July 1, 2014

There’s No Such Thing as a Free Lunch: Aereo, Free-to-Air, and the Future of TV

The SCOTUS ruled against Aereo last week, sounding the death knell for the service and sending the technology industry into a tizzy. By a 6-3 vote in an opinion written by Justice Stephen Breyer, the court found that the Aereo service does indeed infringe the copyrights of TV broadcasters. Shocking? Not really. The end of the world? Hardly. Nevertheless, there is more here than meets the eye. Yes, Aereo itself is done for and has already shuttered the service. The Aereo decision, however, provides some important lessons that will influence the TV industry for years to come. Two points in particular come to mind.

1. Free-to-Air in the US is Dead.
In the US, over-the-air (OTA) television broadcasting is a historical anachronism. It simply makes no sense in 2014 to still be distributing first-run professional-quality commercial video for free into the ether without any access control, content protection, user backchannel, or reliable measurement of who actually views the content (or the ads that accompany it). More than 80% of US households currently subscribe to some form of incumbent pay-TV service. The other 20% do not represent a particularly attractive demographic to advertisers. So let’s be honest: there is no longer a compelling business case for OTA TV broadcasting in the US.

The problem is not business, but politics. Today’s generation of politicians grew up with broadcast TV as the primary source of information and entertainment in their households. Any politician who stands up and says we should shut it down will be immediately pilloried as cruel, heartless, and un-American.

As long as OTA broadcasting exists, it will attract a never-ending string of entrepreneurs who want to make something out of nothing by bottling free TV content and selling it. To date, each of these efforts has run aground on some combination of technical, business, or legal barricades. Aereo seemed to have overcome the first two challenges. Unfortunately, its lawyers were not quite so fortunate.

If nothing else, the Supreme Court’s decision reflects eminent wisdom, and its primary argument in this case certainly has the ring of common sense. For more than forty years – since the early days of cable TV – the Supreme Court came down on the other side of this issue. In the Fortnightly (1968) and Teleprompter (1974) cases, the court ruled that cable companies did not violate copyright when they retransmitted over-the-air broadcast content and therefore did not have to pay the broadcasters for access to their content. Broadcasters were outraged and Congress responded in 1976 by overturning these rulings as part of a major amendment of US copyright law. Since that time, pay-TV companies have had to pay retransmission fees to the broadcasters for the privilege of carrying their signals.

Aereo threatened to demolish this model. If it had won the SCOTUS decision, pay-TV companies would have copied the same technical infrastructure and refused to pay retrans fees. Broadcasters, in turn, would have either gone to Congress (again) or simply pulled all the valuable content from their free-to-air broadcasts and repackaged it as cable channels.

Either way, the powers that be were never going to let Aereo succeed. The US TV industry is not about to let anyone build a for-profit business on the basis of capturing free content and reselling it to the consumer. One way or another, the content owners are always going to regain control over the content. One would hope that the Aereo decision would make this clear to future would-be TV entrepreneurs, but I doubt it. Which brings me to my next point.

2. Content Owners Will Control Their Own Broadband Video (i.e., App) Distribution
Let’s be clear. Aereo offered a valuable consumer service, enabling access to TV programming just about anywhere a consumer may be and on any Internet-connected device they may be using. The problem, however, was that Aereo thought it should be the one providing the broadband video service to the consumer. Wrong. This is a hard lesson not just for Aereo, but for the legacy pay-TV providers, as well. They too believe they should be the ones providing broadband video services to the consumer. In the end, this will also turn out to be mistaken.

At the end of the day, the content owners (i.e., the TV networks) will control their own broadband video distribution. Yes, ‘TV Everywhere’ means that the money will continue to flow from the consumer to the pay-TV provider and on to the TV network. The service, however, is what really matters, and the service of delivering and supporting the apps that enable broadband TV are going to be controlled by the TV networks themselves. They are going to design it. They are going to build it. They are going to determine what shows get produced and distributed on it. And they are going to have to pay the CDNs to deliver the bits to the user.

The Aereo decision pretty much ensures that content owners (the networks and studios) will be the ones that control broadband video services – not Aereo, the pay-TV providers, or any other entity.

Modern copyright law exists mainly to ensure that content owners have the ability to control their content and get paid. Aereo tried to buck the system using free-to-air as a loophole. Close, but no cigar. Now content owners themselves need to push forward and build the TV apps that consumers want. Nobody else is going to do it for them.

Sign Up for Weekly Analyst Insights

Recent Insights