Aereo could help cable operators bring broadcasters to their knees

If every Cablevision (NYSE: CVC) home in the New York area had access to Aereo's array of dime-sized over-the-air antennas that night in October 2010 when Fox pulled game one of the World Series in an attempt to force the cable MSO to pay increased retransmission-consent fees, CEO Jim Dolan could've told Fox to take a walk.

Or if Aereo was available today in Corpus Christi, Texas, where Time Warner Cable (NYSE: TWC) subscribers have gone more than two months without NBC affiliate KRIS-TV and three other local stations, broadcaster Cordillera Communications wouldn't be able to use its coverage of the Super Bowl to demand that Time Warner Cable pay a 300 percent increase in retransmission-consent fees. After all, broadcast TV is free to anyone with an over-the-air antenna, and Aereo could make it easy for any TV viewer with a device connected to the Internet--including set-top boxes--to watch local TV stations without having to rely on a basic-cable subscription or a rooftop antenna.

Aereo caused a bit of a hubbub earlier this week when it unveiled its $12 monthly service which will allow New Yorkers to watch 20 local broadcast channels on mobile phones, tablets and connected TV devices such as the Apple (Nasdaq: AAPL) TV and Roku set-tops. The thinking by some is that Aereo, which also allows viewers who are assigned a personal antenna to store up to 40 hours of programming on their DVR, could appeal to cable cord cutters who could satisfy their home entertainment needs by combining its broadcast TV offering with TV shows and movies from Netflix and other online providers.

Aereo antenna detail.

But Aereo isn't going to set off a wave of cable cord cutting in New York when it debuts March 14. The median rent for a one-bedroom apartment in Brooklyn, the borough that will house hundreds of thousands of Aereo antennas, is about $2,300. In Manhattan, the average rent is more than $3,000. New Yorkers aren't going to shell out more than $3,000 monthly on rent and then cancel cable to cut expenses.

Instead, Aereo could appeal to cable subscribers who want to watch live TV on mobile devices outside the home, and are willing to pay $12 monthly for the convenience. Rather than drain video revenue at cable MSOs, it could boost high-speed data revenue from subscribers who upgrade to faster tiers.

Time Warner Cable and Cablevision both have apps that allow subscribers to watch live TV on iPhones, iPads and even PCs, but only when they are within reach of a WiFi router connected to their cable set-tops. The cable MSOs don't have rights to distribute mobile video outside the home. Aereo maintains that it doesn't need programming rights--it's only renting customers antennas, and converting video to HTML5 so it can be viewed on any device with a Web browser.

The Dyle dongle.

Aereo could allow viewers to easily watch live and recorded TV on mobile devices. And it makes that Dyle TV mobile video joint venture from Belo, Hearst and a dozen other broadcast groups--which would rely on awkward dongles with antennas that attach to mobile phones and tablets--look quite silly.

But where Aereo could really shake up the industry--and prevent broadcasters from demanding exorbitant increases in retransmission-consent fees from cable and satellite TV providers--is what would happen if Aereo could be used to deliver local broadcast channels via HTML5 through a cable set-top.

Aereo says its service will work with Roku and Apple TV set-tops since they can deliver HTML5. Comcast (Nasdaq: CMCSA), through its new X1 digital video service, will be able to offer subscribers Internet access through the TV. X1's cloud-based servers will also support HTML5. What could prevent Comcast from allowing its subscribers to access content from their Aereo antenna?

OK, Comcast may not be the best example, since Steve Burke, CEO of its NBCUniversal unit, says the company hopes to generate "hundreds and hundreds of millions" of dollars each year from retransmission consent. So Aereo may not be Comcast's best friend. But what about Cablevision, which uses cloud-based servers from ActiveVideo to deliver interactive programming to Optimum subscribers. Did you know that Gary Lauder, the founder of Cablevision's key interactive TV technology supplier ActiveVideo, has joined Barry Diller's IAC as an investor in Aereo, and that delivering Internet access to the TV was the primary focus of ActiveVideo when it was still known as ICTV? I bet Lauder could find a way for a cable subscriber to access his Aereo antenna through a set-top.

Time Warner Cable CEO Glenn Britt touched on the subject of what antennas could do for cable operators on the company's fourth-quarter earnings call last month, when Citigroup analyst Jason Bazinet asked about the legal and technical challenges of integrating antennas with cable equipment as a way to gain leverage with broadcasters during retransmission-consent negotiations.

"Interesting question, and it's a very complex legal issue actually. There is nothing stopping consumers from having an antenna, but whether we provide that and if it's a part of our cable system is a legal matter. It's a very complicated thing. It is something we look at a great deal," Britt said.

The prospect of cable and satellite TV subscribers using Aereo antennas to watch live TV anywhere in New York with an iPad or mobile phone--or on TV through a Roku or Apple TV set-top--will likely spark litigation from local broadcasters soon after it begins offering New Yorkers a free 30-day trial of its service next month. If a cable operator were to make it easy for subscribers to access broadcast TV programming through Aereo antennas via cable set-tops, attorneys for Fox, NBC and CBS and other broadcasters would race to the courthouse.

It's a battle that could make its way to the U.S. Supreme Court, which in 2009 declined to hear an appeal from broadcasters of a case that allowed Cablevision to launch its network-based RS-DVR. But I like Aereo's chances of succeeding. Diller and Lauder wouldn't have invested in the company if they thought it would be shut down on its first day out of the gate. Diller has employed some capable attorneys. FCC chairman Julius Genachowski was chief of business operations and general counsel at IAC before joining the commission in 2009.

It's too early to say how Aereo could impact retransmission-consent negotiations. But with the amount of money at stake, and the personalities involved, this battle will be a fun one to cover.--Steve