Aereo Fought the Law and the Law Won

Aereo cannot stream broadcast television to thousands of users over the Internet. Though the ruling may be a loss to economic analysis, it’s not exactly a surprise. 
Aereo Chief Executive Officer Chet Kanojia.

I'm a bit disappointed in today's U.S. Supreme Court ruling on Aereo Inc.'s copyright case, though not for the same reason as Aereo users. Broadcasters were threatening to stop broadcasting their content if Aereo was allowed to keep retransmitting it for free, and I was really looking forward to seeing whether they would make good on their threat. I was pretty sure that this was PR posturing for the sake of influencing the court. But I wasn't entirely sure, and that little bit of uncertainty promised to make things interesting for the next few weeks.

Alas, it was not to be. Today's ruling says that no, Aereo cannot stream broadcast television to thousands of users over the Internet. We will never know if Fox would really have stomped its foot and left the airwaves.

Though this may be a loss to economic analysis, it's not exactly a surprise. Aereo's business plan was basically to do an end-run around the copyright law, emulating basic cable service without paying retransmission fees to the broadcasters. Obviously, that's an attractive value proposition for Aereo and its customers, but broadcasters argued that it violated the 1976 copyright law that lets them dictate how and when their properties may be transmitted to viewers. The court agreed.

For those who were not following along at home, Aereo provides a Web-based DVR service that allows you to live-stream local television, making it a very good substitute for basic cable. Aereo claimed that it wasn't anything like a cable company, because each user was rented a dime-sized antenna for the duration of the broadcast, and an individual copy of the broadcast was stored on servers for the user's benefit. It was a very clever arrangement that theoretically kept it just this side of legal.

Unfortunately, as I have argued before, Supreme Court justices are not Rumpelstiltskin:

You cannot accomplish back-door censorship by taxing at 100% all profits of any news corporation named after a "carnivorous mammal of the dog family with a pointed muzzle and bushy tail, proverbial for its cunning." You cannot curtail the right to protest by requiring instant background checks and a 90-day waiting period on anyone who wants to assemble with 500 of their friends in a public area. Nor can you restrict the supply of ink used to print Korans. If you pass a law like that, the Supreme Court will say "nice try, guys" and void all the painstakingly constructed verbal origami that was supposed to make civil liberties infringement look like an innocent exercise of the taxing power.

Like any libertarian, I've had the pleasure of interacting from time to time with the tax nuts, the folks who think that they don't have to pay taxes because they've found some sort of escape clause in the constitution. That the Supreme Court has ruled against all of their arguments except the most frivolous and bizarre ones does not seem to have made much impression; they keep insisting that the tax system is voluntary, or that the first amendment means they can't be forced to write information on their tax return.

I've spent a fair amount of time diving down the rabbit hole with these lunatics, and the thing is, some of their arguments are even kind of plausible . . . at least, after you've spent four hours of arguing about it. What they won't accept is that it doesn't matter: even if you're right, you lose. The Supreme Court is not going to completely defund the government by arguing that it now operates on the same financial basis as the PTA bake sale. You can argue until you -- and everyone else -- are blue in the face, and still, if you don't pay your taxes, the IRS will seize your bank account, and then the police will come and take you away.

This applies to businesses just as much as it does to activists. Aereo's business model was what you might call the Rumpelstiltskin Gambit: Build something illegal, but add some elaborate wrinkle that allows you to claim you're within the law. If you do it right, you may just be able to turn straw into gold.

There's a tragic flaw in the Rumpelstiltskin Gambit, however: The better your magic, the more likely it is to fail. The better job you do of emulating a desirable but illegal service, the more likely the court is to rule that you are providing that illegal service and shut you down.

Aereo's service was really, really close to what basic cable does. The main differentiating factor was those tiny little antennas. But those tiny little antennas had no business purpose; they existed only in order to allow Aereo to claim that however much it might look like a cable company, however much its viewers might see it as a substitute for cable, however much it might tout its services as an alternative to cable, they were really just in the very-short-term equipment-rental business. To the Supreme Court, however, it looked a lot more like a cable company . . . and therefore, said the court, it cannot stream shows without paying the same transmission fees that the cable companies pay.

Aereo's defenders have pointed to services that do the same thing but less well, such as streaming from your home antenna to your computer. If that's legal, then logically, shouldn't Aereo be legal as well? But in copyright, the ease of emulation matters a lot. A mix tape recorded off the radio is not a very good substitute for a CD, so no one much worried about it. Perfect digital copies downloaded with the click of a button, on the other hand, are very good substitutes for copyright-protected material, and so they attract a lot more unwanted attention from the law.

At some point on the slippery slope, the court says "stop," and while you may point to other points on the slope where it could have stopped instead, that doesn't mean it's obligated to keep rolling.

That's not to say that this ruling was inevitable; I could have seen it going the other way. It's just to say that any business built around the Rumpelstiltskin Gambit is taking the risk that a court or a regulator will get the last, magic word, and that however much they stamp their feet or tear their beard, they will nonetheless have to vanish into the night.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

    To contact the author on this story:
    Megan McArdle at

    To contact the editor on this story:
    Brooke Sample at

    Before it's here, it's on the Bloomberg Terminal.