Google Music

What's next for Aereo?

April 3, 2013: 9:03 AM ET

Adding Internet streams of broadcast TV to the mix of options for viewers is yet another assault on cable's walled garden.


FORTUNE -- Now that Aereo has a new lease on life for its bizarre business model thanks to a court ruling Monday, the question arises: What is the company's end game?

Aereo streams broadcast television programs -- including news and sports -- over the Internet. The company argues that by creating a discrete video file for each user, copyright restrictions on "public performances" don't apply. A federal appeals court agreed, allowing the company to continue operating -- and to commence a major expansion beyond the northeast corridor -- as the underlying case winds its way through the legal system. The company leases tiny antennas, each of which is designated for a particular stream, and thus a particular household. That, the company argues, comports with a 2008 ruling allowing Cablevision to offer "remote DVR" services. Major broadcasters disagree and filed a lawsuit against Aereo last year. They argue that Aereo's business is based on technological trickery designed to circumvent copyrights -- which of course it is, but that doesn't necessarily mean copyrights are being infringed. Does it matter whether someone has an antenna on their roof, as opposed to leasing one that's housed in Aereo's facilities?

The case could have implications that go beyond Aereo to affect all "cloud media" services, like Google Music (GOOG) and Amazon Cloud Player (AMZN). But what does it mean for Aereo itself? And for the TV business as a whole? The Wall Street Journal reported last week that the company has been in talks over possible "partnerships" with AT&T (T) and Dish Network (DISH). According to the Journal, the company's uncertain legal situation is a major sticking point with potential "partners" or acquirers, any of which could help the company expand into markets across the country at relatively little cost.

Monday's ruling was a major step toward solidifying Aereo's business, but it's far from the final one. The case could drag on for years. On the other hand, an acquisition or partnership -- somewhat likelier in the wake of the court ruling -- could encourage broadcasters to seek some sort of settlement. Meanwhile, Aereo will keep growing with or without a major telecom or pay-TV partner.

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With backing from the Barry-Diller-owned IAC/InterActiveCorp (IACI) and Highland Capital, the company plans to expand to 22 markets this year, and possibly up to 100 by next year. IAC and Highland recently closed on a Series B round worth $38 million, on top of a startup investment last year led by IAC, putting the company's total financing at more than $60 million. Diller sits on Aereo's board and has been vocal in his support of the company's efforts.

Aereo currently operates in the New York area and recently expanded into a few other markets in the northeast. Immediate plans call for expansion into Chicago and Atlanta, where it will be able to pick up "superstations" like WGN in Chicago and WTBS in Atlanta -- both of which are cable mainstays that still broadcast over the air in their home markets. That represents a direct assault on the cable industry as well as on broadcasters, which collect retransmission fees from pay-TV operators.

So-called "cord-cutting" has been slicing into cable-TV's business for a few years now, though it's not happening yet in wholesale fashion. Viewers are increasingly irritated by being forced to buy dozens or hundreds of channels at a time, most of which they don't watch. Rising subscription rates only add to the annoyance. And the trend is already spurred on by the growth of Internet-based video services like Netflix (NFLX) and Amazon. Adding broadcast TV streams to that mix of non-cable options only gives people that much more reason to cut the cord.

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