Aereo Forges Ahead Despite Legal Battles, Practical Hurdles

• by Wendy Davis , Staff Writer @wendyndavis, January 9, 2013

Barry Diller's cord-cutting service Aereo is fighting for its life in court. But not even the threat that the Second Circuit Court of Appeals will shutter the service has stopped the company from raising an additional $38 million in order to expand into 22 new cities.

Of course, investors have funded riskier companies than Aereo before. But in this case, it's not clear whether Aereo can ever be profitable even if it survives the legal challenge it's facing.

In Aereo's favor, it can help people shed expensive cable packages. Cable companies' pricing structures have left many customers shelling out monthly fees for hundreds of channels they don't want and never watch. Any company that offers people a way to pay less and receive fewer channels potentially stands to win fans.

But the problem with Aereo is that it charges around $8 a month, but only offers subscribers over-the-air broadcast channels -- which are available for free. True, Aereo offers some extras, like the ability to watch shows on demand or on iPhones and iPads. But it's not as practical as it could be to watch TV on iPhones and iPads. For one thing, some carriers impose data caps that limit how much video people can stream on 3G or 4G networks. If users don't want to burn through their caps, they can stream over WiFi, but only if they can access a network -- which isn't practical for users who are outdoors or in transit. Another practical problem is that many mobile devices' have a short battery life that makes it impractical to stream video for any length of time.

Of course, these business issues might not seem all that pressing if the Second Circuit grants an injunction shutting down Aereo. A panel of that court heard arguments about the issue at a hearing last month, and reportedly weren't impressed with Aereo's legal strategy -- which the judges compared to tax avoidance.

That strategy hinges on thousands of dime-sized antennas that Aereo installed in New York before launching. Aereo uses those antennas to capture broadcasts and then creates individual recordings of shows for customers' personal use; it plays back those recordings using a remote digital video recorder. Aereo says it doesn't have to pay licensing fees because people are allowed to install antennas and receive TV transmissions for free, as well as to record shows for personal use via remote DVRs.

But Aereo doesn't need thousands of antennas for any technological reason. Instead, the company installed multiple antennas in hopes of proving it doesn't violate copyright law. The company's reasoning is that its streams aren't a public performance -- which would infringe copyright -- because the streams are made on an antenna-to-user basis rather than an antenna-to-group basis.

At the court hearing last month, Judge John Gleeson seemed skeptical of that stance. "You don't have all these little antennas because it makes any sense," he told Aereo's lawyer, according to the transcript. "It's kind of like constructing your business affairs to avoid taxes. Right?"

Of course, anything could still happen in court. The judges could decide that Aereo should be shut down immediately, before there's been a trial on the copyright issues. Of they could decide that the service can remain in operation for now, even if it does push the boundaries of copyright law.

But even if Aereo can survive this preliminary court skirmish, the company is still facing the daunting task of convincing people to pay for its service.