In a 6-3 vote, the U.S. Supreme Court ruled that the Aereo streaming television service violates federal copyright law. The decision puts the future of the company in doubt and deals a blow to consumers looking to cut the cord with their cable companies but keep access to the major broadcast networks.
Aereo operates by assigning each paid subscriber a tiny, dedicated antenna and DVR in one of the company's facilities around the country. The antennas capture local, over-the-air programming and send it over the cloud to whatever Internet-connected device the subscriber chooses to watch it on. Aereo subscribers paid around $12 a month for the service, including local channels that could be picked up via a traditional antenna as well as a handful of fringe cable networks.
Disney's (NYSE:DIS) ABC, CBS (NYSE:CBS), Comcast's (NASDAQ:CMCSA) NBC, and Fox (NASDAQ:FOX) were among the group that brought the case against Aereo. Network owners charge retransmission fees, and allowing one company to avoid paying could open the door for others to do the same. Retransmission fees brought in an estimated $2.37 billion in 2013, according to USA Today.
It's easy to see the merit of both sides. The broadcasters spend money creating a product and have a right to be paid for it. On the other hand, the channels are available for free over the air, and Aereo was merely using technology to deliver them in a different way. It came down to whether the Supreme Court would consider Aereo's loophole reasonable or a violation of the spirit of the law -- if not the direct wording.
Understanding the dispute
Aereo argued that the individual antennas were legal under copyright law because all they did was make it easier for television viewers to capture and view broadcast content.
CEO Chet Kanojia reiterated that stance in a blog post after the ruling was issued.
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. This sends a chilling message to the technology industry. It is troubling that the Court states in its decision that, 'to the extent commercial actors or other interested entities may be concerned with the relationship between the development and use of such technologies and the Copyright Act, they are of course free to seek action from Congress.' That begs the question: Are we moving toward a permission-based system for technology innovation?
The major broadcasters who pursued the case argued that the service constituted an illegal public performance of copyrighted work. The court agreed.
The majority opinion written by Justice Stephen Breyer said that Aereo amounted to a cable television provider. Congress has required that providers pay broadcasters to transmit their content. Breyer both acknowledged and dismissed the technological minefield that the decision could raise. Questions involving cloud computing and "other novel issues not before the Court should await a case in which they are squarely presented," he wrote.
Aereo's loss closes the door on not just this service, but any others that might arise.
Breyer acknowledged concerns that the decision "will impose copyright liability on other technologies, including new technologies, that Congress could not possibly have wanted to reach." However, the ruling said, "we do not believe that our limited holding today will have that effect."
Aereo may have been skirting the edges of the law, but that's often necessary for innovation. The Supreme Court's decision may loom large when any new entrepreneur with a non-traditional idea seeks funding.
Why is this bad for consumers?
Aereo provided the only streaming option for the major broadcast networks that did not involve paying for a cable subscription. If a customer paid $12 for Aereo and $7.99 a month for Netflix (NASDAQ: NFLX), she would have access to all the major broadcast networks plus an array of movies, original content, and older TV shows for just under $20. That's much less than the $64.41 per month the average household pays for cable, according to the FCC Media Bureau's annual survey of cable rates. For at least the past two decades, the report shows, the average monthly cable bill has risen about $2-$3 per year. As a result, customers are paying nearly triple what they were in 1995.
An Aereo/Netflix combo would not offer everything a cable package would -- no ESPN would be a major drawback for sports fans. But for many, it might have been good enough. Satellite pay-TV providers Dish (NASDAQ: DISH) and DirecTV (NASDAQ: DTV) are both pursuing services that will offer a digital streaming package of channels without requiring a traditional cable subscription. Those eventual offerings, however, will likely cost much more than Aereo because the satellite companies are making the required deals for retransmission with the various networks.
Will this harm other companies?
David Sohn, general counsel for the Center for Democracy and Technology, said the decision "fails to provide much clarity regarding how future courts should analyze emerging technologies."
During oral arguments in April, Aereo's attorney David Frederick warned that "the cloud-computing industry is freaked out about this case."
Addressing these fears, Breyer wrote that "questions about cloud computing, remote storage DVRs, and other novel matters not now before us should await a case in which they are clearly presented." But it seems likely that this decision will cause many tech innovators to at least consider the court's ruling before entering uncharted territory.
Is Aereo dead?
The ruling means that Aereo cannot operate using its current model, and most signs point to the company shutting down. A better strategy might be to make deals with the major broadcast networks for a service like those the satellite companies are seeking to establish. That would certainly change the economics for Aereo, but the company already has an infrastructure and a customer base. It would require a price increase, but it's possible Aereo could keep it in line if it limited the service to Fox, NBC, CBS, and ABC.
The networks and Aereo have a contentious relationship, but the FCC set a precedent in its net neutrality negotiations to require a preferential deal made with one company to be offered to all others on comparable terms. There is no guarantee that the networks would make those deals, but Aereo should take a shot.
Daniel Kline has no position in any stocks mentioned. 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.