The genie is out of the bottle: Aereo’s court victory and what it means for the TV business

A federal appeals court has ruled that Aereo’s TV-anywhere service doesn’t violate copyright law, opening the door for the startup to expand a service that lets consumers watch television on their mobile device for as low as $ 1 a day. The decision amounts to a major victory for cord cutters and could hasten the end of a pay TV model that forces consumers to buy expensive bundles of channels they don’t want to watch.

Here’s a plain English explanation of the decision (embedded below), in which the US Court of Appeals for the Second Circuit ruled that Aereo’s technology is legal, and why it’s so significant for the TV industry. (Note that Aereo CEO Chet Kanojia will be speaking at paidContent Live).

Aereo’s legal loophole

Aereo captures over-the-air TV signals by means of tiny antennas and streams them to subscribers who watch and record shows on their mobile devices or computer browsers. Aereo’s antennas are not just a marvel of technology (see photos here) — they’re also the key to a legal strategy that helps the company avoid copyright infringement.

To get a better idea of both Aereo’s technology and its legal strategy, it’s helpful to consider how it works for consumers. According to the Second Aereo antennas Circuit, “Aereo functions much like a television with a remote Digital Video Recorder (“DVR”) and Slingbox” — allowing subscribers to use internet technology to capture live broadcasts on stations like CBS or Fox and and watch them later.

Aereo argues that its “one antenna for one subscriber” operation means it’s just like a personal recording tool. The country’s broadcasters disagreed and sued Aereo, arguing that it’s illegally retransmitting their signals to the public.

Aereo won the first round last year when a US District Court in New York refused to grant the broadcasters a preliminary injunction, saying that Aereo’s service was on all-fours with a previous Second Circuit ruling that found Cablevision’s remote DVR’s to be legal because they involved one copy of a show being transmitted to one subscriber.

On appeal, the broadcasters repeated their argument that Aereo’s mini-antenna system was built specifically to get around copyright law and that Aereo was different than the situation in Cablevision because Aereo offers live TV without a license.

The Second Circuit, however, ruled on Monday in a two-to-one decision that each Aereo subscriber controls the TV stream they receive — including the ability to pause, rewind or record any given show. This means that Aereo is not transmitting to the public and that the service is consistent with the Cablevision decision. The court added that it didn’t matter if Aereo didn’t have a license to show the original programming or that it had created the mini-antenna service specifically to take advantage of the copyright loophole.

The decision was not unanimous, however. In a lengthy dissent, Judge Denny Chin blasted Aereo’s service as a “sham” and “a Rube Goldberg-like contrivance, over-engineered in an attempt to avoid the reach of the Copyright Act and to take advantage of a perceived loophole in the law.”

A major blow for the TV industry

The TV business has long been based on selling customers large bundles of channels at ever-increasing prices. Unlike the music industry, which has been thoroughly disintermediated by services like iTunes, the television incumbents have so far been able to resist the forces of digital disruption.

The arrival of Aereo thus represented a major threat to the TV business because it offered consumers a way to get broadcast channels where and when they wanted. And unlike other would-be disruptors, Aereo arrived well-funded and prepared to fight: it has top-notch lawyers and has already received at least $ 58 million in backing from media mogul Barry Diller and others.

Aereo devices in action Aereo alarms the TV industry not only because it encourages subscribers to watch shows where and when they want to, but also because it refuses to pay “retransmission” fees that cable and satellite companies give broadcast networks to retransmit over-the-air shows. At the same time, Aereo is promising to upend the cable industry by training users to come and go as they please — without expensive set-top boxes or installation fees or contracts. Instead, Aereo users can simply $ 1 a day or $ 8 a month.

For now, the broadcasters still have the upper hand in one way in that they own many popular cable channels such as ESPN that they can withhold from Aereo. This may help them in the short term but it does not address the bigger problem of changing TV-watching behavior of the sort that Aereo is ushering in. And in the meantime, Aereo has added one speciality channel (Bloomberg TV) and is likely to add others soon.

In the long run, Aereo’s CEO, Chet Kanojia, has vowed to break the current system which he has described as “an abusive system set up in an artificial way” and instead offer “rational bundles.”

Is the genie out of the bottle?

The significance of Aereo’s win at the Second Circuit is not just that can it continue operating. It’s also a big symbolic boost from the country’s most influential appeals court.

This symbolic support is likely to draw in more investment money and to facilitate Aereo’s expansion. Right now, the service is only available in New York City with plans to open soon in 22 more cities — Aereo is likely to treat the court ruling as a greenlight to open shop in the new cities sooner than later. At the same time, the new legal legitimacy is likely to speed Aereo’s existing partnership discussions with distributors like AT&T and Dish Networks.

Things aren’t all smooth sailing for Aereo, of course. The ruling only addresses a preliminary injunction, and the broadcasters will almost certainly appeal to a full panel of the Second Circuit and to the Supreme Court. At the same time, a California court has already ruled that a service offered by a would-be Aereo competitor amounts to copyright infringement — meaning that Aereo has no hope of coast-to-coast distribution for the foreseeable future. (The California case is at an earlier stage and could still be overturned; if not, it could set up a circuit split to be resolved by the Supreme Court).

But while it’s legal status remains uncertain, Aereo now has time on its side. Any future court decisions are likely to occur a year or more from now, providing the company with ample time to further ramp up its service. As it does so, consumers will become more familiar with Aereo and other over-the-top TV options — meaning it will be harder than ever for the traditional TV industry to persuade consumers to stick with an expensive bundle-of-channels model.

AEREO Decision