Breakout

Supreme Court kills Aereo — and cord-cutters' dreams

Breakout

To the dismay of cord-cutters everywhere, the Supreme Court put the kibosh on Internet television service Aereo.

The court ruled that Aereo, which transmits broadcast TV channels over the Internet to its subscribers, was just like a cable television service, which must pay licensing fees to broadcasters in return for showing copyrighted programs. Aereo had argued it merely rented a tiny, dedicated broadcast antenna to each of its thousands of customers, who have a right to watch the copyrighted programs and shouldn’t have to pay licensing fees.

Stocks of broadcasters, which had sued to shut Aereo down, shot up on the ruling, led by Sinclair Broadcasting (SBGI), up 15%, and CBS (CBS), which gained 6%. More-diversified network owners Walt Disney (DIS), Twenty First Century Fox (FOXA) and Comcast (CMCSA) were up about 1%.

A ruling in favor of Aereo could have upset the current system that requires cable providers to pay billions of dollars a year to broadcasters such as CBS and Sinclair. Cable companies could have set up their own multiple antenna systems, mimicking Aereo, for example.

[See related: Why is cable TV so expensive?]

Aereo customers don’t face an immediate shutdown as the high court’s ruling winds it way back through the lower courts. But the end is near for an estimated hundreds of thousands of subscribers (one source put the number of subscribers in New York City at 300,000). Aereo has not commented on its total number of subscribers.

In theory, Aereo could try to negotiate licensing deals with broadcasters, but analysts said that was unlikely given the high cost of obtaining such rights. The service was a boon for so-called cord cutters, television watchers who don't pay for cable. Only 62% of millennials said they watched cable or satellite TV, while 67% said they watched streaming TV over the Internet or via a broadcast antenna, according to a recent Harris Poll. Another 7% said they never watched TV, in the poll in which respondents were allowed to choose multiple answers.

The tricky part of the ruling will be how it impacts Internet and cloud-storage services. The court went out of its way in an attempt to differentiate Aereo from other kinds of Internet services, but just how successfully it managed the task won’t be clear immediately. On a day when the overall stock market rose, some video-related Internet stocks such as Akamai (AKAM) and digital video recorder maker Tivo (TIVO) were off slightly after the ruling came out.

"We agree that Congress, while intending the Transmit Clause [of the Copyright Act of 1976] to apply broadly to cable companies and their equivalents, did not intend to discourage or to control the emergence or use of different kinds of technologies," Justice Stephen Breyer wrote in the court's majority decision. "But we do not believe that our limited holding today will have that effect."

Lawyers, venture capitalists and others involved in the tech industry differed on the impact the ruling will have on innovation and other new services.

"The broadcasters are obviously very happy, and Aereo is obviously very unhappy," says Jason Buckweitz, Associate Director for the Columbia Institute for Tele-Information at Columbia University. "The consumer should probably be the most unhappy. This is going to adversely affect consumers in the long run."

Copyright attorney Andy Baum, a partner at Foley & Lardner, agrees the result might encourage broadcasters to sue more, but wouldn't necessarily help them win their cases.

"Content owners will be very aggressive in going after technologies that they believe threaten their income streams," Baum says. "This decision won't discourage them from doing that -- it may even encourage them. But I don't think that, in substance, the decision provides any new ammunition where the issue is not simultaneous viewing of broadcast content."

Aereo, which was founded in 2012 and is backed by cable pioneer Barry Diller, had relied on a series of prior rulings, including the Supreme Court’s famous 1982 ruling in favor of allowing consumers to tape television broadcasts using Sony’s Betamax recorder. A lower court later upheld the use of digital video recorders, even if the recording was done at a central location by a cable provider.

Aereo founder and CEO Chet Kanojia has said the service may die if it lost the case.
"If there's no viable business, then we'll probably go out of business,” he told Yahoo Global News Anchor Katie Couric. "I do know the technology we've built is tremendously valuable to a lot of people."

The decision was not unanimous. Three conservative justices, led by Antonin Scalia, wrote in a dissent that Aereo was not performing a public broadcast of TV shows and thus did not owe broadcasters any licensing fees.

"The court vows that its ruling will not affect cloud-storage providers and cable television systems ... but it cannot deliver on that promise given the imprecision of its results-driven rule," Scalia wrote.

After the ruling came out, Kanojia endorsed Scalia's view. "Today’s decision by the United States Supreme Court is a massive setback for the American consumer," he said in a blog post. "We’ve said all along that we worked diligently to create a technology that complies with the law, but today’s decision clearly states that how the technology works does not matter."

The service was available in almost a dozen major cities, including New York, Boston, Dallas and Atlanta. Customers paid $8 a month to access all the local television channels in their city, plus a few additional networks.

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