Fox Broadcasting Company

Aereo could bring down broadcast TV

April 9, 2013: 1:25 PM ET

If Fox Broadcasting makes good on its threat to yank its signal from the air and go all-cable, it would upend the already-chaotic TV industry.

So long, handsome.

So long, handsome.

FORTUNE -- Could it really turn out that a company with a seemingly loopy business model -- capturing over-the-air TV signals and streaming them to subscribers over the Internet -- will be the thing that finally brings down the American broadcasting industry? Quite possibly.

Chase Carey, News Corp.'s (NWSA) chief operating officer, said Monday that if the company in question, Aereo, is allowed to continue, his company's Fox Broadcasting, and all its affiliate stations, will stop broadcasting over the air and go all-cable. "If CBS, NBC, and ABC follow," says Bloomberg News, it would "mark an end to television as it's been known since The Honeymooners aired in the 1950s." So far, those networks haven't weighed in, but the Spanish-language TV giant Univision has: It made a similar threat after Carey made his remarks during to the National Association of Broadcasters convention in Las Vegas.

Those other networks, though, along with PBS and Fox, are fighting hard to put Aereo out of business. But so far, they're losing their legal argument. A federal appeals court last week ruled that Aereo can keep operating while their lawsuit against the company proceeds. In so doing, the judges noted that the networks are unlikely to win at trial. Barring a further appeal to the Supreme Court or passage of new laws, that would mean that broadcast signals are there for the taking by Internet streaming companies like Aereo, which is backed by Barry Diller's IAC/Interactive (IACI).

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The broadcasters say the model amounts to copyright infringement. Carey on Monday said that his company "won't just sit idle and allow our content to be actively stolen." Aereo's business is based on a 2008 court ruling that applied in that case to Cablevision's "cloud based" DVR service, which essentially functions as a home video recorder with a really long cord, attached at the other end to a machine in a Cablevision (CVC) facility that stores video files for the personal use of subscribers. The length of the cord, the court essentially ruled, shouldn't matter.

Aereo says it's basically doing the same thing, but with broadcast signals, which, after all, are free for the taking by any viewer who wants them. Aereo makes a TV signal available to viewers, via the Internet, for a subscription fee. The legal basis for the business depends on Aereo creating a separate video file for each subscriber -- something that's not technically necessary but is done only to comply with copyright laws.

Aereo draws more viewers to the programming, and hence to the ads. But it devalues the cable subscriptions that people buy largely in order to access local and live programming without having to fuss with an antenna. "It is clear that the broadcast business needs a dual revenue stream from both ad and subscription to be viable," Carey told the crowd at the NAB convention. And he made it clear which revenue stream is more important: "We simply cannot provide the type of quality sports, news, and entertainment content that we do from an ad-supported-only business model. We have no choice but to develop business solutions that ensure we continue to remain in the driver's seat of our own destiny."

Such a move, though, especially if copied by other networks, "could cripple the network-local station broadcast model," notes AdWeek's Katy Bachman.

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There is some irony in the fact that Aereo's threat to TV has broadcasters considering retreating behind cable's walls, which themselves are under threat from the Internet. While "cord cutting" isn't so far a huge problem for cable companies, it is a problem. Only about 5% of viewers gave up on pay-TV last year, according to Nielsen, but that number is slowly growing as Internet-viewing options proliferate. So far the threat is mainly from the likes of Netflix (NFLX) and Amazon (AMZN), which offer a range of movies and TV shows for a fraction of the cost of a cable subscription, which can run higher than $100 a month.

Live sports and local news are keeping a lot of viewers within the cable fold, but that's just the kind of programming that Aereo offers. Meanwhile, HBO -- which, like Fortune, is currently owned by Time Warner (TWX) -- has hinted that it might make its HBO Go streaming service to all who want to subscribe, even if they don't have a cable subscription, which is now required. For the moment, it seems like HBO believes it can make more money from the fees it collects from cable subscribers than it could make battling it out on the Internet, where prices are extremely low. But the fact that HBO is even thinking about such a move represents another crack in cable's walled fortress.

A lot of people subscribe to cable mainly to have access to programming from networks like HBO, Showtime, and AMC. If such fare makes its way to the Internet separately from cable, the rationale for having a cable subscription will be that much harder to defend, especially if Aereo is allowed to remain in business.

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