How Congress could wind up accidentally saving Aereo

August 12

Aereo's service uses thousands of tiny antennas to help it stay within the bounds of copyright law. (Aereo)

A sliver of light may have just appeared at the end of Aereo's long legal tunnel.

Since the Supreme Court ruled in June that its business model violated copyright law, the streaming video company's put its service on ice, made new and ever more confusing arguments as to why it should survive, claimed it's "bleeding to death" before a skeptical judge, and generally left onlookers with little doubt about its impending demise — at least, as it exists in its current form.

But all that could change thanks to a Senate proposal aiming to rewrite the economics of TV. If the idea moves forward, Aereo might be spared the fate it fears most — and the company might even be able to keep the business model that got it into trouble with the Supreme Court. A whole lot of pieces need to fall into place just right for Aereo (or any of its would-be copycats) to squeeze by. If nothing else, it's an interesting thought experiment. But however small, the company still has a chance.

Here's the TL;DR version: The Senate proposal, known as "Local Choice," would ease the pressure on cable companies who currently pay rising fees to broadcasters to get their content. This idea could work in Aereo's favor; if the courts accept its new argument that Aereo is a cable company, Aereo might find itself lumped in with the other firms that would be affected by Local Choice, too. Local Choice would benefit Aereo by letting it avoid paying those expensive content fees itself, landing it back where it began before it was laid low by litigation. Voila — Aereo emerges more or less intact, though the details are a little more complicated.

Remember that Aereo really doesn't want to pay content fees.

Before we move on, let's go over what Aereo wanted to do that was against the law. Remember that Aereo used countless individual antennas to grab broadcast TV signals out of the air for free, and then sold access to those signals to consumers over the Internet. With the service, you could record the CBS Evening News and play it back to yourself online as if you were taping it with a DVR. Aereo's whole business was predicated on the idea that it could avoid paying the content licensing fees that cable companies and satellite TV operators have traditionally paid to broadcasters. Broadcasters didn't like the idea of an Internet startup wriggling out of those "retransmission" fees. So they sued, and the Supreme Court took their side.

The Supreme Court has forced Aereo to make the best of a bad situation.

If you think that's the end of it, think again. Aereo is currently caught in a kind of legal limbo; it's waiting to hear whether a judge will allow it to argue that it is, in fact, a cable company. (For those keeping track, that's the opposite of what it argued before.) It's complicated, but the basic idea here is that if Aereo's original business model is invalid, then the company would like to be considered a cable company in the eyes of the Copyright Office — and only in the eyes of the Copyright Office, not in the eyes of other agencies like the Federal Communications Commission. This argument would allow Aereo to use a separate licensing scheme whereby it pays content fees directly to the Copyright Office. These fees would be substantially less than what they'd pay to broadcasters under the retransmission scheme, which if you'll recall, is the whole point. Aereo declined to comment for this story.

Aereo's best-case, though, could easily become a worst-case. 

The Copyright Office has actually rejected this new argument already, leaving much of this in the hands of the FCC. It's hard to imagine this turning out well for Aereo; how can the FCC accept Aereo's position that it's a cable company as far as copyright is concerned but then not treat Aereo like every other "multi-channel video provider" (MVPD) the FCC already oversees?

Under the Supreme Court's ruling, "Aereo was close enough to a cable operator to violate copyright law, but not close enough to a cable operator to fall within the FCC's definition of an MVPD," said Rich Greenfield, a media analyst at BTIG. "This puts all of the balls in [FCC Chairman] Tom Wheeler's court to redefine what is or isn't an MVPD."

If the FCC decides that Aereo is a cable company — and therefore subject to all the same, relevant rules — then Aereo will be forced to live under the retransmission regime that it so desperately wanted to avoid. (There are other consequences of an FCC decision along these lines, said Greenfield; if Aereo is considered an MVPD, then so might YouTube and Amazon and all manner of other Internet video services. But that's for another time.)

Aereo plus retransmission equals disaster for the company. It's the nightmare scenario. But here's how the Senate proposal I mentioned before can help.

With Local Choice, the worst-case becomes not-so-bad, after all.

Local Choice would end the retransmission system as we know it. Rather than have cable companies negotiate with broadcasters over how much to pay in retransmission, broadcasters would deal with viewers directly. You'd be able to unbundle the broadcast portion of your cable bills, picking and choosing which broadcast channels you want and don't want. You could opt to subscribe to CBS and ABC but not Fox or NBC — and then you'd pay only for the channels you select. You'd get to avoid annoying content blackouts that arise from price disputes between companies. You'd have a better idea of what one channel is worth relative to another. And your choices would more directly influence the TV market. In fact, analysts say, the price of retransmission might even fall over time as competing broadcasters fought for your eyeballs. (You would still, of course, be able to get broadcast channels for free with an over-the-air antenna, just like always.)

This proposal would change much of the economics of TV overall. But it would be a lifeline for Aereo in particular, because absolving cable providers of paying retrans gets Aereo back to where it began. Local Choice effectively turns back the clock for Aereo. Or put another way, it extends the core idea of Aereo's business strategy to every cable and satellite TV provider in the country.

"It’s a bill to end blackouts," said a former FCC official of the plan, "but it could have the added bonus of bailing out Aereo."

In short, if Aereo is a cable company, and all cable companies no longer have to pay retransmission fees, then Aereo no longer has to pay retransmission fees. And that amounts to Aereo's original business model.

Local Choice might shake up the broader TV industry.

How would Aereo make any money in this new world? Well, consumers would presumably have to pay more than the base subscription fee of $8 a month, because on top of that they'd have to cover any retransmission fees themselves. But it's hard to imagine that it would be any more than what cable companies pay to carry, say, ESPN, which costs about $6 per subscriber per month. Analysts say broadcast licensing fees are generally much lower than that.

Even if you did have to pay $5 a month for the right to record and watch NBC through Aereo, some people might think it was worth it — particularly if they're already on the fence about cord-cutting.

Broadcasters are resisting the Local Choice proposal, but they might not object to this setup; after all, they'd be getting the retransmission fees from Aereo customers one way or another, which is what the initial lawsuits were all about. In fact, Aereo could become a way for broadcasters to extend their reach into households that don't have TV, cable or otherwise. A spokesman for the National Association of Broadcasters didn't immediately reply to a request for comment.

Live sports, long the draw for cable viewers, might keep others wedded to their cable subscriptions. But as I pointed out in another post, many view broadcast unbundling as a potential prelude to cable unbundling, marking another momentous shift for television. In that universe, it's anyone's guess as to what happens to live sports.

As I said, a lot has to line up just right for this to work out for Aereo. The courts have to let Aereo make its argument that it's a cable company. Then the FCC has to weigh in on whether it views Aereo as a cable company subject to the retransmission regime (and the FCC is probably loath to make any major moves that would implicate other online video providers). And then most difficult of all, Congress actually has to pass the Local Choice proposal.

Yet as narrow as that path may be for Aereo, it is a path.

Brian Fung covers technology for The Washington Post.
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Brian Fung · August 12