Disney and Fox Near Showdown With Aereo at Top Court

Major broadcasters are heading for a showdown in their bid to block a Barry Diller-backed company from upending the industry’s economics by offering subscribers live television over the Internet.

The U.S. Supreme Court will say as soon as tomorrow whether it will consider the claim by companies including Walt Disney Co. (DIS)’s ABC and 21st Century Fox Inc. (FOX) that Aereo Inc.’s business is built on copyright violations, obtaining broadcast signals for free and distributing them for a profit.

Both sides in the dispute are seeking a high court hearing, increasing the chances the justices will step in. If so, the case will determine the fate of Aereo, a startup that threatens the billions of dollars in retransmission fees broadcasters get from pay-TV systems that provide signals to subscribers.

“It’s nothing short of a watershed moment,” said David Bank, a media analyst with RBC Capital Markets. “If the Supreme Court agrees to hear it, we’re going to finally resolve the issue.”

A federal appeals court in New York ruled that Aereo, which provides broadcast signals to subscribers after capturing them with thousands of small antennas, isn’t violating broadcasters’ copyrights. Comcast Corp. (CMCSA)’s NBCUniversal and CBS Corp. (CBS) are joining Disney and Fox in urging reversal.

A decision to take up the case this month would mean a Supreme Court ruling by early July. The justices could also ask the Obama administration for input, a step that would delay a resolution.

Retransmission Fees

Retransmission fees have become increasingly important for broadcast networks, supplementing advertising revenue.

Broadcasters are expected to reap more than $4.29 billion in fees paid by satellite and cable companies this year, a 30 percent gain from last year, according to research firm SNL Kagan. That revenue is projected to reach $7.15 billion by 2018.

Fox and CBS have said they may abandon their broadcast signals and become cable networks if Aereo continues unabated.

“We need to be able to be fairly compensated for our content,” 21st Century Fox President and Chief Operating Officer Chase Carey said at an industry conference last year. “We can’t sit idly by and let an entity steal our signal. We will move to a subscription model if that’s our only recourse.”

Conversion to a cable network would mean that broadcast signals would no longer be freely available over the airwaves.

Cable Switch

Should broadcasters make the switch, it would affect about 12 percent of households, according to estimates based on data from SNL Kagan and Nielsen. About 100 million of 114 million U.S. homes with televisions subscribe to pay-TV services.

Diller, the billionaire investor who helped create the Fox network, says New York-based Aereo may eventually get as much as 35 percent of U.S. households to subscribe if it overcomes legal challenges. The service charges customers $8 a month.

DirecTV, Time Warner Cable Inc. and Charter Communications Inc. are considering using the same approach, capturing free broadcast-TV signals to avoid paying retransmission fees, according to people with knowledge of the companies’ plans.

The cable companies could use Aereo’s approach in an effort to bypass or reduce the fees they now pay, the people said.

The court fight centers on a provision in the federal copyright law that gives owners the exclusive right to perform their works “publicly.” The appeals court said Aereo’s service was legal because the separate antennas let each customer create a distinct copy of a broadcast program for viewing, so no public transmission was taking place.

‘Technical Detail’

The broadcasters argued in their appeal that Aereo is trying to use a “technical detail” to circumvent well-established legal rights.

“There is no dispute that Aereo has developed a business model around the massive, for-profit exploitation of the copyrighted works of others,” the broadcasters argued.

Aereo is taking the unusual step of encouraging Supreme Court review of a ruling in the company’s favor, saying it wants to resolve legal doubt. That stems in part from rulings by two federal trial judges declaring another company’s similar system to be a copyright violation.

Litigation has “created uncertainty that undermines Aereo’s efforts to expand its footprint and further develop its business,” the company told the court.

Chet Kanojia, chief executive officer of Aereo, told Bloomberg Television yesterday that “it will become clear what the road map looks like on the legal front over the next few months” if the Supreme Court takes up the case.

NFL Backing

Lower court disagreement often prompts the high court to consider a case, though the justices tend to wait until the same issue has been decided differently at the appeals court level.

The National Football League and Major League Baseball, whose games appear on broadcast TV, are backing the media companies. The broadcasters also have support at the high court from companies that produce television programs, including Time Warner Inc. and Viacom Inc.

Cablevision Systems Corp. (CVC) is taking a middle ground in the debate, saying that while Aereo’s service violates the copyright laws, the broadcasters’ arguments go too far and threaten legitimate services.

The local TV broadcast industry is run separately from the national networks and would face a different challenge if Aereo is found to be legal. Local broadcasters act as affiliates of the national networks and negotiate separate deals with pay-TV operators.

Consolidating Business

Local broadcasters have consolidated in the last few years, a move partly spurred by the growth in retransmission revenue as well as the value of their broadcasting bandwidth, also known as spectrum, parts of which could be sold.

The situation led to more than $10 billion in acquisitions last year, according to data compiled by Bloomberg. Aereo’s legality could threaten the value of those deals, according to Bank.

“It’s super-complicated from an investor perspective,” he said.

The Supreme Court case is American Broadcasting Companies v. Aereo, 13-461.

To contact the reporters on this story: Greg Stohr in Washington at gstohr@bloomberg.net; Edmund Lee in New York at elee310@bloomberg.net

To contact the editors responsible for this story: Patrick Oster at poster@bloomberg.net; Nick Turner at nturner7@bloomberg.net

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