Will Aereo Lower Your Cable Bill?

NEW YORK (TheStreet)--Small tech startup Aereo.com, partly owned by IAC/InterActiveCorp (IACI), recently won an important skirmish on par with David vs. Goliath against several well-known large broadcasters and content providers.

Aereo provides a web service that uses antennas to receive broadcast TV signals and makes the programming available to Aereo subscribers on the internet. Aereo currently limits its offering to New York City. Users are able to watch high-definition TV from a portable device live or record programming for later viewing.

CBS ( CBS), Comcast ( CMCSA), Walt Disney/ ( DIS), News Corp. ( NWSA) and other broadcasters are suing Aereo for what they contend is Aereo's public broadcasting of their content without permission and without paying royalty fees.

( TheStreet's Gary Krakow writes more about Barry Diller and Aereo Aereo Wins First Round In Court.)

The broadcasters are up in arms over Aereo because beyond the advertising revenue they receive, they also charge cable and satellite companies including Verizon Communications ( VZ),   AT&T ( T), Directv Group ( DTV), DISH Network ( DISH), Cablevision Systems ( CVC), and others who want to carry the broadcasters programming.

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Aereo fired back at the broadcasters and stated the technology it employs is perfectly legal and cited several previous court cases including at least one from the U.S. Supreme Court. The Federal Communications Commission requires broadcasters to offer their programming over the airways free of charge in return for broadcasters' use of the radio spectrum.

Aereo claims that because every Aereo customer is provided their own antenna at Aereo's location to pick up the signal, Aereo's service does not fall within the meaning of a public broadcast. Furthermore, Aereo claims its recording service is no different from that of a household VCR or the Cablevision ruling on digital recordings.

In the Cablevision case, a federal court ruled "each RS-DVR playback transmission is made to a single subscriber using a single unique copy produced by that subscriber ...such transmissions are not performances 'to the public.' "

Even in a cloud storage situation, each subscriber needs to have their own copy of the same programming.

In hopes of a quick Aereo death, the aforementioned broadcasters filed a request for a temporary injunction against Aereo to stop its service. On Wednesday U.S. District Judge Alison Nathan for the Southern District of New York ruled in favor of Aereo and denied the motion, thereby allowing Aereo to continue while the case makes its way through the court system.

In the ruling, Judge Alison Nathan wrote "...Plaintiffs have not shown a likelihood of success on the merits. And although they have demonstrated that they face irreparable harm, they have not demonstrated that the balance of hardships decidedly tips in their favor."

Cable and satellite companies are paying close attention as this court case develops. If the case concludes in Aereo's favor, the cable and satellite companies will find their ability to negotiate with broadcasters (for at least the local content) greatly strengthened.

If the broadcasters eventually lose this fight, they will have to decide what the next course of action is most advantageous. Broadcasters can either allow rebroadcasting of their signals, pull the plug completely on over-the-air broadcasting, and/or change their business model and lower content fees. At some point it doesn't make financial sense using the airways to capture the content.

The end of some broadcasted TV shows is a very realistic possibility because services like Aereo depend on the free-use loophole in the copyright law for over-the-air content. Another real possibility is the broadcasters and Aereo negotiate a compromise that allows Aereo and others like it to continue with a revenue-sharing agreement.

Undoubtedly, conversations are taking place inside the broadcasters' offices on how they can monetize Internet consumption of their programming. They know the genie is out of the bottle for good, and now their goal is to determine which direction will result in the greatest ROI. (Be sure to read my article Best Buy vs. Groupon: Deadliest Portfolio Killer.)

Diller, chairman of IAC/InterActiveCorp., an investor in Aereo, stated: "Now we actually get to begin and find out if this product has the kind of appeal we think it has."

Relevant cases are: American Broadcasting Companies et al. v. Aereo, Inc. Civil Action No. 12-CV-1540 (AJN) and WNET et al. v. Aereo, Inc. Civil Action No. 12-CV-1543 (AJN)

At the time of publication the author did not hold a position in any stock mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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