goldstein, the Chicago attorney, said broad applicability to the whole cloud-computing industry is unlikely. Those using the cloud to share software have permission of licensors, he noted. "That type of model takes up a big chunk of what is being offered as cloud services."
So which way will it go?
Who is likely to come out on top: the broadcasters or Aereo? As with any case before the bench, it's a difficult call.
Aereo has been victorious in courts thus far. In April, the Second Circuit Court of Appeals denied a preliminary injunction sought by the television networks, and denied a motion it be reheard before a full panel of judges. A judge in Boston ruled along the same line.
However, FilmonX, a company offering a service similar to Aereo's, hasn't had as much success, failing to deflect injunctions in Los Angeles, D.C., and Boston courts. While it's unclear whether Aereo and FilmonX are based on the same technology, the latter's court failures cast uncertainty on Aereo's record.
No matter who wins, one thing is certain -- Aereo will be changing the course of television history, just as it wanted.