Could Fallout from Aereo Ruling Have “Chilling Effect On Startups”?

Aereo’s legal war ended in the chambers of the U.S. Supreme Court, but other startups should be wary.

In spite of CEO Chet Kanojia’s audacity, on Wednesday the New York-based company that thought it could trump television broadcasters lost its closely watched case. Since its introduction to the public in 2012, doubts swirled whether Aereo’s service that lets customers stream live broadcast television on mobile devices was legal.

Nonplused by naysayers, Kanojia and key backer Barry Diller plowed ahead with a plan to make broadcast television available at any time on mobile devices, for a fee. The problem was they had no intention of paying a nickel to broadcasters, banking on the fact that the public already had the right to watch those shows for private consumption.

So Aereo rented private, tiny antennae to its customers to stream broadcast networks over the Web. After lengthy legal fights, the U.S. Supreme Court ruled that Aereo violated broadcast networks’ copyrights. The broadcasters were clearly happy with the decision, as CBS Corp. CEO Les Moonves declared “justice was served.” Meanwhile Diller, whose Internet company IAC invested in Aereo, called the ruling a “loss for consumers.”

And that brings up more than a few questions about industry disruption and what constitutes real innovation.

Michael Phillips, an attorney with Fensterstock & Partners in New York who has followed the case, believes startups must now ask themselves if their ideas are “too cute” or obviously designed to flout existing laws—and they might not like the answer. “I think this ruling could have a chilling effect on startups,” he says.

Phillips says the Supreme Court’s ruling could have unforeseen consequences, such as putting the line between innovation and an “unfair workaround” under closer scrutiny. “Maybe that line shouldn’t exist at all?” he asks.

Based on their written opinion, the majority of the Supreme Court justices seemed largely unimpressed by many of the technological nuances of Aereo’s case, Phillips says. Even justices he believed to be progressive on technology looked more at the spirit of the law and less at the digital wizardry the startup was concocting. “It wasn’t what I was I expected,” he says.

Though the ruling was a bleak outcome for Aereo, some observers believe there is a chance for such a service to continue by paying carriage fees to broadcasters. “This is what the networks were arguing for,” says Howdy Pierce, a veteran of the digital video industry and co-founder of contract design and engineering services firm Cardinal Peak in Lafayette, CO.

Pierce praised Aereo’s attempt to create a clever way to provide a service the public seemed to want. However, swimming in murky legal waters was dicey, especially when facing powerful foes.

“Maybe the lesson for innovators is that there’s more risk than you might think in a business model that relies on a particular reading of fuzzy law,” Pierce says. Still, he says he would rather support risky technology and bet on the team figuring out a solution than back a plan that relies on convincing five judges of a particular business plan’s merits.

If Aereo were to seek a deal with broadcasters to survive, it’s pretty clear the price of its service would increase in turn. “But I bet there would still be a market where people could pay a small amount of money each month, under $20, and receive a limited number of channels streamed over the Internet,” Pierce says.

Based on some of the company’s past statements, it seems unlikely Aereo would pursue a deal with broadcasters. But Pierce believes by doing so the company could wring some of the complexity and cost out of its technology. “Much of what they were doing was an attempt to comply with what they thought the law was,” he says.

If Aereo fades permanently from the landscape, streaming video over-the-top will continue to grow, Pierce says. There are already lots of ways to get streaming video over the Internet, through Netflix, HBO Go, Hulu, and others. The number of competitors in the space could grow dramatically in coming years, he says.

Whatever happens next, there seems to be little possibility the novel hardware that Aereo had hinged its hopes on will find new life elsewhere.

“If you’re referring to circuit boards packed full of tiny antennas, it’s hard to see who wants that anymore,” Pierce says.

Phillips believes, however, that there might be a chance for the company’s legacy to survive another way. “It sounds like Aereo is going to simply pack it up,” he says. “But I do think the [court’s] opinion leaves wiggle room for the next TV startup to argue that it is sufficiently ‘different from cable’ to survive a copyright claim.”

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