The TV Cartel Is Starting To Crack

on April 3, 2013
Reading Time: 4 minutes

Aereo antenna array (Aereo, Inc.)

By any reasonable standard, Aereo is a ridiculous service. But the rules and contracts that cover the distribution of television content are anything but reasonable. And that means that Aereo, silly as it is, could be the beginning of the end for the cartel of studios, sports leagues, broadcasters, networks, and cable and satellite distributors that has a headlock on content.

Aereo, which is backed by IAC/Interactive Corp. and its wily CEO, Barry Diller, invested a new way of distributing broadcast television. If you subscribe (currently available only in New York) for $12 a month, you are assigned a tiny TV antenna in an array of antennas (pictured above) in a Brooklyn data center. The content–all over-the-air broadcast stations in the area–is converted to an internet stream and delivered to your iPhone or iPad, computer browser, AppleTV, or Roku box. The service also functions as a DVR in the cloud so you can time-shift your viewing.

The silliness is that broadcasters ought to cut out the middleman and stream broadcasts themselves. But local stations can only stream their own content, mostly local news. Networks could stream a lot more, but only content they own outright or have the streaming rights for (a restriction that excludes most sports and much else.) Besides, local stations, networks, studios, sports leagues, and cable companies are locked into a system of contracts, often long term, which no one wants to break because, in the imortal words of Milo Minderbender*, “everyone has a share.”

It’s obvious why Aereo poses a threat to this cozy relationship. So its not surprising that pretty much every station in New York filed suit claiming that Aereo violated their copyrights. They argued that Aereo was essentially acting as a cable company and was required to negotiated what is called “retransmission consent,” a privilege that typically requires a hefty fee. But Aereo carefully exploited every corner and loophole in the law. Those individual antennas–technically quite unnecessary–allowed it to argue that it was merely piping over-the-air content to customers from their own antennas. And it made sure to deliver content only to subscribers within stations’ service areas, thereby honoring local exclusivity requirements,

Aereo won the first round of the legal battle when a district judge denied an injunction blocking the service. And in a potentially much more important decision, the Second Circuit Court of Appeals, in a 2-1 decision, affirmed the lower court decision. The only bright spot for the broadcasters was the dissent of Judge Denny Chin, who called the approach of individual antennas “a sham” and “a Rube Goldberg-like contrivance over-engineered in an attempt to avoid the reach of the Copyright Act and to take advantage of a perceived loophole in the law.”

It’s not clear what will happen next in the case. The TV stations could request an en banc review by the full Court of Appeals or appeal to the Supreme Court, but both are fairly long shots legally. Aereo CEO Chet Kanojia told The Verge he expects the broadcasters will turn to Congress for legislation blocking Aereo. Local broadcasters still carry considerable heft on Capitol Hill primarily because members count on local news to provide vital free media during campaigns.[pullquote]Local broadcasters still carry considerable heft on Capitol Hill primarily because members count on local news to provide vital free media during campaigns.[/pullquote]

But the loss of  the Aereo case is not the only ill omen for broadcasters and networks. Another major blow to the status quo was the success of House of Cards, the slick, high-budget original series on Netflix. While Netflix won’t give out viewer numbers, the company is clearly pleased with the effort and plans to expand it. Original internet programming that can compete straight-up with HBO and Showtime has to make those networks start rethinking their dependence on cable and satellite companies for distribution. For now, they make their content available online only to viewers who are already subscribers. They know full well that a lot of people are viewing pirated versions of their shows–the season premiere of HBO’s Game of Thrones set a BitTorrent volume record–and they know that subscribers are sharing their IDs and passwords with non-subscribers. For now, they are prepared to tolerate the loss (assuming that folks getting content illegally but for free would be willing to pay for it if it were available a la carte.) But this is purely an economic calculation, not a conviction, and will change when the economics tip.

The condition of the television business shouldn’t be confused with the collapse of the record industry. The music business was in trouble before it was hit with large-scale piracy and the record companies made things worse through denial, resistance, and the idiotic strategy of suing customers. The TV industry knows it has to move into a new era. But the current arrangements are highly profitable and it wants to proceed with all deliberate speed.

In the end, that may not be possible. Dish Networks CEO Charlie Ergen sees the end coming. “One of two things will happen,” he said at the D: Dive Into Media conference in February. The rising cost of content will present an incumbent distributor “with a deal they just can’t stomach” and they’ll blow the system up. “But more than likely, they’ll just die because somebody will come in underneath them on price. The likeliest candidates are Amazon or Netflix. Possible Apple. And Microsoft could do it.”

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*–If you don’t know who this is, you should stop whatever you are doing and read Joseph Heller’s Catch-22.”