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Who's afraid of a little live TV? Why streaming service Aereo scares the broadcast industry

aereo ecosystems reports lead

There is an infamous attack ad from the 1970s that opens with a montage of a devil, a vampire, and Frankenstein's monster — and then shifts to a terrifying, anthropomorphized cable box. The angry cable box has red eyes and a wide row of shark-like teeth, which it gnashes as a paternal-sounding announcer warns viewers to stay away from cable: "Don’t let pay TV be the monster in your living room!

The broadcast television industry has fought — in court, in Congress, and in the media — to block every major innovation in the delivery of its content. Broadcasters fought the upstart cable companies that figured out that a physical connection could deliver a clearer picture than a TV antenna. They fought the VCR and the DVR all the way to the Supreme Court. Now, they’re fighting a startup called Aereo that streams broadcast television live over the internet.

If you haven’t heard of Aereo, you probably will soon. The service launched in New York City in March, giving customers access to more than 20 channels, including NBC, ABC, CBS, FOX, and PBS, via a rooftop data center filled with tiny antennas that Aereo says are legally indistinguishable from the rabbit ears you have at home. Each customer, they argue, is merely renting an antenna. The broadcasters promptly filed a lawsuit that’s still working its way through the courts. But in the meantime, Aereo users can watch live television on the web, iPhone, or iPad, and record up to 40 hours of programming at a time for about $12 a month.

The lawsuit has been Aereo’s biggest source of publicity, but that’s about to change. The company just hired a marketing manager, and plans to roll out to at least ten more markets by the spring. And as The Verge discovered during our testing of the six major web TV ecosystems, the biggest obstacle preventing consumers from getting all their entertainment over the internet is the lack of live TV; the local news and sports Aereo grabs from the networks.

Aereo’s founder Chet Kanojia is a slender, level-headed engineer who dresses in blues and grays and is always chewing Nicorette. He got the idea for the company after suffering through negotiations with cable companies at his previous venture, an analytics company called Navic Networks that sold to Microsoft.

"If you were innovating on technology, you couldn’t get in front of the consumer until the cable guy said okay."

“The cable industry was a very difficult industry to operate in because they have this monopolistic, gatekeeper mentality,” Kanojia said during a recent visit to Aereo’s New York headquarters, a sparse fifth-floor office in Long Island City, Queens. “If you were innovating on technology, you couldn’t get in front of the consumer until the cable guy said okay,” he said. “And they typically didn’t say okay until they owned you.”

Aereo raised more than $20 million from investors, including media mogul Barry Diller, who is regarded as a disruptive force in the television industry for inventing the made-for-TV movie and launching a fourth network, Fox, when everyone said three would do.

While Aereo has also been hailed as disruptive, BuzzFeed’s John Herrman dismissed it as a “loophole startup.” Its technology is a bridge solution; there would be no need to use a warehouse of tiny antennas to distribute TV over the internet, except to circumvent copyright and telecommunications laws.

Under the 1992 Cable Act, broadcasters can demand that cable companies like Time Warner pay “retransmission fees,”(“retrans” is the industry parlance,) a growing source of revenue that brought in $1.4 billion for broadcasters in 2011. Because it rents antennas for private viewing, Aereo argues, it shouldn’t have to pay retransmission fees.

As legal blogger Terry Hart points out, this is a tricky argument. “In effect, Aereo and its amici argue that its service — which receives transmissions of TV broadcast signals and retransmits them to paying subscribers — is the opposite of a cable service provider — which receives transmissions of TV broadcast signals and retransmits them to paying subscribers.”

Naturally, the broadcast industry feels cut out by Aereo. “They’re charging a fee for content that they do not own,” said Dennis Wharton, a spokesman for the National Association of Broadcasters. “They’re charging $12 a month for the service and not sharing any of the revenue with the content creators.”

Interestingly, some cable companies are actually taking Aereo’s side. “I don’t know if it’s legal or not,” Time Warner Cable CEO Glenn Britt told the Wall Street Journal. “But if it is, we should do it too.” That’s what broadcasters are afraid of. If Aereo escapes paying retransmission fees, cable and satellite companies could too.

"I don’t know if it’s legal or not. But if it is we should do it too."

Wesley Verhoeve, a 33-year-old music and fashion entrepreneur in Brooklyn, does not own a TV. About half his friends are the same way. “I don’t really care about TV,” he said. He heard about Aereo a few months ago and checked out the site, thought, “that's cool, that'll be useful to someone,” and forgot about it until he heard that comedian Louis CK would be hosting Saturday Night Live.

“I tweeted, ‘oh I love Louis CK, I wish I could see this one thing on TV just once,’” he recalled. A follower suggested Aereo, and soon he was comfortably watching the opening monologue on his laptop.

Verhoeve didn’t subscribe, but he recommended it to a friend who did. He also figures he can use Aereo to watch one-off events in the future, like news or sports. Aereo offers a free trial and a $1 day pass, and Kanojia promises more price experimentation. “We live in a digital world. Why should it be one-size-fits-all?” says Kanojia.

In a time of YouTube channels and HuffPost Live, it’s counterintuitive to think that a startup would be interested in stuffy old broadcast content. But the biggest drawback among all the web TV ecosystems we tested was a lack of live news and sports. Aereo fills that gap. Perhaps broadcasters should be flattered, as Aereo targets the millennials who have been drifting away from television and gravitating to the internet for the past decade. Aereo isn’t paying broadcasters for their content, but it may be giving them something more valuable: relevance.

Explore the ecosystems

This week we're taking a close look at the future of TV and the living room — the great unclaimed space of the technology world. Check back each day for a close look at all the major players, along with a full range of interviews with industry players and reports on everything from the state of remote controls to the future of gaming. Tune in all week for the rest. Here’s a sampling:

Tuesday:
Google, Microsoft, Aereo, Boxee CEO Avner Ronen
Wednesday: Amazon, Sony, live sports, TV apps, Condé Nast’s Dawn Ostroff, NBC's Vivian Schiller
Thursday: Apple, the state of remotes, Vizio CTO Matt McRae
Friday: Independents, New Yorker's Emily Nussbaum, Valve

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