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Smart money followed Aereo--but is it still doomed?

The Web video play, barraged by lawsuits, appears to be a new take on an old, failed idea. So why does Barry Diller believe in the company?

Barry Diller doesn't typically throw money away. If he's involved in Aereo, then the company must make a pretty good case about how it can overcome the legal challenges.
Dan Farber/CNET

Ordinarily, I would write that Aereo, the Internet video company slammed yesterday by lawsuits from nearly every major TV broadcaster in New York, is doomed.

I would write that Aereo is headed for the same gloomy ending as ivi.TV and Zediva. These were goofy, legal-loophole plays that were shut down by the courts faster than you can say permanent injunction.

But hold up.

Aereo is supported by some very smart people. Barry Diller, one of the savviest media tycoons around, is an investor and is on the board. There's no doubt that he and the company anticipated a legal challenge. It's likely they see something in the law that they think they can exploit. Whatever that is, it's not apparent.

Aereo, formerly known as Bamboom Labs, is a Web video service scheduled to launch March 14 in New York. The company plans to take over-the-air TV shows, which are freely available to anyone with an antenna, and stream them to subscribers using the Internet. To do this, the company has built scores of tiny TV antennas (about the size of a fingertip), which are then connected to the Internet. Each Aereo subscriber uses the Web to control his or her own high-tech rabbit ears.

For $12 a month, a subscriber gets Web access to broadcast TV, as well as the ability to record shows. Aereo argues, not very convincingly, that since every user controls their own antenna, the company is not a distributor and doesn't have to pay for retransmission fees.

In the two complaints filed yesterday, one from NBC, ABC and CBS (parent company of CNET) and the other from Fox, Univision and PBS, the broadcasters say "no amount of technological gimmickry" changes copyright law or the fact that Aereo needs permission to distribute their shows. They want the court to block the company from launching and asked for monetary damages.

This is only the latest attempt by some upstart company to circumvent restrictions copyright owners place on Internet distribution of their shows. The public is clamoring for cheaper, more convenient access to popular movies and TV shows and the copyright owners have been slow to provide it. Netflix has built a successful Internet-streaming business by meeting some of that need.

But the potential for a humongous payday that would come with snatching Web TV rights without having to pay for them means every so often a new company claims to have found a way to legally distribute TV on the Web.

Before Aereo there was The company claimed that as long as it paid a $100 annual fee to the U.S. Copyright Office, it would classify as a cable system and could therefore take advantage of a compulsory license to rebroadcast over-the-air TV transmissions without paying fees. Ivi's lawyers then tried to argue that the rules governing cable systems laid down by the Federal Communications Commission did not apply to it because the FCC had no authority over Web-video transmissions.

It didn't fly. A year ago, a federal court in New York ruled Ivi was not a cable system and ordered the Seattle-based company to shut down. In her written decision, Judge Naomi Buchwald found that Internet transmissions couldn't qualify as a cable system. She said that while FCC rules may not be binding to Internet companies, its regulations were vital for those that wished to retransmit broadcasts.

Buchwald sounded utterly unconvinced, nearly disdainful of the way that tried to bend itself around the law. "Defendants argue that Ivi is a cable system for purposes of the Copyright Act and thus may take advantage of the compulsory license," Buckwald wrote, "but that it is not a cable system for purposes of the Communications Act, and thus it need not comply with the (Act's) requirements."

Aereo's antennas, which are about the size of a dime, allow the company to stick thousands of them in a single 'antenna array.' Matthew Moskovciak

Zediva, meanwhile, set up individual video recorders for each subscriber and also hooked those up to the Web. You guessed it. The company argued that the users were the ones controlling the recorders, and that meant Zediva didn't have to license movies or TV shows.

Zediva was sued in April and out of business by November.

It would be easy to dismiss Aereo as just another lame scheme on its way to burning investor money in court. But there's nothing lame about Diller and his interest gives the company the kind of cache that isn't easily ignored. Diller is the chairman of IAC/InterActive Corp and former Hollywood wunderkind. He is also one of the few former media moguls to profit from the Web.

A little background: Diller was running Paramount Pictures at the age of 32. He conquered Hollywood at a time when some of America's brightest young business minds were there, attracted by the money, starlets and the Malibu sunshine.

Future studio heavyweights Michael Eisner and Jeffrey Katzenberg, who would later run Disney and DreamWorks Animation respectively, once called him boss. He helped build Fox Broadcasting into the power it is today. During the last decade, when other media poobahs, such as Eisner and former super-agent Micheal Ovitz, were getting roughed up investing on the Web, Diller helped build IACInterActive Corp. That company once owned Expedia and now is parent company to and the search engine

Sure, IAC's overall record of picking winners is spotty but a media play like Aereo is in Diller's wheelhouse. Unless Diller, 70, has lost his fastball, I'm betting that the Aereo case won't be easy for the broadcasters.