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), 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.

He has threatened to go "over the top," switching solely to cable and Internet distribution if Aereo wins. 

The problem for the broadcasters, then, is not this case. They can survive Aereo, by going over the top.

The problem is what happens to all those valuable broadcast frequencies if they do? What's TV without programming?

The answer is, it's a conduit. Just like cable is a conduit, and the Internet is a conduit. It's a conduit through which sellers of video can deliver their product to buyers of video.

All of which brings us back to Washington, this time to the Federal Communications Commission, and its coming auction of UHF spectrum that TV stations are being asked to abandon. 

In today's world this is highly valuable spectrum, at around the 600 MHz range, compared to the 2.4 GHz spectrum used by mobile carriers and WiFi. It takes more power to generate such a wave than one at a higher frequency, but it goes much further, and it even goes through walls.

A decision in Aereo's favor could cause many UHF station owners to agree to sell their spectrum to mobile carriers next year, which the FCC wants. A decision for broadcasters, on the other hand, makes this spectrum more valuable to them. They know that it will bring more retransmission fees.

That, in the end, is what this case is about. The old TV business model was broken long ago. The ideal of "free TV" that rides on advertising died with retransmission fees.

Now we're only discussing what comes next.

At the time of publication the author owned no shares in companies mentioned in this story.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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