Aereo’s saga signals a chilling effect for innovation

BEBETO MATTHEWS/ASSOCIATED PRESS/FILE
BEBETO MATTHEWS/ASSOCIATED PRESS/FILE

Thursday’s announcement by Aereo that it will be shuttering its Boston office and laying off most of its staff is the inevitable consequence of an unfortunate Supreme Court decision that will chill disruptive innovation in stodgy industries like broadcasting for many years to come.

Aereo is, of course, the company that deployed a warehouse full of dime-sized antennas to stream over-the-air broadcasts to its customers’ Internet-connected devices. Unlike traditional cable TV systems, which use one big antenna to capture and distribute the same broadcast signals to every subscriber, each of Aereo’s tiny antennas enabled individual customers to watch a broadcast in real-time or record programs on Aereo’s cloud-based DVR service.

Issues arose for the company not long after Aereo debuted in New York City in 2012, when broadcasters filed a federal lawsuit accusing  the service of copyright infringement. Two lower federal courts rejected the broadcasters’ claims, but in June of this year a divided Supreme Court ruled that the “overwhelming likeness” between Aereo and traditional cable TV meant that Aereo “performed” the broadcasters’ copyrighted signals “publicly” when it streamed them over the Internet. And since the public performance of a copyrighted work without payment or permission is an infringement, Aereo was ordered to pull the plug on its live streaming service last month by a federal judge in New York (though the company voluntarily suspended its service soon after the Supreme Court delivered its verdict).

Aereo then tried to make lemons out of judicial lemonade by embracing the “looks-like-cable-TV” logic of the Supreme Court’s ruling. It applied to the federal Copyright Office for the same right that cable TV companies operate to redistribute over-the-air TV signals to their subscribers in exchange for paying the broadcasters a set licensing fee. In July, however, the Copyright Office ruled that Aereo did not qualify for a so-called “compulsory license” because it wasn’t a bona fide cable TV provider, and the federal judge in New York followed the Copyright Office’s lead in ordering Aereo to suspend its live streaming service last month.

At this stage in the ongoing litigation, Aereo is still free to offer the cloud-based DVR component of its services, so long as it prevents its customers from viewing any part of a recorded show until its broadcast ends. This may change when the broadcasters’ lawsuit is fully resolved by the courts, but the ongoing uncertainty was apparently too much for Aereo’s investors, who backed away from extending the struggling company a financial lifeline after last month’s adverse court decision.

Aereo’s saga before the courts and federal regulators is dispiriting to innovators with bold ideas to disrupt incumbent industries, but three things stand out as particularly galling:

Form vs. Function

Despite scoring two victories in the lower federal courts, Aereo lost in the Supreme Court because the justices in the majority focused on its function rather than its form. Engineers and designers can argue about whether a product’s design should put form or function first, but form is what ought to matter to lawyers and judges in deciding if a new product violates laws enacted to regulate an old technology. Like all smart innovators, Aereo designed its service around the state of the law back in 2012 when it seemed clear that streaming broadcasts to users via individual antennas did not render one into a cable company. If, however, old laws are to apply to new ways of doing things, then the scope for path-breaking innovation is greatly narrowed.

Performance Anxiety

The Supreme Court’s emphasis on function over form seems to turn almost entirely on who performs the function and where. Justice Stephen Breyer’s majority opinion points to the fact that Aereo has a warehouse full of antennas, servers, and routers in concluding that the company “publicly performs” broadcasters’ signals even though this elaborate apparatus remains at rest until an Aereo user logs into the site and tunes in to a program. No one disputes that similar equipment housed in a customer’s home (say, in a Slingbox) is perfectly legal, so why should it be illegal to rent as a service what one can buy as a product? The Aereo decision therefore casts a shadow over the future of cloud computing, as there will inevitably be other cases where doing something on a centralized basis will subject an upstart to rules intended for the old guard.

Copyright Confusion

Perhaps worst of all, even though the Supreme Court found Aereo to be like a cable TV service for some copyright purposes, the Copyright Office then ruled that Aereo wasn’t enough like a cable TV service to obtain a retransmission license — reportedly because Congress didn’t intend the relevant provisions of the 1976 Copyright Act to apply to Internet streaming. By this logic, however, the Supreme Court shouldn’t have found Aereo to be like a cable TV service in the first place, because cable TV and Aereo’s streaming service are fundamentally different technologies. This absurd outcome points to the risk that other innovators face of being subject to the same restrictions as their incumbent competitors without enjoying any of their privileges.

All in all, Aereo’s tale of woe signals a giant leap backward in the attractiveness of the United States as a global innovation engine. American entrepreneurs are already saddled by a dysfunctional patent system where “trolls” who haven’t really invented anything harass legitimate businesses with lawsuits that are tantamount to extortion. If existing laws are to apply selectively to new ways of doing things, and Congress is both too gridlocked and sufficiently in the pocket of powerful interests to change the law, the only forms of innovation American consumers will enjoy are those backed by the incumbents. So if you want to enjoy a DVR in the cloud, you’ll have to pay your cable provider $80 or more per month for a bundle of channels you’ll never watch instead of the $8 that Aereo used to charge.

Vivek Krishnamurthy teaches in the Cyberlaw Clinic at Harvard Law School’s Berkman Center for Internet & Society. The opinions in this article are his own.