Did The Supreme Court just murder Aereo?
The Supreme Court today ruled that you can steal something that is given away for free, so long as you use a computer rather than a metal rod. The question now is if the decision not only limited consumer choice, but if it also killed off an innovative startup that had raised nearly $100 million from venture capital firms and Barry Diller’s IAC/Interactive Corp. IACI (IACI)
At issue here is the future of Aereo, a Boston-based company that had basically leveraged the old rabbit-ears concept to provide streaming of over-the-air broadcast networks. Big broadcasters were none to pleased that Aereo wasn’t paying retransmission fees, while Aereo argued that it was providing equipment (i.e., new-age antennae) rather than a service (i.e., cable companies).
Aereo won several lower court decisions, but opted to accept an invitation to the Supreme Court, rather than continue to fight jurisdiction-by-jurisdiction. It was a big gamble, and one that didn’t pay off, with the Supreme Court this morning ruling by a 6-3 vote that Aereo is breaking the law. Or, put another way, the federal government that effectively handed broadcast spectrum over for free is now protecting the wealthy holders of that spectrum. I guess it’s somewhat reassuring to see consistency between the separated powers.
The popular perception is that Aereo will now simply shut down, since CEO Chet Kanojia has repeatedly said that there is no Plan B (both before and after he raised much of the aforementioned $100 million). And Barry Diller seemed to confirm that sentiment in his resigned reaction to today’s ruling, saying: “I do believe blocking this technology is a big loss for consumers, and beyond that I only salute Chet Kanojia and his band of Aereo’lers for fighting the good fight.”
But Kanojia was a bit more vague two weeks ago, when I interviewed him at a Boston Private Bank event on Cape Cod. He suggested that Aereo could explore several strategic options in case of a loss, including the payment of some sort of retransmission fee to broadcasters. But this is where it gets a bit tricky. Kanojia didn’t seem willing to pay a fee outright, but rather would ascent to such payments if the law was changed so that all broadcast equipment manufacturers — which Aereo believes itself to be, in opposition to the SCOTUS majority — to pay some sort of fee.
To be sure, there is no way that a new federal tax or fee on equipment makers is going to appear in time to save Aereo. Moreover, Kanojia’s entire reasoning was that current law (as he understood it) did not require a company like Aereo to pay retransmission fees. At the same time, he insisted that Aereo wanted to comply with all laws. That first line of thinking has now been shot down by the Supreme Court, which objectively means that Kanojia is wrong. So, if Kanojia still wants Aereo to both survive and comply with settled law, would be consider paying some sort of retransmission fee outright (as opposed to what he said on Cape Cod)? Or could he somehow reengineer the hardware so that Aereo’s tiny antennae are actually housed by the consumer, rather than by Aereo (thus making it less cable-ish)?
No word yet on any of this from the company, but it ultimately will come down to simple economics. Can Aereo create a suitable value proposition for consumers while simultaneously swallowing a major new expense? Moreover, does Kanojia believe the remaining arbitrage would be significant enough that it’s worth pursuing, given that he has explicitly said that, to continue, Aereo must be transformative rather than iterative.
When Kanojia first tried raising money from venture capitalists, he told them it would be their greatest-ever investment or a total write-off. Even though the Supreme Court has now ruled, the jury remains out on if Aereo will try to find a middle ground.
UPDATE: Kanojia has issued a statement, which can be read here in full. The relevant part, for the discussion of Aereo’s future, is at the end: “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.”
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