Cable Companies Both Love and Hate Aereo

Aereo is an extremely interesting company, and it could potentially disrupt the entire TV entertainment ecosystem. The technology company captures free over-the-air television broadcasts and streams them over the Internet to its subscribers.

The company may eventually find itself in the Supreme Court facing charges of copyright infringement from the major network broadcasters. Pay-TV operators will be paying close attention, as some already have plans to copy Aereo's strategy.

Free content
Anyone (with decent reception) can get network broadcasts for free. A coat hanger from the dry cleaners will work wonders. Cable companies (aka pay-TV operators), however, are forced to pay retransmission fees to carry the channels.

We saw Time Warner Cable (NYSE: TWC  ) battle with CBS over these rates for a month while it blacked out the most popular network in America. It cost the company dearly, as it lost more than 300,000 video subscribers last quarter.

Aereo found a loophole in the law that requires pay-TV operators to compensate networks for their content. It leases a tiny antenna to each of its subscribers, which means it's technically no different than setting up an antenna of your own. Subscribers pay Aereo to lease the antenna, stream the content, and set up a cloud-based DVR.

DirecTV (NASDAQ: DTV  ) , Time Warner Cable, and Charter Communications (NASDAQ: CHTR  ) are each considering copying Aereo's business model. Other cable companies will likely follow suit to avoid paying billions of dollars in retransmission fees.

Network executives have threatened to move their content to a subscription-only (read cable) model to avoid such a nightmare scenario, but there are quite a few speed bumps that will slow that transition. In the meantime, cable companies can push antenna-captured content to Internet-connected set-top boxes.

TV over the Internet
While an Aereo win could save the cable industry billions in the interim while networks engineer a move to cable, it represents the next step in technology for pay-TV operators. The fact that Aereo is well ahead of most cable companies in technology could make it a serious threat to other standard cable companies, which already face growing competition from telecom companies like AT&T and Verizon.

The biggest advantage of TV over the Internet is that there are no physical limitations as to where you can send your signal. Although Aereo currently limits its subscribers by metropolitan area, this is only a legal limitation, not a technological one.

Charter Communications already has the technological capability to stream its video over the top. Its new app allows subscribers to stream 100 live channels inside of their home. Again, the limiting factor is content rights. Several other cable companies have similar capabilities.

Aereo's growth may spur it to find new products to offer. That might include some sort of cable alternative. But the National Football League and Major League Baseball just gave Aereo a great idea when they filed an amicus brief with the Supreme Court.

NFL over the Internet
The NFL is the only major sports league in America that doesn't offer a streaming service. The National Basketball Association, Major League Baseball, and National Hockey League all offer live streaming and replay of every game of the season. The NFL purposely plays it closer to the vest to protect its product.

But Aereo represents a threat to that business model. Because every NFL game is broadcast over-the-air in local markets, Aereo could, theoretically, create its own NFL package while the NFL receives absolutely no compensation for its content. The only thing blocking it is a trial court on the West Coast that ruled in favor of broadcasters in a case against an Aereo-like service.

This is a threat to DirecTV as well, which has exclusive rights to the NFL's Sunday Ticket package and broadcasts every game every Sunday afternoon. It's an important tool for the company, which pays an estimated $1 billion a year for it, to draw new subscribers to its service.

A stand-alone copycat service would put a serious dent in new subscribers for DirecTV, and could be a hugely popular product for Aereo. An estimated 2 million DirecTV subscribers currently receive the service.

Both the NFL and MLB have threatened to move their content to cable if Aereo wins at the Supreme Court level, much like the national networks' recent  threat to move to a subscription-only model. That being said, such a threat faces similar roadblocks with contracts locking the networks up through the end of the decade. 

Costs and benefits
It's hard for cable companies, and their shareholders, to pick a side in the Aereo case. Content owners that are battling Aereo have been making pay-TV operators pay more and more every year in retransmission fees. A ruling in favor of Aereo could save cable companies billions of dollars.

At the same time, Aereo's service represents a threat to cable operators as an alternative to the old-hat pay-TV services. It's no wonder Time Warner Cable has considered buying the company.

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