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McAdams On: Aereo’s Unlikely Proposition

THE STAGE—New Yorkers were falling over each other Wednesday as they negotiated crowded city sidewalks while watching a celebrity chef implode on NBC courtesy of mobile TV service provided by Aereo. No, they were not, because, as Aereo-bankroller Barry Diller told AllThingsD’s Walt Mossberg in late May, the service has “very few” subscribers. This may be why Aereo is still a going concern. That, and some court drama.

We all know Aereo as the New York-based startup that’s retransmitting broadcast TV signals to mobile devices via the cloud. Much of Aereo’s marketing power is derived from getting sued by those broadcasters for copyright infringement, and having myself and others like me write about it. So we all know what Aereo is even if we don’t care.

Aereo launched in New York in March of 2012 to much fanfare, in part because broadcasters failed to secure an injunction on the service. It has since been switched on in Boston and Atlanta and soon, in Chicago—also to much fanfare but likely not much consumer adoption. This could be the key to Aereo’s success, astute observers observe.

Aereo charges $8 a month for 20 hours of cloud storage. Aereo CEO Chet Kanojia told GigaOmlast December that the company is scoring storage for as low as $95 per TB. That translates to roughly $3 per 20-hour subscriber, at around 1.8 GB per hour for HD content. There are also data handling and file transfer costs. Amazon charges 48 cents an hour to process large on-demand files, or about $10.67 a month; plus $3 = $13.67 for the Aereo customer paying $8.

Assuming Aereo cracked this storage/transcoding/cost equation and will squeeze a buck or two a sub should those materialize, it is nonetheless missing out on the kind of licensing fees that would make Larry Ellison blush.

Aereo claims to use tiny antennas, each serving an individual (theoretical) subscriber. The company says its technology model reflects the one argued years ago in Cablevision. That case established the legality of centralized DVR service by deeming it a private rather than a public performance. Public performances are subject to copyright protection and thus, retransmission consent law. Aereo says each of its little antennas provides a private performance per individual subscriber. The federal judge who declined broadcasters’ request for an injunction agreed.

“Aereo’s use of single antennas does… reinforce the conclusion that the copies created by Aereo’s system are unique and accessible only to a particular user, as they indicate that the copies are created using wholly distinct signal paths,” Judge Alison Nathan of the U.S. District Court for the Southern District of New York wrote in her ruling.

The rub is that these antennas are packed so tightly that Aereo says it can fit 50,000 pairs (TV and DVR service) into a 200-square-foot vertical array. Non-theoretical physicists and engineers alike agree that this is on par with alchemy.

“Anyone who has taken antennae 101 knows that tiny pieces of metal separated by tiny distances act as one piece of metal,” said one.

And another: “Does Aereo start with one tiny little antenna for their first subscriber and add another little tiny antenna as they add each additional subscriber? Can they point to a tiny antenna and say, ‘That one is for subscriber 932,’ and, if they disconnect that one, does subscriber 932 lose off-air TV via Aereo?”

For the antennas to act individually, each would have to have a local oscillator for tuning, which would cause enough interference to overpower reception. However, Aereo’s patent application describes a system that relies on switching rather than dedicated demodulators and tuners.

“Processing pipelines are used to demodulate, transcode and index the content transmissions to produce content data that are streamed to users,” the patent states. “In this way the feeds from the antennas can be accessed by users over a network connection.” It then goes on to say that the “antenna elements outnumber the antenna processing pipelines.”

Even if the tuning problem has been resolved through the clever use of “pipelines,” the antennas are too small to have any resonance at UHF frequencies, let alone high-band VHF channels, according to technology journalist Pete Putman.

“The close spacing of each antenna element virtually assures, through inductive and capacitive coupling, that the individual arrays act as a larger antenna, which can achieve resonance,” he said. “And Aereo has admitted that subscribers can lease ‘one or more antennas’ when they are watching broadcast channels, which of course contradicts their ‘one antenna, one subscriber’ argument.”

Which is indeed what the good Mr. Diller promulgated to the good Mr. Mossberg:

“If you go to Radio Shack… and buy an aerial to put on your roof to receive free over-the-air broadcasting, that costs money. The device, the platform costs money. We’re not charging anybody for free over-the-air broadcasting.”

The main problem with the antenna fandango is that no one other than the good folks at Aereo have had access to the arrays—the New York one is said to be located somewhere in a Brooklyn warehouse. So the court is relying on Aereo’s word that it’s renting individual antennas rather than distributing one signal (via one big antenna) to many subscribers, making it a public performance and legally subject to retransmission.

One D.C. attorney familiar with the particulars said an itty-bitty TV antenna that picks up signals in Brooklyn for reception throughout New York City would be lucrative.

“There’s been a lot of incentive over the years to come up with an antenna that didn’t take six foot over the top of a person’s TV set,” he said “Wouldn’t the first step have been to license this antenna technology to RCA?”

Aereo has expended a lot of effort to keep the antenna business at a “very theoretical level” in court, he said. This, then, goes to the heart of a query put forth by Wells Fargo analysts in a June 6, 2013 note on the service:

“Aereo’s technology has not even factored into any of the legal discussions, i.e., how can Aereo be considered a [private] use when 1) it is fueled by one big antenna, and 2) it retransmits broadcast content via the Internet? This might be the tipping point that shuts Aereo down,” they wrote.

That might have been so except for legal hijinks. My sources tell me that the engineer hired by broadcasters to dispute the antenna claims before Judge Nathan essentially phoned it in and got raked by Barry’s Band of Barristers. Judge Nathan was left with a written report from the plaintiffs and oral testimony from Aereo attorneys. She accepted Aereo’s version of the technology.

Broadcasters appealed her decision in the Second Circuit, which had to accept her finding of fact. Therefore, the technological argument could not be reexamined by the appellate court. The Second Circuit also refused to grant an injunction based on the Cablevision defense, though Judge Denny Chin wrote a pointed dissent:

“There is no technologically sound reason to use a multitude of tiny individual antennas rather than one central antenna; indeed, the system is a Rube Goldberg-like contrivance, over-engineered in an attempt to avoid the reach of the Copyright Act and to take advantage of a perceived loophole in the law.”

The broadcast plaintiffs have requested an en banc hearing with all 13 judges in the Second Circuit. The folks at Wells Fargo say it’s not likely, according to their sources. That leaves a copyright trial in Judge Nathan’s court and a “meanwhile in California” scenario where Alki David is doing his best impression of Barry Diller. David, another mad hatter with way too much money, launched an Aereo-like service from the West Coast, where broadcasters sued and won and injunction from the U.S. District Court for Central California. That case is on appeal in the Ninth Circuit. Should the Ninth Circuit affirm the injunction and disagree with the Second Circuit, the resulting “Circuit Split” likely will trigger a grant of cert from the U.S. Supreme Court.

And so the moral of this story is that there isn’t one. There’s no morality involved, whatsoever. Veracity has taken a back seat to manipulation. The question is, to what end? Should Aereo prevail, what is the actual intent of overturning copyright law as it applies to broadcast signals—taking the the cable business into the cloud without pesky retrans fees? Maybe.

The bottom line is that a handful of judges could decide the course TV distribution without proof positive of technology claims upon which their decision rests.

The result will be the legacy of a flimflam.

image from Stuff I Stumbled Upon