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What the Aereo Case Is Really About

NEW YORK (TheStreet) -- ABC vs. Aereo goes before the Supreme Court Tuesday, and court watchers are all atwitter.

They're on pins and needles because they don't know how the case will go, or even how it should go.

Aereo, a start-up backed by Barry Diller and IAC/Interactive (IACI), rents an antenna-and-digital-video recorder service for $8 a month to consumers. This allows them to watch over-the-air programs either live or whenever they want to, on Internet-connected devices.

ABC, a unit of Disney (DIS - Get Report), and the other networks backing it, say this violates copyright law, that Aereo is creating a "performance" for which it must pay "retransmission fees."

So while this may seem like a copyright case, or even a technology case, it's actually a business model case. And that case was settled long ago.

Although nearly all broadcasts have ads in them, a key piece of their income consists of these "retransmission fees." Your cable operator is required, by terms of its franchise, to take local broadcast signals and retransmit them. Over the years this has become a big source of revenue for the broadcasters.

If you have a broadcast station in a market, that station can force itself onto the local cable system and make it pay for the privilege. SNL Kagan estimates these fees came to $3.3 billion last year but could hit $7.6 billion by 2019.

Advertisers spent $40.1 billion on all TV ads last year, according to IAB.Net.

In other words, the original business model of the plaintiffs in this case, the broadcast model, was breaking years ago and won't be put back together regardless of how the court decides. They are no longer offering their programming free for ads. They are selling it, increasingly, for retransmission fees.

So when CBS (CBS) CEO Leslie Moonves talks about his business, as he did with David Faber on CNBC's "Squawk Box" last month, he's increasingly talking about retransmission fees, not advertising. They are his growth model.

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