Aereo Shut Down, But Does It Have a Future as a Cable Company?

The company wants to try again -- this time actually paying for the content it delivers.

Jul 18, 2014 at 11:08AM

When the Supreme Court ruled against Aereo, even Barry Diller, whose IAC (NASDAQ:IACI) funded the company, said it looked like the end for the rogue television service. But Aereo appears to be fighting to stay in business -- this time, using a new model.

In the Supreme Court ruling, the justices in the majority suggested that the business was acting as a kind of cable company. In order to legally operate as a cable provider, a company needs to get a statutory license to the programming it retransmits.

Aereo has appealed to a U.S. District Court in New York, seeking the legal right to get that license. That was something the company fought against while it was still battling for the right to rebroadcast over-the-air television signals captured by its "farms" of micro-antennas. Aereo is singing a different tune now because there are no higher courts to appeal to. 

"Under the Second Circuit's precedents, Aereo was a provider of technology and equipment with respect to the near-live transmissions at issue in the preliminary injunction appeal," wrote its lawyers. "After the Supreme Court's decision, Aereo is a cable system with respect to those transmissions."

If Aereo can successfully declare itself a cable company, it would be allowed to secure the agreements needed to resume its business.

There are huge questions surrounding whether the major broadcast networks would make any deal with Aereo -- or whether they could be compelled to by the Federal Communications Commission on "commercially reasonable" terms. Clearly the odds are long for Aereo. But the company is continuing to fight because the loss in the Supreme Court may have invalidated its business model, but not the demand for a cable-like streaming service.

Will the networks make deals with Aereo?
The television industry has a history of companies and people suing each other one day, then doing business the next. In many cases, lawsuits are simply negotiating ploys used to make the best deals possible. Disney (NYSE:DIS) and Dish Network (NASDAQ:DISH) were at odds over issues similar to the Aereo dispute, and the two companies settled on a far-ranging, long-term deal. That agreement allows ABC and ESPN to be part of a future Dish digital streaming service, which is similar to what Aereo would be trying to become.

CBS (NYSE:CBS) CEO Les Moonves would at least be willing to discus a deal that involves Aereo paying for content, he said at a technology conference earlier this week.

Forrester Research VP James McQuivey told VentureBeat.com that Aereo only has "one option from here and that's to compete as a pay TV operator.... If it chooses to compete using the broadcast content it currently has access to, it will have only a modest offering to give consumers, so in addition to negotiating with CBS, the new Aereo would need to pay for rights to the content owned by Viacom, Comcast, and many other cable providers."

That's an uphill battle, but not an impossible one. In addition to Disney, a number of other content providers have either made deals or begun discussing them with Dish and rival satellite company DirecTV (NASDAQ:DTV) to license their channels for streaming services that don't require a traditional cable or satellite subscription. If this type of service is inevitable, which it appears to be, it seems likely content owners will want to make as many deals as possible, as long as they can do so on favorable terms.

Aereo will lack the leverage the satellite companies have, as Dish and DirecTV already have relationships and deals with all the major broadcast and cable networks. Still, if the money is right, it's hard to see too many content owners being unwilling to deal with Aereo over past animosity. 

How would things change?
The biggest change for Aereo -- if it can gain legal standing as a cable company -- is that it would have to charge well more than the $7.99 its average customer paid under the old arrangement. That might be a turnoff to the easiest people the company can market a new service to -- its previous customer base. Those users were likely drawn in by price, so selling them on similar features for a lot more money will be difficult, if not impossible.

If Aereo can make fair deals -- ones in line with the agreements the satellite providers make -- it might be able to roll out a competitive service. The challenge, however, is going to be finding a way to market and deliver a product that's cheap enough to lure in cord-cutters but profitable enough to stay afloat. That likely comes down to a question of whether the company can build incredibly efficient delivery technology, find a way to market cheaply -- something Aereo has been good at -- and whether Diller or other investors will come back on board to foot the bill.

Streaming television that does not require a cable or satellite subscription is coming, but whether Aereo can revive itself and become a player remains a big question. It's not impossible. But it seems unlikely, as more established, wealthier competitors are already father along.

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Daniel Kline has no position in any stocks mentioned. He never subscribed to Aereo but would like one its tiny satellite dishes for his desk. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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