Diller Goes Big in Supreme Court Gamble on Aereo’s Future

IAC Chairman Barry Diller
Barry Diller, chairman and chief executive officer of IAC/InterActiveCorp., pauses during an interview in New York, on April 1, 2014. Photographer: Scott Eells/Bloomberg

From the moment billionaire media mogul Barry Diller joined the board of Aereo Inc. in 2012, he had a date with the U.S. Supreme Court.

Aereo, the streaming-TV startup challenging the economics of the television industry, goes before the court next week to fight copyright claims from broadcasters including CBS Corp. and Walt Disney Co.’s ABC. Aereo’s Internet service lets customers in 11 cities watch live and recorded broadcast programs for $8 a month.

The case marks the culmination of a two-year court fight stemming from Aereo’s bid to forge a technological route around the broadcasters’ copyrights and from Diller’s hope to transform an industry he once embodied. It was Diller who pushed Aereo beyond its original plan to offer service only in parts of New York, said Chet Kanojia, the company’s chief executive officer.

“True to Barry’s style, when he got involved he asked me: ‘Do you think you are correct? Do you have conviction?’ I said absolutely,” Kanojia recalled in an interview. “And he said: ‘Then why on earth would you not go big?’”

Broadcasters say an Aereo victory might create a blueprint that would let cable and satellite providers stop paying billions of dollars in retransmission fees each year to carry local programming. While Aereo questions that assessment, Diller says his goal is nothing short of upending the TV distribution system so consumers can buy programming they want, rather than the packages offered through cable and satellite.

Bigger Threat

The threat was magnified last year when a federal appeals court said Aereo wasn’t infringing the broadcasters’ copyrights. ABC, CBS, Comcast Corp.’s NBCUniversal, 21st Century Fox Inc., Tribune Co. and the Public Broadcasting Service are asking the Supreme Court to reverse that ruling. They are aiming to shut Aereo down.

“Aereo’s business model is effectively something for nothing,” said Neal Katyal, a Washington lawyer speaking on behalf of the broadcasters. “It’s taking content signals that broadcasters have spent billions of dollars to create and produce and market and distribute, and yanking those signals out of the air and rebundling them and selling them to people for a profit.”

Dime-Sized Antenna

That business model -- and Aereo’s legal case -- starts with a dime-sized antenna shaped roughly like the eating end of a three-pronged fork. Aereo has deployed thousands of antennas on rooftop data centers in its cities. Each is capable of directing local broadcast signals to a single Internet customer.

The system was designed that way for legal reasons, Kanojia says. Under federal law, copyright holders have the exclusive right “to perform the copyrighted work publicly.”

Although the provision would bar Aereo from using a single antenna to serve its customers, the company says it is doing something different: facilitating thousands of “one-to-one” transmissions from an Aereo antenna to a customer’s screen. The company says its system is legally indistinguishable from the antennas homeowners have placed on their own roofs for decades.

“From day one, we were obsessed about the idea of making sure that anything that we built would be deemed a legal technology,” Kanojia said. “So the entire technology was architected to make sure that it was well within the purview of applicable law.”

2011 Prototype

The broadcasters weren’t buying it -- and still aren’t. After Aereo developed a prototype in 2011, Kanojia says he spent seven or eight months trying to interest media companies in working together.

“They gave us no feedback,” Kanojia said. “They would kind of look and nod and say, ‘Hmm, interesting.’”

One person who was truly interested was Diller, 72, the former chairman and CEO of the film studio Paramount Pictures Corp. and the co-creator of the Fox broadcast network. In February 2012 Diller’s IAC/InterActiveCorp led a $20.5 million round of financing for Aereo. Diller also joined the New York-based company’s board.

The broadcasters provided their answer the following month: They sued Aereo in federal court in Manhattan, seeking an order that would bar the company from transmitting programs. A federal trial judge and then the appeals court refused, letting Aereo press ahead with its business plans.

When the broadcasters appealed to the Supreme Court in October, Aereo had to make a choice. It could urge the justices to reject the appeal, following the path used by the vast majority of litigants who win at the appeals court level.

Legal Answer

That would leave intact the lower court decision, letting the company proceed in New York, Vermont and Connecticut -- without providing a definitive legal answer. At the time, federal judges in Los Angeles and Washington had ruled in favor of the broadcasters in cases involving similar services.

Aereo’s other option was to join the broadcasters in asking the high court to get involved, angling for a definitive answer even at the risk of a ruling that would wipe out the company.

Kanojia gathered his board members. They decided they would take the gamble.

“The company apparently decided that its interest in obtaining a nationwide ruling on a legal question critical to its business model now outweighed preserving its victory,” said Andy Pincus, a Washington lawyer who filed a brief on behalf of BSA/The Software Alliance, a technology industry trade group that says the case might have ramifications for cloud computing.

Aereo’s Gamble

With the Supreme Court now set to hear a one-hour argument on April 22 and rule by early July, the broadcasters say they are confident the gamble will fail.

“This is not an antenna on your roof,” Katyal said. “An antenna on your roof is for your own private watching. What Aereo is doing is making a subscription service available for anyone.”

Chances for a definitive ruling rose today when Justice Samuel Alito indicated he will take part. Alito didn’t participate when the court agreed in January to hear the dispute, raising the prospect that the court might divide 4-4. The court’s online docket today said Alito is “no longer recused” from the case.

Should the Supreme Court disagree with the broadcasters, Diller plans to expand Aereo nationwide, he said in an interview this month at Bloomberg headquarters in New York. To fund an expansion, Kanojia said, the company would need to raise as much as $300 million within a year.

‘Closed System’

Diller said he would use Aereo to try to break up the “closed system” of broadcast-TV distribution, giving consumers more ability to buy just the programming they want. Aereo won’t disclose the number of its subscribers.

“What’s important is that we have another distribution methodology that is not part of the closed system,” Diller said. An Aereo win “allows technology and innovation to move forward, whoever benefits from it.”

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

Download: Bloomberg Law: Kanojia Discusses Aereo's Future (Audio)

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