Aereo & the Rebel Startup Myth: Some Say “Not Where You Want to Be”

There is a certain mystique to playing the radical in an old, traditional industry. However, stirring things up almost guarantees the incumbents will push back—and push back hard.

If that tension leads to a legal spat, most startups do not have a war chest ready for a lengthy battle. Nor do they have the time. So, following in the footsteps of a company like Aereo, which has been defending itself all the way to the U.S. Supreme Court, is far from an ideal scenario. Just this Wednesday, Aereo got hit with an injunction in a federal court in Utah, blocking the service in that state as well as Colorado, Kansas, New Mexico, Oklahoma, Wyoming, and other locales.

New York-based Aereo debuted two years ago, offering access to miniature antennas that stream broadcast TV shows to mobile devices—all for a monthly fee of $8 plus tax for basic service. Part of Aereo’s legal argument is that the viewer already has the right to watch the programs at home. But one of the big questions raised at Aereo’s first press conference was whether broadcasters would cry foul since the startup was not paying for the content.

Eventually they did.

The major TV networks—including ABC, CBS, NBC, and Fox—struck back claiming Aereo’s service infringed on copyright and rebroadcasting regulations. The cases coiled their way through the lower courts, with Aereo claiming victory on some fronts. But last September, Brian Roberts, CEO of NBC’s parent Comcast, said in a PBS interview that he believes what Aereo does is flat out illegal.

Before taking on powerful incumbents, startups should think about the clout they are up against, says Michael Phillips, an associate with law firm Fensterstock & Partners in New York. He says startups need to know what existing rules are in play before those rules get used against them. “You don’t want your technology to look too much like regulatory arbitrage,” he says. “That’s the problem Aereo has run into.”

There is a fine line, Phillips says, between innovation and cleverness that has gone too far. On one hand, he says, Aereo looks like a savvy advance over old TV antennas. “But when you look at [their] satellite dish array and how every [user] is assigned an itty-bitty antenna,” he says, “it begins to look like this is just a strategy to work around the Copyright Act.”

Phillips thinks startups need to look hard at the risks of taking on an industry.

Phillips thinks startups need to look hard at the risks they face.

For all their ingenuity, sometimes startups must bend to the rules, Phillips says. That makes playing the rebel dicey, he says, if startups cannot adjust their technology to both satisfy regulators and be profitable. “For some, it’s the core of the enterprise or nothing,” Phillips says. “That’s Aereo’s circumstance. If the system they’ve set up violates the Copyright Act, then that’s it for Aereo.”

Aereo’s case is due to be heard this April by the U.S. Supreme Court. The company stated it welcomes the chance to resolve the matter once and for all. Its CEO, Chet Kanojia, seems to be looking forward to some finality to the fight.

But Phillips believes Aereo might be a bit wary that the highest court in the land took on its case rather than defer to the lower court rulings. If Aereo loses before the Supreme Court, he says, the brand might still have some market appeal—but it would not be the same service anymore. “That’s a scary risk for any startup or its investors to take on,” Phillips says.

The allure of being the rebel, he says, can be a persuasive way to quickly build a client base. Apple is a classic example. But Phillips says startups should think about being more subtle and careful about what they want to revolt against. “With the Aereo case, some of the judges look at it as rebelling against the law,” he says. “That’s not where you want to be.”

So far Aereo has come out ahead in some of  its legal quarrels, but a rival startup called FilmOn X has not, says Andrew Goldstein, a partner with law firm Freeborn & Peters in Chicago. Britain-based FilmOn X, which previously went by the name Aereokiller, also offers streaming content from TV broadcasters. Goldstein says FilmOn X lost some of its courtroom fights, stalling its plans. (Incidentally, FilmOn X recently requested to have a voice in Aereo’s case—a request Aereo is fighting.)

Indeed, the consequences of building a business around supposed loopholes in the law can be harsh. Goldstein wonders if other startups taking this approach understand what they are getting into. “It could be a house of cards,” he says. “If you’re in this scenario, someone is likely going to test your loophole; your whole business could come tumbling down.”

Goldstein says Aereo’s fight differs from other startups battling within an industry because Aereo has Internet mogul Barry Diller as a backer. However, the outcome of the case could be a lesson for all. “If the Supreme Court rules in favor of Aereo, … Next Page »

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