Does Chet Kanojia's Aereo have a chance in court? Photographer: Andrew Harrer/Bloomberg

Aereo's Self-Destructive Logic

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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(Corrects reference to adjudicating court in fifth paragraph.)

The thing to keep in mind about the Aereo Inc. case before the Supreme Court today is that no one's arguments make much sense.

I don't mean that they make no legal sense. From what I can gather from the legal experts, one side is likely to win, and that side will not be Aereo. The broadcasters appear to have intellectual property case law on their side. But that case law is itself sort of a logical mess, designed more for practical effect than for the elegance of its pure reason.

For those unfamiliar with Aereo, it is a streaming service with an unusual gimmick. The company has thousands of tiny antennae and a lot of hard drives. When you log in and select a show to record, the company hooks up your account to one of those antennae, records the show for you and stores a copy for you to watch.

Why all these antennae? you may ask. Why indeed? You would never rationally construct a streaming service this way; it's much more efficient to have one big antenna and one copy of a show, which you stream to anyone who wants it. Aereo's business model seems unnecessarily complicated.

The answer, unsurprisingly, is "regulation," which is almost always the answer when someone is doing something absurd and complicated that could be done more simply and easily. In 2008, the U.S. Court of Appeals for the Second Circuit said that cable companies could rent you a box to record your shows, because you are allowed to record shows for your own home, recreational use. So Aereo carefully set up its service so that it could argue that it was just providing a DVR that happens to not be in your house. It may be too clever by half, however; the government often takes a dim view of services and transactions that are mainly structured to do an end-run around a fairly clear law -- in this case, the law forbidding people to stage "public performances" of copyrighted content without paying for it. You are free to have a party at home where you watch DVDs with friends. But don't try to do the same thing in an auditorium unless you're prepared to pay a hefty fine.

I think Aereo makes a convincing case that what it is doing is not really that much different from renting someone a DVR. But this won't necessarily help the company, because as I noted above, U.S. intellectual property law is not an elegant logical structure designed to produce impeccable reasoning from unimpeachable first principles. It is a bit of a kludge, focused on outcomes as much as logic.

The core problem that IP law is supposed to solve is that information wants to be free ... but the people who produce that information want to get paid. In economics parlance, IP is not very "appropriable": Once you've produced it, it's hard to keep to yourself. I can spend years writing a book, at enormous personal and financial sacrifice, and you can easily take all the words in that book for free, print them, and make money off of my work without paying me.

This morally outrages people who produce IP for a living. It may also result in such content being undersupplied. By "undersupplied," I don't mean "we have too few symphonies" in some metaphysical sense, but that consumers of content are actually worse off. They would rather live in a world where they pay for content, and more is available from their favorite artists, but rampant piracy makes that impossible. Because there's no point being the one sucker who pays and still doesn't get all the content you want, everyone pirates, and most people lose out.

IP law tries to solve this problem by granting a monopoly on the right to use a given work. However, if the monopoly is too tight, you also create problems. Media companies will jack up prices until folks are consuming much less content than they would like, and derivative works that people would really enjoy can't be made. (Imagine how many movies we would not have if fairy tales were still under copyright.) There's also the problem of transaction costs -- critical rights-holders can delay negotiations and make it impossible to get anything done. So we limit the terms of copyrights and patents, and allow consumers various rights over the IP products that they buy: Books can be sold to libraries, or resold to another private citizen, without giving publishers a cut; you can play any song or perform any play as long as you pay the licensing fee; and you can write parodies, or use a snippet of a song or a printed work in order to illustrate a point, without paying royalties.

You can pretty much describe the history of IP law in the 20th century thusly: We reach an uneasy balance between the rights of the producers and those of the consumers that preserves a broad legal market in the product, often with some wink-wink, nudge-nudge compromises. Then some technology blows our truce to hell, and everything gets renegotiated. It happened with recorded music, then with movies and television, then with home recording, and again with digital.

At each juncture, we're trying to reason forward from the old compromises. Because the old compromises were not entirely reasonable, this doesn't work very well.

For example, why can't I rent an auditorium and put up a big screen and charge people to watch new DVD releases? I am allowed to have a very large room in my house and show it to friends. I am not taking anything from the studios, am I? I paid for the DVD, after all.

The answer is that if you do this, you will kill the second-run theater business and cut into its cable fees, and they might stop selling DVDs in order to defend those other businesses. This is not a simple moral intuition; it's a practical concession to the fact that we'd like to have movies, and movies are expensive to make, and we might not see so many get made if people could kill off a major portion of studio revenue streams.

Here's another: How come I can legally record a radio station on my handy cassette player, but it's illegal to download a copy of a song, even if someone else paid to buy the original? In fact, many people don't see a moral difference. But there is a big practical difference. Middle-schoolers recording songs off the radio didn't make much difference to the bottom line of the record companies, because those tapes weren't very good. Instead of a professionally produced cassette, you got something with the low quality of a radio broadcast. You had to sit through the ads unless you spent tedious hours with a double-cassette player, making a new tape with the commercials omitted. Anyone with the disposable income to afford a new album would just buy it in the store.

The old recordings didn't substantially endanger the market that made the content available to record. The new ones do, because they are actually perfect substitutes for paying for content. And so the law said no.

Aereo may be in that same unfortunate spot. Its business model is based on giving you the content without paying the providers. It's not a perfect substitute for basic cable, but it's pretty close. And it allows you to skip the commercials that traditionally funded over-the-air transmission.

That's great for Aereo and for consumers in the short run. But like I say, however much information wants to be free, the producers do have to get paid; it's expensive to make a movie or a TV show. If it's too easy to watch without ads and without paying the cable company, the industry could rapidly end up in a fiscal crisis.

Or broadcasters might go off the air, as they've been threatening; only about a fifth of homes are dependent on over-the-air transmission, and they might rather give that market up than lose a big chunk of their cable fees. As far as I know, the government can't force them to keep transmitting. Which would be rather hard on the households that depend on over-the-air broadcasting.

The court is probably going to be thinking harder about these issues than whether its decision will be perfectly and logically consistent with their ruling on Betamax tapes in the 1980s. So all the impassioned pleas on either side seem sort of beside the point. The court does, of course, want to be consistent. But the logic of many new technologies would drive the price of many forms of content to basically zero. And that's a bit too logical for the law.

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