After the U.S. Supreme Court ruled that Aereo's core business is illegal, the company faces difficult choices if it wants to continue operating.
What do you do when your entire business is rendered illegal?
On Wednesday, the United States Supreme Court ruled in a 6-3 decision that Aereo, the streaming video service backed by media mogul Barry Diller, had violated the copyrighted work of the broadcast TV networks. Diller, who had previously said there was “no plan B” if the courts ruled against Aereo, called the decision a big loss for consumers and told CNBC: “It’s over now.”
Aereo has not revealed what its next move might be (a spokesperson would only say that the company is “evaluating its options”), but the company’s founder and chief executive, Chet Kanojia, said in a statement after the ruling: “We are disappointed in the outcome, but our work is not done. We will continue to fight for our consumers and fight to create innovative technologies that have a meaningful and positive impact on our world.”
His determination is admirable, but there’s no getting around it: for Aereo to continue operating as a corporate entity, it would have to change the way it fundamentally does business.
“Aereo will not have a way around the decision, except for striking a deal with the broadcasters and paying transmission fees like the cable providers,” said Orly Lobel, a professor of employment and labor law at the University of San Diego.
Aside from fundamentally changing the company’s business—by paying those fees, Aereo would be no different than, say, Netflix NFLX —it’s unlikely to happen because the costs involved would likely be too high for the young company. Further, while there are several high-profile mergers in progress among pay-TV services, it is unlikely that any would line up to court Aereo, because too much of its business is barred.
“The big issue is that its technology is being used for re-transmission of copyrighted content, which the court basically ruled is illegal,” said Randy Giusto, a vice president at the market research firm Outsell. “As acquisitions goes they’re not exactly attractive to services such as Netflix or Hulu, as they already are plunking down a lot of money for content. Netflix has content deals and part of its appeal is that the programming is available without commercials. Hulu is a non-starter as it is owned by a number of content producers.”
That’s not to say Aereo isn’t worth something. The company’s most valuable asset could still be its technology, even if it isn’t allowed to deliver that content to its customers. Aereo developed a technology that converts broadcast video streams into a digital forma for a fraction of the cost of rival methods, and holds 18 patents to complement it. Kanojia has previously said that the company has enough intellectual property to create several viable businesses, even if that doesn’t include streaming of broadcast content over the Internet.
“It is possible that someone will want to purchase the patents, and even possibly the physical equipment,” said Ryan Radia of the Competitive Enterprise Institute, who co-authored an amicus brief in support of the broadcaster ABC. “In terms of the patents the challenge remains that these are linked to the dime-sized antennas and re-transmission of the content they pulled off the air. These technologies are so intertwined with taking broadcast signals and transcoding that it makes it hard to see how someone could buy the technology and not run afoul of the same problems Aereo faced.”
One possible scenario could see Aereo licensing this transcoding technology to media companies as a way to transmit video over the Internet to customers. The only problem? That, again, would require working with the same companies it has been facing off against in the courts.
“Obviously the technology that they have is still very valuable even after the Supreme Court decision,” said Steve Beck, founder of management consulting firm cg42. “Their technology assets are a critical part of their monetization process right now. How they can use this technology isn’t so clear, but its technology is still extremely valuable to someone.”
Any company that seeks to compete with the cable industry could benefit from what Aereo has to offer, Beck said. “Anyone who thinks they can solve some of the frustration of getting that mammoth bill each month and frustration with the industry could be interested in acquiring Aereo’s technology,” Beck said.
In his dissenting option, Justice Antonin Scalia suggested that the court’s ruling may create problems for the cloud computing industry. “The Court vows that is ruling will not affect cloud-storage providers and cable-television systems,” Scalia wrote, adding, “but it cannot deliver on that promise given the imprecision of its result-driven rule.”
It is that “kind of uncertainty that discourages investment in new tech and new business models,” Lobel told Fortune.
Others think it might also be too early to call Aereo down for the count.
“I have a feeling they will find a way to stick around and aggravate the television industry,” said Jeff Kagan, a telecommunications industry analyst. “They just have to find a way to do it legally. Meaning they have to tweak their model, which could mean changing it to make it acceptable to the Supreme Court and the industry by paying licensing fees to all the networks and broadcasters.”
That would mean their costs would go up so they would have to charge more, but they could indeed stay in business that way, Kagan suggested.
“Aereo is important because it was one of the very high profile companies wanting to transform the television industry with new technology and new ideas,” Kagan said. “The television industry will continue to change. Other people with innovative ideas are watching very closely and will introduce their own new competitive ideas going forward. This Aereo case gave them the kind kick in the butt every entrepreneur looks for.”