Innovation or Gamesmanship? The Supreme Court’s Ruling on Aereo

by / 0 Comments / 41 View / July 5, 2014

On June 25th, in one of the most anticipated judicial rulings of the summer, the controversial broadcasting service and start-up Aereo was dealt a critical blow by the Supreme Court. The Court ruled against Aereo and founder Chet Kanojia in the case American Broadcasting Companies, et al. v. Aereo Inc., finding by a 6-3 margin that Aereo violated the 1976 Copyright Act and illegally transmitted the content of free-to-air broadcasters like ABC, NBC, FOX, and Univision by not paying due retransmission fees to each network. The ruling effectively ended Aereo’s ability to provide its novel streaming services to consumers, with Aereo’s major investor, media mogul Barry Diller, stating to CNBC “we did try, but it’s over now” and Kanojia saying there was “no Plan B” for the company. Despite the considerable anxiety and apprehension surrounding the case (Rupert Murdoch went so far as to claim that he would move Fox from free-to-air to a paid model if Aereo won), the ruling was written largely as expected. The Court ruled narrowly, but strongly in favor of broadcasters, essentially yielding to Congress’s patently pro-broadcaster wording of the Copyright Act and the relevant Transmit Clause. While not signifying the death knell for innovation in the cable and TV industry, the decision significantly dampened optimism that the cable and TV industries were finally embracing new formats and more consumer-friendly pricing models.

The central question before the Court was fairly simple—did Aereo’s streaming service constitute a “public performance” under the terms of the 1976 Copyright Act? In other words, was Aereo just a slightly revamped version of the same old cable provider business, subject to the same old rules, or something new altogether? The primary importance of the question lies in the lucrative retransmission fees collected by broadcasters from cable companies, the chief re-transmitters. Under the terms of the Act and its so-called “Transmit Clause,” broadcasters are entitled to payment for the usage and retransmission of their copyrighted content by any secondhand provider. Retransmission fees are an important component of broadcasters’ revenue stream, at $4 billion total this year and expected to reach $8 billion by 2018. If Aereo won, the impact of the lost fees would have dramatically reshaped the TV industry and the economics of pay TV. A secondary importance was attached to Aereo’s technological setup, which heavily used cloud-based storage of copyrighted content. The Court had yet to grapple with copyright protections in the new era of cloud computing, and SCOTUS watchers described ABC v. Aereo as the first big opportunity to do so. Thus, given these dual impacts, the Court looked closely to determine whether Aereo’s business and technological model violated these terms of copyright usage in streaming and storage.

Aereo strenuously objected to the broadcasters’ demand for retransmission fees, claiming that its technology skirted around the all-important Transmit Clause. The company pointed to its signature mini-antenna model, a complex technological system that consumers subscribed to at a rate of about $8 to $12 a month, as a novel way of selling content. The system worked by Aereo first developing large and dense “farms” of their mini-antennas, all closely packed together, and capable of receiving signal from broadcasters’ antennas. Aereo then leased out the streaming rights of one antenna to each subscriber. When a consumer tuned their antenna to a particular channel, Aereo’s antenna would download the material and create a copy that was accessible through cloud storage on any of the devices Aereo supports. By developing this elaborate method, Aereo offered the attractive features of near-live TV or access of content at a later date through the equipment’s DVR capacity. Critically, the antenna was initially tuned to dead air, until the users themselves directed the antenna to tune to a particular channel or portion of the feed and record. As such, each time the user accessed the antenna, he/she was creating what Aereo described as a “personal copy” of the content. In such a configuration, Aereo could deny acting as a traditional retransmitter and describe itself as a source purely of technology, not of content, and step around the Transmit Clause. In court arguments in April, Aereo contended first that it never actually provided a “public performance,” but thousands of “private performances” because of the single antenna per customer; and second, Aereo argued that it functioned in the same way as cloud companies such as Dropbox and Copy.com did by providing copies of the shows that consumers themselves owned and viewed.

Ultimately, the majority of the Supreme Court took a dim view of Aereo’s arguments and found that Aereo toed too fine of a line in trying to escape the Copyright Act’s mandated fees. Led by Justice Stephen Breyer, the majority decided that Aereo’s streaming constituted an illegal “public performance” of copyrighted content, despite the technological loopholes Aereo sought to take advantage of. Breyer wrote in the majority opinion that “Aereo is not simply an equipment provider… (It) sells a service that allows subscribers to watch television programs, many of which are copyrighted, almost as they are being broadcast.” This interpretation of  Aereo’s offerings meshed with the opinion’s deferral to Congress’s intentions in passing the Copyright Act, as he wrote that”in terms of Congress’ regulatory objectives… Congress would as much have intended to protect a copyright holder from the unlicensed activities of Aereo as from those of cable companies.” Justice Antonin Scalia, in dissenting along with Justice Clarence Thomas and Justice Samuel Alito, took a much different view. Rather than interpreting the Act and Congress’s intentions as broadly as the majority, Scalia opined that Aereo simply outsmarted the law and the broadcasters with its technology. Scalia wrote that “it is not the role of this Court to identify and plug loopholes… it is the role of good lawyers to identify and exploit them, and the role of Congress to eliminate them if it wishes,” essentially leaving the matter more to Congress to fix.

The overall ruling was widely viewed as a huge win for broadcasters. Stocks of CBS, Fox, and many other broadcasters trended steeply upward after the verdict. Aereo had been seen as part of a vanguard of new tech-centric companies like Netflix and Amazon’s Prime service that had taken on the major cable and TV companies. Netflix had set a hopeful precedent by successfully producing high-quality content (such as its in-house Emmy-winning show House of Cards). Aereo was a completion of the Internet content-delivery trend, as it provided the elusive live TV capacity that many cord-cutting customers sought to watch, such as sports and other programs Netflix could not offer quickly. The Supreme Court inflicted a blow to those hoping to see these companies further reshape the TV industry. The ruling also reaffirmed the status quo of copyright protections, a severe concern for many technology companies. In an era of free-flowing content, technology companies are increasingly worried that they will be held responsible for users’ transfers of copyrighted content in the absence of current law or precedent on the issue. Kanojia, in a press release, tapped such fears by describing the decision as a “chilling message” to technology companies and advocates. The Court sought to allay these sentiments by specifying the judgment applied exclusively to Aereo and the specific case at hand. Nevertheless, court-watchers were surprised that the judges took no step towards providing guidance on the subject.

Regardless of the outcome of the case, industry experts applauded Aereo’s upstart attempt to change the TV status quo. Clay Brockman, an analyst at investment-research firm Height Analytics, stated in an interview with Bloomberg that “People really like this Aereo technology… There’s a greater sense of urgency that this technology is out there now.” He expects Aereo to influence other companies to fill its former niche in other ways.

Works Cited

  1. Barinka, Alex, and Edmund Lee. “Aereo Court Loss Protects $4 Billion in Broadcast Fees.” Bloomberg.com. Bloomberg, 25 June 2014. Web. 29 June 2014.
  2. SCOTUSblog RSS. Bloomberg Law, n.d. Web. 1 July 2014.
  3. Luckerson, Victor. “Aereo Backer Barry Diller: ‘It’s Over Now’.” Time. Time, 25 June 2014. Web. 1 July 2014.
  4. Healey, Jon. “In Aereo case, Supreme Court to weigh public (performance) vs. private.” Los Angeles Times. Los Angeles Times, 21 Apr. 2014. Web. 1 July 2014.
  5. Kang, Cecilia, and Robert Barnes. “Supreme Court to decide on Aereo, obscure start-up that could reshape TV industry.” Washington Post. The Washington Post, 21 Apr. 2014. Web. 1 July 2014.