Breakout

Aereo ruling could shake up tech stocks

Breakout
Kanojia stands before reporters with Frederick and Cotter as they depart the U.S. Supreme Court in Washington
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Aereo CEO and Founder Chet Kanojia (L) stands before reporters with his outside counsel David Frederick and Aereo General Counsel Brenda Cotter (R) as they depart the U.S. Supreme Court in Washington April 22, 2014. The court heard an appeal filed by the four major broadcasters, who say the online TV startup Aereo Inc steals copyrighted content, and the case is being closely watched due to concerns that a ruling against Aereo could call into question cloud computing services, in which personal files, including TV shows, are stored remotely on the internet. REUTERS/Jonathan Ernst (UNITED STATES - Tags: CRIME LAW BUSINESS MEDIA)

The Supreme Court could decide as early as Thursday whether the online television service Aereo lives or dies, but a much larger band of tech companies is also wary of the highly anticipated ruling.

Big broadcasters including CBS (CBS), Twenty-First Century Fox (FOXA) and Comcast’s (CMCSA) NBCUniversal sued Aereo, charging that the upstart’s offering of free over-the-air television broadcasts via Internet subscriptions violates copyright law.

But tech companies such as Google (GOOGL), Amazon (AMZN) and Apple (AAPL) fear a ruling against Aereo could also outlaw all kinds of popular Internet services consumers use, and deter sales of tablets, phones and future gadgets. The Computer & Communications Industry Association, which represents Internet companies, and the Consumer Electronics Association, which represents hardware makers, both filed briefs asking the court to side with Aereo. Yahoo (YHOO) is a member of the CCIA.

The Supreme Court heard oral arguments in the case on April 22. Now, with only a few weeks left in its current term, the court is expected to issue its ruling in the Aereo case on Thursday or on Monday, June 23.

The market impact

Handicapping the decision’s impact on stocks is no easy matter, for the most part.

The broadcasting industry’s reaction is probably the most straightforward. If Aereo gets an all-clear for its service, broadcasting stocks will likely take an immediate hit.

Although cable companies must pay broadcasters billions of dollars a year for the right to carry local TV channels (thanks to the 1992 Cable Act), Aereo pays nothing. The company, backed by media mogul Barry Diller, set up thousands of tiny antennas in major U.S. cities to capture free over-the-air TV broadcasts. Since each of its customers is renting a dedicated antenna, the service is little different than other kinds of time-and-place shifting technologies such as a DVR, Aereo argues.

“We rent you technology," Aereo CEO Chet Kanojia explained on CNBC this week. "The length of the cord that connects a user's equipment should not be relevant. That's the crux of the case."

If the court endorses that logic, cable stocks such as Charter Communications (CHTR) and Cablevision Systems (CVC) could get a boost, as such a ruling could enhance their leverage in negotiations over future retransmission rights. What happens to Comcast, the largest cable operator and the owner of NBCUniversal, is anybody’s guess.

But as investors digest just how long it might take for Aereo and others actually to make a financial impact on broadcasters, any stocks that see an initial hit could recover.

A clear-cut ruling against Aereo and its methods for attempting to get around copyright restrictions would likely be more painful for tech stocks. While giants such as Apple and Google may be too big to feel much more than a minor hit, a deeper selloff could hit small companies such as Tivo (TIVO). Such a ruling could also waylay future initial public offerings for cloud storage providers including Box and Dropbox. Again, as investors come to realize the complexities of any ruling, any selloff may be short-lived.

Unfortunately, the third and most likely scenario appears to be a muddled ruling that tries to outlaw what Aereo is doing without harming the broader Internet services industry. It’s quite possible, for example, that a majority ruling will claim it has found a way to trim off Aereo without hurting other kinds of cloud offerings. But a minority opinion may argue that the ruling will nonetheless open the door for lawsuits against tech companies.

In that case, investors and analysts will have to wade through the court’s opinion and seek their own interpretations.

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