NEW YORK -- The Barry Diller-backed Internet company that challenged cable and satellite TV services by offering inexpensive live television online plans to expand beyond New York City this spring.
In the wake of a federal court ruling that tentatively endorsed its legality, Aereo will bring its $8-a-month service to Boston, Chicago, Philadelphia, Washington and 18 other markets in the U.S., as well as to New York's suburbs. For the past year, the service had been limited to New York City residents as the company fine-tuned its technology and awaited guidance on whether its unlicensed use of free, over-the-air broadcasts amounted to a copyright violation.
A federal judge in New York ruled in July that the service doesn't appear to violate copyright law because individual subscribers are assigned their own, tiny antenna at Aereo's Brooklyn data center, making it analogous to the free signal a consumer would get with a regular antenna at home. Aereo spent the subsequent months selecting markets for expansion and renting space for new equipment in those cities.
"The court decision was the green light in our perspective," CEO and founder Chet Kanojia said in a recent interview at Aereo's sparse offices in a former engine factory in Queens. "This is an opportunity of a lifetime to build up something meaningful to change how people access TV."
Aereo is one of several startups created to deliver traditional media over the Internet without licensing agreements. Past efforts have typically been rejected by courts as copyright violations. In Aereo's case, the judge accepted the company's legal reasoning, but with reluctance.
If the ruling stands, Aereo could cause a great deal of upheaval in the broadcast industry. It could give people a reason to drop cable or satellite subscriptions as monthly bills rise. It also might hinder broadcasters' ability to sell ads because it's not yet clear how traditional audience measures will incorporate Aereo's viewership. In addition, it could reduce the licensing fees broadcasters collect from cable and satellite companies.
Broadcasters have appealed the July ruling. At a November hearing, appellate judges expressed skepticism about the legality of Aereo's operations. In addition, the original judge's ruling was preliminary, made as part of a decision to let Aereo continue operating while the lawsuits wind their way through court. Even if courts continue to side with Aereo on the legality of its setup, broadcasters still could nitpick on the details and try to argue that the antennas don't actually operate individually as claimed.
Despite Aereo's initial win, copyright attorney Kevin Goldberg with the firm Fletcher, Heald & Hildreth rated the company's chances "a toss-up. You really are trying to break new ground here."
Goldberg, who isn't representing either side in the case, noted that a federal judge in Los Angeles already has ruled against a copycat service called Aereokiller. Furthermore, he said, Congress can step in at any time to clarify the law.
Kanojia said he didn't want to wait for a final resolution, which could take years. He said all startups accept some risk when they try to shake up an industry.
With average monthly TV bills exceeding $75, Aereo is positioning itself as a cheaper alternative. For $8 a month, subscribers in New York get 29 over-the-air stations. They can watch shows live and record up to 20 hours using Aereo's Internet-based digital video recorder. Subscribers get 40 hours of DVR space for $12 a month and can reduce that to less than $7 by paying for a year in advance.
While cable and satellite services are geared toward watching television on TVs, Aereo streams feeds over the Internet to Windows and Mac computers, iPhones, iPads and boxes such as Roku and Apple (AAPL) TV for feeding Internet content to regular TVs. Android support is expected this year. Services such as Hulu and Apple's iTunes also offer television over the Internet, but not live.
The downside: Aereo doesn't offer cable channels such as CNN, HBO, ESPN and regional sports networks. The exception is Bloomberg TV financial news channel, which reached a deal in which Aereo is paying an unspecified fee. Cable lineups typically have hundreds of channels, compared with a few dozen for Aereo.
The 22 markets Aereo announced in Las Vegas on Tuesday for this spring's expansion are Atlanta, Austin, Baltimore, Birmingham, Ala., Boston, Chicago, Cleveland, Dallas, Denver, Detroit, Houston, Kansas City, Madison, Wis., Miami, Minneapolis, Philadelphia, Pittsburgh, Providence, R.I., Raleigh-Durham, N.C., Salt Lake City, Tampa, Fla., and Washington. With that, Aereo estimates that the service will reach nearly 100 million potential customers.
After that, Aereo plans to add more cities a few times each year.
One factor for the initial round was a market's proximity to Aereo's headquarters in New York, in case engineers need to board a train or a plane to resolve problems. Weather also was a factor, as much of the construction is taking place during winter months.
Another consideration was demographics. One key target will be people in their 20s who have never subscribed to cable or satellite TV, a group Aereo terms the "cord nevers." Research from Nielsen shows that younger Americans tend to watch more video over the Internet and less on traditional TV than older audiences.
Kanojia said Aereo is offering broadcasters a way to reach younger audiences where they spend their time.
The National Association of Broadcasters disagrees. NAB spokesman Dennis Wharton likened Aereo to someone who steals a six-pack of Coke, shares cans with friends and then claims to be helping the soda company promote its product.
"If you're selling the program for a fee and not compensating the rights holder for that product, that's fundamentally unfair and violates the copyright law," Wharton said.
Aereo, which wouldn't reveal how many subscribers it has, said it will keep prices the same in the new markets, though the available channels will vary.
Not all channels will be offered to everyone in a given market. For example, a Virginia subscriber might be blocked from a Maryland station even though both are in the Washington market. Aereo said it will use data from the Federal Communications Commission to calculate whether that subscriber would normally be able to pick up that station using a regular antenna.
Out-of-market stations won't be available, even if both markets are served by Aereo after the expansion. A New York subscriber who takes a trip to Chicago, for instance, would be able to watch only Chicago stations -- and not New York channels -- while in the Windy City.
In doing so, Aereo continues to tread the boundaries of copyright law.
A 1992 federal cable law allows broadcasters to demand licensing fees from services that retransmit their signals, even if a station offers its signal over the air for free. Cable and satellite companies spend millions of dollars for those rights and often blame price hikes on the fees. High-profile disputes over such fees have led to blackouts of stations on some TV lineups, as broadcasters aren't required to offer their signals to any of these services.
Aereo argues that it isn't subject to those fees because it uses thousands of dime-size antennas to pick up signals and assigns them to subscribers one at a time. The company insists it is merely renting an antenna to the customer, and it's the customer who enables the transmission, the way one would with a home antenna. If two subscribers record the same show, two antennas would be assigned and two copies would be stored on the virtual DVR. The setup is inefficient; Aereo admits it's done solely because of copyright law.
Judge Alison Nathan sided with Aereo last summer, denying broadcasters a request to shut down the service pending resolution of the lawsuits filed in March by major networks and local stations, as well as producers of some of their shows. Nathan ruled that while the service might hurt broadcasters' ability to make money, the law left her no other choice.
Nathan had relied on a 2008 court decision involving a remote DVR service offered by Cablevision Systems. In their appeal, broadcasters pointed out that Cablevision was already paying licensing fees for TV signals, so the court was deciding whether the company had to pay extra for the new service. Cable and satellite TV operators are not plaintiffs in the lawsuits against Aereo, but Cablevision filed a brief saying that Aereo should be subject to the same fees that cable companies have to pay.
Aereo's early investors include Diller's IAC/InterActiveCorp, which owns Match.com, Ask.com and other websites. On Tuesday, Aereo said it has closed on a second round of financing, worth $38 million and led by IAC and Highland Capital Partners.