How Supreme Court ruling affects Aereo, the cloud, and you

The court was loud and clear: Aereo's streaming TV business is illegal. But the decision raises more questions than it answers.

Joan E. Solsman Former Senior Reporter
Joan E. Solsman was CNET's senior media reporter, covering the intersection of entertainment and technology. She's reported from locations spanning from Disneyland to Serbian refugee camps, and she previously wrote for Dow Jones Newswires and The Wall Street Journal. She bikes to get almost everywhere and has been doored only once.
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Joan E. Solsman
7 min read

An array of Aereo antennas Aereo

The chief of streaming-TV startup Aereo has said that his mission to bring unbundled broadcast TV to the Internet has greater stakes than just the fate of his company -- and that it's the crusaders, taking on those with power, who fill graveyards.

Aereo CEO Chet Kanojia may end up correct on both counts. A 6-3 Supreme Court decision Wednesday found that Aereo, whose antenna-plus-cloud-storage technology streams over-the-air TV signals, is illegal if it continues to operate without paying broadcasters any fees. The ruling handed a victory to the networks' owners, some of the biggest media companies in the world, in their fight to shut it down.

The decision kills Aereo as we know it, but it may affect more than just one service operating in just 13 cities for little more than an analyst-estimated 100,000 subscribers. While the Supreme Court answered one question clearly, it raised many others for Aereo, its customers, its foes and its relative peers, services like Dropbox and Apple's iCloud that might be collateral damage. For consumers, the decision makes little difference to practical matters, but it may mean a lot on matters of principle -- would you rather make sure TV keeps the most-watched shows on free networks or see a disrupter like Aereo upend how you can watch TV in the first place?

Effectively, the Supreme Court said Aereo violates copyright law because it is basically the same as a cable company yet doesn't pay broadcasters the same fees that cable companies must. (CBS, the parent company of CNET, is one of the broadcasters suing Aereo.)

Officially, the majority opinion written by Justice Stephen Breyer decided that Aereo publicly performs copyrighted works rather than enables private performances in subscribers' homes, which would have been fine without any fees. It's a rejection of Aereo's defense that its technology -- mini antennas under the remote control of individual subscribers -- make it more of an equipment rental service than a cable company.

The court was split 6-3. Justice Antonin Scalia, in his dissent, said Aereo technically doesn't perform at all, and so it can't be held liable for directly infringing. However, he suggested Aereo might still be violating the Copyright Act through another type of infringement.

Will cloud-based services, like iCloud and Dropbox, be affected?

The worry remains that services that allow customers to stream copyrighted materials stored on a server -- be they MP3s, ebooks, or copies of movies or TV shows -- are now open to copyright infringement claims.

Aereo has long argued that a ruling against it would have such ramifications. After the decision, Kanojia said it "sends a chilling message to the technology industry," one that could move the country toward "a permission-based system" of copyright without more clarity on what is kosher and what is not.

Aereo CEO Chet Kanojia Greg Sandoval/CNET

The court's narrow ruling is the source of the fog around the cloud-industry effect.

"We know what the Supreme Court intends to do, which is to say [Aereo] is illegal and nothing else, at least presumptively, is," said Jessica Litman, a professor at the University of Michigan's law school. However, "there's a bunch of ambiguity in the attempted carve-out of cloud storage services."

The majority opinion doesn't give courts much guidance besides examining an individual's relationship with the content as an owner or possessor, she said. "What now happens to all of my Kindle books in Amazon's cloud? Am I the owner of the book? Am I the owner of the digital copy? Am I the owner of the license? Whether one is the owner or possessor of content...is again pretty much up in the air."

Amazon didn't provide a reaction to the decision, and neither did Google, Apple, nor Dropbox -- major providers of cloud-storage services for consumers -- but the thrust of Breyer's opinion is that these services will be fine. "Congress...did not intend to discourage or to control the emergence or use of different kinds of technologies," he wrote "We do not believe that our limited holding today will have that effect."

But Scalia noted in his dissent that the majority opinion is essentially toothless to ensure that effect does not come to pass.

"There will be a lot to litigate," Litman said.

Will Aereo shut down?

It is more likely than not that Aereo will shutter, unable to keep operating in its current form permanently.

Previously, the Second Circuit Court of Appeals rejected an injunction to stop Aereo, and now that the Supreme Court reversed that decision, the claim will go back to the lower court after about 30 days. The Second Circuit then will decide to order the parties to file supplemental briefs or proceed based on what both sides have already told the court, according to Marc Hearron, a Washington, D.C.-based lawyer specializing in appeals at the firm Morrison & Foerster.

The majority opinion doesn't give the Second Circuit much leeway other than issuing the preliminary injunction, said Dotan Oliar, a University of Virginia law professor. "In this situation, nine out of 10 cases would be over."

Aereo could take the case to full trial while it is enjoined. It has other arguments at its disposal, such as fair use, an exception to copyright liability that succeeded in the landmark "Sony Betamax" Supreme Court case to permit home recording of copyrighted television programs. (Historical sidenote: Even though the movie industry technically lost that case, the disruptive technology it was fighting ended up making it rich: Sales of home video cassettes ended up quickly eclipsing -- and not cannibalizing -- movie ticket sales.)

However, Aereo faces the prospect of embarking on an expensive legal battle while lacking revenue, forcing it to soliciting more investment after the highest court in the country already sided against it.

In short, the case "doesn't look good," Oliar said.

Aereo hasn't disclosed any specific plans since the decision, neither for its operations nor legal strategy. Aereo has raised about $100 million in funding from investors like IAC, capped by the last infusion of $34 million in January, but its most vocal investor, IAC Chairman Barry Diller, told CNBC immediately after the decision that "it's over." Currently, Aereo's Web site is still up and operational, with the motto "Watch live TV online. Save shows for later. No cable required."

What's next for Aereo if it can't keep operating its business?

We don't have many hints about how Aereo will continue. While waiting on a decision, Aereo continually deferred discussing the alternatives it was considering, saying it would see the rules and then decide how to play.

Before oral arguments, Kanojia said that Aereo had no Plan B, and Wednesday the company took nearly two hours to prepare and release a statement on the ruling that lacked any specifics about its future plans.

A simple route would be for Aereo to start paying licensing fees. This isn't likely to happen. Kanojia's statement Wednesday reiterated the company's guiding principles that over-the-air broadcasts are free and consumers using an antenna to get them is "an essential part of our country's fabric," which doesn't indicate a shift in ideology toward paying up.

Joan E. Solsman/CNET

Meanwhile, Aereo's technology has few other applications. Aereo designed a system of miniature antennas, machines that transcode over-the-air signals into digital files, and remote DVRs that store the content and stream it to members online. The antennas, in particular, were Aereo's central engineering accomplishment and the most significant target of its research and development early on.

But they're not very useful for other jobs, and Wednesday's decision rendered their intended use moot. Though Aereo's remote DVRs could be applied to copyright-legal purposes, they represent a small part of Aereo's operation, and they're a garden-variety technology. Lately, Aereo's chief R&D effort has been in its channel guide and interface, which could be sold to a pay-TV provider, but such companies like Comcast already have well-funded teams working on solutions to the same problems Aereo has aimed to fix.

I'm not an Aereo subscriber, why is this important to me?

Speaking practically, very little changes in the day-to-day life of the average television viewer.

Not much changes for the broadcasters. Aereo had threatened a large and growing part of their business called retransmission fees, which are tolls pay-TV providers must cough up to carry their programming. When Aereo circumvented this system, the broadcasters worried their big cable and satellite accounts would do the same -- costing them billions of dollars.

"Retransmission consent is 'safe,'" said Marci Ryvicker, an analyst of media and cable companies for Wells Fargo Securities, in a note. "We anticipate broadcast networks and affiliates will be conducting 'business as usual.'"

The importance of the decision depends on how invested you are in seeing the current television system change.

"Cord cutters," people who forsake traditional pay-TV service for Internet-based alternatives, are a rare breed. Just 15 percent of adult broadband users that subscribe to a pay-TV service are likely to cancel their service in the next six months, according to a report earlier this month from a researcher TDG. The figure hasn't changed materially during the last four years.

Michael Greeson, TDG's director of research, cited the lack of compelling competitors to pay-TV providers, which has given incumbents the opportunity to ramp up on-demand and "TV Everywhere" offerings. "The new boss is looking more like the old boss," he said.

That only matters to consumers who are dissatisfied with the old bosses, and some data indicate consumers are. An annual poll by the Temkin Group surveying customer satisfaction across 43 industries found it deteriorated for all of the largest pay-TV providers, which were ranked second worst to Internet service providers -- many of which are the exact same companies.

Other data suggest consumers are pleased with incumbents. TV Everywhere, a partnership between television companies and pay-TV operators offering content online to viewers who "authenticate" that they already pay for a traditional video service, is surging. In the first quarter of this year, the total amount of TV Everywhere authentications more than tripled from the year-earlier period, according to Adobe. And PwC this month said such initiatives were countering the effect of disruptive technologies like Aereo, projecting that global subscription TV revenues would grow at a 3.5 percent compound annual rate to $236 billion in 2018.

So does the Supreme Court's Aereo decision matter to consumers? Without a doubt, it favors copyright protection -- the value ascribed to creative endeavors -- over technological evolution. To answer that question is to ask another: Which do you want more?