Aereo’s decision to ask the Supreme Court to take the case is a bold gesture: the startup could instead have argued that it was too soon for the country’s highest court to hear the broadcasters’ petition, especially as there is ongoing, unresolved litigation over streaming TV in the lower courts.

But as set out in its brief (embedded below), Aereo argues that the court should rule on the case now in part because the big broadcasters, including Fox, NBC, ABC and CBS, are drowning the startup in litigation costs:

“[The broadcasters] have signaled their intention to wage a war of attrition by re-litigating this issue in every market to which Aereo expands its business,” writes Aereo, which is now streaming local TV in about 20 different cities for $8 to $12 a month through personal antennas.

There is a lot at stake in the case, which pits powerful players of the traditional TV industry against Aereo and others who want to break the so-called bundle model, in which viewers are force fed large  and expensive packages of channels, many of which they don’t watch.

The central legal issue turns on copyright law, and whether Aereo is akin to watching a personal recording via a remote DVR unit (which is legal) or if it is instead an illegal re-transmission of the broadcasters’ signal. The case has also attracted the attention of sports leagues, with the NFL and Major League Baseball filing in support of the broadcasters.

Aereo argues that its technology, which provides a tiny personal antenna to every subscriber, is akin a remote DVR case called Cablevision in which the US Second Circuit Court of Appeals ruled in 2008 that the Copyright Act does not apply if a person is watching a personal, discrete transmission. In April, the same court in New York ruled that the same reasoning applied to Aereo — giving the company the green light to expand operations.

In its new filing, Aereo repeats the individual transmission argument, and compares itself to someone renting antennas on a hill:

If a landowner offered space on a hilltop where individuals could place a conventional antenna, no one would argue that the land- owner was engaged in a public performance, even if hundreds of individuals placed individual antennas there and watched the same World Series game.

The broadcasters, by contrast, have argued that the New York court got it wrong, and that the Copyright Act should apply to the underlying show — not the individual streaming transmission.

It’s hard to say if the Supreme Court will accept the case. The court is well into its term, which lasts until about May, and its docket is mostly full already; but, for now, it’s still adding new cases to the schedule.

Aereo is also urging the court to consider the facts of the case as they relate to Aereo specifically — and not to consider legal issues related Film On, a would-be streaming clone launched by eccentric billionaire Alki David, that a California court shut down in late 2012.

Finally, Aereo is framing the outcome of the case as important to the success of still-emerging cloud-based entertainment technologies, and consumers’ ability to access them at low cost:

“Instead of purchasing a home DVR, an antenna for over-the-air broadcasts, and a media- shifting device (such as a Slingbox) to transmit those signals to Internet-connected devices, a consumer can purchase access to functionally equivalent Aereo equipment for a fraction of that cost,” its filing states.

The filing is below with key parts underlined.

Aereo Cert Petition Response Brief Final (Filed 12-12-13)

Hopkins is the president of distribution for Fox Networks Group and has been on Hulu’s board since 2011. Fox parent company News Corp owns about a third of Hulu; Disney owns another third; and Comcast owns the rest but can’t directly influence the company thanks to conditions for its merger with NBC Universal.

“After an extensive search, Mike was simply the best candidate for the job,” Anne Sweeney, co-chair of Disney Media Networks and president of Disney/ABC TV, said in a statement. “He has a strong understanding of programming, digital distribution and consumer behavior, and a great vision for Hulu’s next chapter.”

Hulu’s CEO search has been going on since the beginning of the year, when Jason Kilar left the company. But even before that, Disney and News Corp had battled each other over the future of the streaming TV site, which offers both free and premium versions. As my colleague Janko Roettgers reported last year, News Corp wants to force consumers to authenticate their pay TV subscriptions before using the free version of the site; Fox shows are only available to non-Hulu Plus users after an eight-day delay. Disney, meanwhile, apparently doesn’t think Hulu users to have to prove they’re paying cable customers.

In his new role, Hopkins will be grappling with those issues and helping to determine the future of Hulu — whether it’s essentially a TV Everywhere service or whether it can exist as a free alternative to pay TV.

According to the most recently released statistics, Hulu had more than four million Hulu Plus subscribers (paying $7.99 per month) in the first quarter of 2013 — double the number of paying subscribers from the same time in 2012. The free service, meanwhile, gets about 30 million monthly unique visitors. Hulu also said it streamed more than 1 billion videos in both the first and second quarters of this year.

In a letter to Hulu employees also posted on Hulu’s blog, Hopkins wrote:

“The fact is, through all the recent uncertainty not only have you kept this business together, but you’ve continued to deliver on every key performance metric. In fact, you are delivering one of the strongest years Hulu has ever seen: We expect revenues to be close to a billion dollars this year, and Hulu Plus subscribers continue to climb.”

In a complaint filed on Monday, a Fox station asked a federal judge in Utah to shut down the service on the grounds that Aereo’s technology, which uses tiny antennas to beam over-the-air TV shows to viewers for $8 a month, infringes on copyright.

The legal dispute is important because Aereo now represents the greatest threat to the TV industry’s “bundle” model, which involves force-feeding giant packages of channels to cable and satellite viewers at ever higher prices. Aereo CEO Chet Kanojia, whose company is backed by media mogul Barry Diller, has described the system as “abusive” and proposes instead a “rational bundle” system.

The legal fight turns on whether Aereo’s technology, which lets each subscriber watch and record TV via a personal antenna, is a “private” transmission under copyright or, instead, an unauthorized rebroadcast. In a major victory for Aereo, a New York appeals court accepted the start-up’s private transmission theory, giving it the green light to operate in New York, Vermont and Connecticut.

The broadcasters have won victories of their own as a result of suing an Aereo clone, known as FilmOn, and winning a California decision that effectively shuts out the streaming services in nine western states. Since then, the TV industry won a similar ruling in the nation’s capital, while Aereo has won in Boston, which will let the company operate in New England for the time being. (If you’re losing track, the Disco Project has a helpful map).

So how will the Utah case change the game? The short answer is that, since it is taking place within the 10th Circuit, it will determine Aereo’s fate in six more western states (Utah, Wyoming, Oklahoma, Kansas, New Mexico and Colorado).

Update: In a statement, Aereo referred to the New York appeals court ruling and stated: ”Fox is simply not entitled to repeated do-overs on this matter. Aereo will respond to this latest attempt at a mulligan in due course.”

The bottom line is that the legal fight is fast producing a strange situation where half of the country can watch Aereo and the other half cannot. The whole thing is likely to be determined by the Supreme Court in 2015.

Here’s the new Fox filing:

Fox v Aereo in Utah

The unanimous three-judge decision is a blow to Fox, which sued Dish last year, and other broadcasters, which fear that ad-skipping will erode the value of their advertising.

The judges based their decision on earlier decisions that held that hat technologies that allow for private copies – like the Betamax and Cablevision’s DVR – are fair use under copyright law. In other words, Dish was not liable because, from a legal standpoint, it was the viewers, not Dish, who were making the copies.

The decision is significant because it further loosens the control that broadcasters can exert over the shows they transmit. In an astute analysis at the Washington Post’s Wonkblog, copyright professor James Grimmelmann suggests that “scale is no longer an issue” when it comes to primetime and that consumers can now record large volumes for personal consumption.

The court did not explore the ad-skipping issue in detail, in part because Fox only owns the copyright to its shows, not to the ads.

The Hopper ruling comes at the same time that broadcasters are experiencing setbacks in other areas of the TV industry. This includes an affirmation last week by an influential New York appeals court that Aereo, a service that beams over-the-air TV to smartphones for $8 a month, is also legal. Meanwhile, Time Warner Cable is encouraging viewers to try Aereo as part of a PR campaign against CBS over a contract dispute.

Dish’s CEO, Charlie Ergen, also suggested this year that viewers are “cutting the cord” to get away from traditional TV models.

In the Dish ruling, the California court did leave a glimmer of hope for Fox by suggesting the broadcaster could restrict the use of ad-skipping through the contracts it signs with distributors.

There’s just one problem — it won’t happen anytime soon. According to consulting firm PwC’s annual media report, online video will increase from $2.3 billion in 2012 to $5.9 billion by 2017. The figure represents 9 percent of future online ad spending, but this is still a small amount compared to TV ads — which PwC predicts will pull in $81.6 billion, or 37 percent of all ad dollars in 2017 (the figure includes ads “around broadcasters TV content” so adjust accordingly.)

This slow growth forecast jibes with the assessment of industry experts who spoke at a VideoNuze ad event last week in New York City. Their explanation was simple enough — brands already feel their budgets are spread thin by TV and they’re not in a mood to experiment.

“If you followed viewers across all screens, we’d have to add at least 70 percent to the budget … our clients say ‘we don’t have have any more money and everything’s more expensive,’” said Michael Bologna, Director of Emerging Communications at GroupM.

Bologna and Digitas’ SVP of Media, Adam Schlachter, both said that media companies’ recent “NewFronts” in New York (a boozy, glitzy preview of new shows intended to resemble the Upfronts in LA), had at best “sparked a conversation” but did not lead to any resolutions to turn on the cash spigots.

The main problem, for now, appears to be a lack of consensus on how to measure the effectiveness of online video ads. Here’s how PwC puts it:

There are [..] challenges facing audience-measurement researchers seeking to provide more accurate data for their clients: …Until progress is made on these, migration of advertising revenues from traditional TV to online video platforms will lag consumer adoption of these new services.

The ongoing status quo (whatever its cause) appeared to frustrate at least one audience member at the VideoNuze event, who demanded that someone explain why TV stations charged more even as they bring brand messages to fewer people.

“We don’t want to pay the failure tax any more. It should be more like the stock market [where value declines with performance]. The agency must say, if your audience goes down, you get less.”

The panel host, Forrester’s Jim Nail, suggested a culture of risk aversion may explain the status quo: “Nobody gets fired for buying ABC, NBC, CBS and Fox.”

Fox’s cable TV business made up the vast majority of News Corp’s profits for the quarter ending March 31, contributing $993 million of the $1.36 billion in operating income for the period. Total revenues were $9.54 billion, up 14 percent over the previous year.

The overall home video market is up five percent and “we’re up a bit more than that,” Carey said. “The driving force is digital…the overall marketplace continues to grow really well, and digital is becoming a growing part of what we do.” He also said that the DVD business has stabilized, “with Blu-Ray offsetting the decline in the older formats,” and that “really low-priced rentals” through services like Redbox  are “becoming less of a force.”

In response to an analyst’s question about the future of Hulu, Carey said that the service has “great momentum,” and “we’re particularly excited about subscriptions” through Hulu Plus. “There’s an important role for Hulu Classic in the marketplace,” he said, but “we need to develop the dual-revenue side of it.” In a few years, he said, “Hulu will look a bit different than it does today,” partly in response to changes in Netflix’s business: “Netflix talks about evolving their business to somewhat different business models” (he didn’t elaborate on what those are).

When asked to offer general advice to the broadcast networks, Carey said they are still the “viewership leaders,” but acknowledged the networks might need to “be a bit more targeted in the types of series [they] invest in…networks have been more about the volume game, stuck in historical practices…Do you need to break some of those rules? The answer is clearly yes.”

The TV business is still based on an archaic business model that forces customers to buy arbitrary bundles of channels. Fans of arts programming, for instance, often have to shell out $5 a month for football shows — even if they hate football.

This isn’t a technology issue. It’s instead the problem of what media doyen Peter Kafka calls the “TV industrial complex” — a cabal of broadcasters and cable distributors that refuse to surrender their bundled TV business model.

That’s why upstart Aereo, which uses tiny antennas to stream TV signals to mobile devices, is so intriguing to watch. The company is offering a way for people to watch shows where and when they want — and has so far withstood the TV industry’s lawsuits. Yesterday, we showed off photos of Aereo’s tech. Today, we’re exploring the vision and strategy of the man who wants to kick in the door of the TV industrial complex once and for all.

The quest to end an “abusive” system

Chet Kanojia, who is speaking at paidContent Live in April, is a soft-spoken engineer who likes stylish shoes. At 43, he’s already built an advertising company, Navic Networks, and sold it to Microsoft — and presumably made himself a fortune. When we chatted at Aereo’s site in Brooklyn this week, the first thing I wanted to know is why he picked this fight. Why, that is, did he decide put so much energy into Aereo when the TV industry might crush the company in a second like it has done to others before?

“I had the option to be a VC, to do nothing or to do something really really meaningful,” said Kanojia. “In my heart of hearts, I belive that when businesses are created or preserved with analogue mentalities, they’re artificially constrained and ripe to to be recast in a different way.”

He adds that he loves TV content like 60 Minutes, Parenthood and Downton Abbey. But he is exasperated by the TV industry’s ossified pricing model.

“Why can’t there be a simple way to pay for this? It’s just irrational that it should cost hundreds of dollars a month. It’s an abusive system set up in an artificial way.”

Broadcasters like NBC and Fox, of course, would argue that we need a system that provides revenue to produce the content that people like so much. In recent years, these networks have been leaning on distributors to pay them for carrying over-the-air channels — and presumably think Aereo should too.

Kanojia is having none of it, saying the broadcasters are already making money from public spectrum through advertising and that it’s unreasonable for them to ask for more. Also, Aereo is not part of the regulatory regime that requires big TV companies to offer their channels for sale to cable and satellite distributors; this means that, for now, Aereo is unable to sell channels like ESPN (owned by ABC) to its customers.

Kanojia adds that pure “a la carte” TV is not the only solution to the TV muddle. He would also settle for “rational bundles.”

A high stakes bet

Aereo’s disruptive potential lies in the fact that, unlike other forms of pay TV, subscribers can add or drop it without the hassle of set-top boxes or contracts. For now, Aereo is available only in New York City but is about to roll out to 22 new markets across the country for the same price of $1 a day or $8 a month to watch and record shows. Kanojia believes this will change people’s conception of how we get access to television.

“You can come in five or ten times a year and a pay a dollar. We have lots of habitual one dollar buyers. It’s a massive dent in the psyche.”

For Aereo to have a long-term impact, though, it will still have to survive an ongoing legal gauntlet. On this front, it has a decent chance because investors and lawyers designed the company as a high-stakes bet, counting on a 2008 appeals court ruling that said private remote DVRs don’t violate copyright (you can read the legal details here). After broadcasters sued it last year, Aereo won the first round and the case is now on appeal.

The price tag for the loser will be high. On one hand, media mogul Barry Diller and others have put at least $58 million into Aereo, money that could evaporate if Aereo is shut down. On the other hand, GigaOM Pro analyst Paul Sweeting (who has written about Aereo) said the initial court decision was a “disaster” for the networks and that a loss at the appeal level will open the floodgates.

“If the networks don’t win, what it means is that all you have to do is bounce a signal off a cloud-based DVR and you can do what you want,” said Sweeting by phone.

Whatever the outcome of the court case (which could go to the Supreme Court if courts in New York and California continue to disagree), Kanojia thinks he will have made an inexorable dent in the current tv structure. He also thinks the litigation will help other pioneering TV companies.

“The legal situation is unfortunate, but it forces clarity and that’s a good thing.”

Media attention to the service has focused primarily on the legal dispute between Aereo and TV broadcasters who have tried, and so far failed, to shut it down. The legal controversy is real but also overshadows the implications of the service for TV viewing and the technological wizardry that makes Aereo work. (Aereo founder and CEO Chet Kanojia will be speaking at our paidContent Live event in April.)

To get a better idea of just how Aereo is serving up TV, we went to the company’s plant in Brooklyn to get some up-close photos. Here’s our tour:

From the Empire State Building to your iPhone

Aereo transmits from the top floor of a nondescript government building on Vanderbilt Avenue on the edge of downtown Brooklyn. You can see it on the right: 

Aereo chose this location for a reason. The floor on which it operates has a direct line of sight to the city’s biggest transmission tower. Here’s a picture of the tower and the view from Aereo’s window:

These direct sight lines make it easy for Aereo to pick up the powerful signals emitted from over-the-air broadcast services like ABC, NBC, CBS, Fox and local community stations. Aereo’s technology then transcodes and relays those signals to its customers who can watch TV, change channels and record shows with their phones or iPads:

Tiny antennas for everyone in the city

Aereo works by letting every subscriber rent a pair of tiny antennas. Customers get two antennas so that they can watch live TV while also recording a show or, alternately, to watch live TV on two different devices at the same time. While Aereo created the personal antenna system as a way to comply with copyright rules (you can read about the legal issues here), the antennas themselves are remarkable in that they give Aereo the capacity to serve 1 million New York City customers from the single floor in Brooklyn and an adjoining rooftop.

Here’s a close up look of the dime-sized antennas in action:

Aereo CEO Chet Kanojia explained that the device is a simple copper antenna but that, rather than picking up the entire TV spectrum like a typical cable antenna, it picks up only the 6 megahertz block of spectrum that a viewer wants to see at a given time. He describes it as a “switched antenna” that’s beautiful in its simplicity. The ingenuity, Kanojia said, is that Aereo’s 1.5 inch antenna changes its electrical and magnetic characteristics in order to replicate the tasks of a standard 35 inch UFH or three foot VHF antenna.

The size of the antenna allows Aereo to cram many of them into a small space which is one reason Aereo is able to relay TV to so many people at the same time. Another reason is that the antennas are “multitenant” which means that, when one Aereo subscriber is not using an antenna at a given time, it is available to all other subscribers.

Cheap storage and high-performance fiber

Aereo relies on the antenna system to offer a cheap TV services that subscribers can easily add or drop at any time. But the antenna is only part of the equation. To make the service economically viable, Aereo is also capitalizing on major advances in transcoding technology and cloud storage. It is these advances that now make it affordable for Aereo to translate the over-the-air TV signals into iPhone video streams and to let people store hours of television on remote servers.

According to Kanojia, commercial transcoding costs per stream would have been $8,000 per customer two years ago but now the company can do it for under $20 (these figures relate to capital expenditures, not monthly costs). He also notes that a terabyte of storage, which once cost over $1 million, can now be had for under $100. The new efficiency, he said, is not just in raw storage capacity but better spindle speeds on hard drives that improve transmission times.

Here is a look at Kanojia standing in front of Aereo’s proprietary transcoding devices and a close-up of the servers which act as a private cloud service and on which Aereo customers store thousands of hours of TV to watch later:

To connect the antenna system with the transcoding and recording devices, Aereo relies on multiple 10 gigabit fiber links that look like this:

Aereo also relies on leased fiber networks in different spots around New York City to deliver TV content to its subscribers. This system means it doesn’t have to rely on content delivery networks or other middlemen.

“What’s the point of long-hauling something when you’re already 80 percent there?. There’s no CDN’s. It’s a local to local product,” said Kanojia.

Next: the man who would break the cable industry

Aereo wants to overturn the current TV business model in which viewers shell a hundred dollars for a bundle of channels, many of which they don’t want to watch. Aereo’s challenge comes by way of its technology but also in the form of Kanojia himself, who is picking a fight that many have lost before (iCravetv, ivi, etc) — and is so far holding his own. You can now read our follow-up account of Kanojia’s vision for the future of television.

Diller, who used to run Paramount and Fox, filed a complaint this week against BarryDriller.com, a new service that offers TV-on-the-go to west coast markets. The complaint notes Diller’s fame based on works like Raiders of the Lost Ark and Grease, and accuses BarryDriller of cyber-squatting, trademark infringement and stepping on Diller’s right to publicity. Diller had initially joked about BarryDriller, telling the Wall Street Journal, “I had hoped that if they steal my name they’d do it for something more provocative.”

Diller’s suit comes on the heels of a Fox lawsuit that says BarryDriller infringes the copyright for shows like The Simpsons and Glee. BarryDriller is run by David Alki, who launched the short-lived FilmON, a TV streaming service that the entertainment industry smothered in 2010. He appears to have named the new venture BarryDriller in an effort to generate publicity and, possibly, to stick a finger in the eye of Diller.

While Fox may be on the same side as Diller against BarryDriller, it is also part of a major effort by broadcasters to shut down his Aereo business, which offers TV and DVR services for around $12 per month. Fox and other broadcasters say Aereo, like BarryDriller, infringes copyright though they have failed so far to win an injunction.

Technology advances lead to legal pile-up

New technology and changing notions of TV is what lies at the heart of the legal pile-up. Specifically, Diller’s Aereo has been relying on a legal loophole that says one-to-one transmission is not broadcasting and therefore shouldn’t be considered copyright infringement. To make the argument hold up, Aereo points to a novel technology that gives every subscriber a dime-size antenna. Each antenna relays a personalized stream of over-the-air TV signals to subscribers’ iPhones.

Aereo also says its service is the legal equivalent of remote DVR recording technology, which courts have said doesn’t infringe copyright. But the broadcasters disagree, and claim Aereo is hiding behind a technicality. They says the “one antenna one user” theory doesn’t change the fact that Aereo is retransmitting shows without permission.

The dispute is about law, but also about money of course. The broadcasters recently won a drawn-out battle to force cable companies to pay them for retransmitting their shows and now, one suspects, they want Aereo to pay too. Diller, for now, says Aereo has no obligation to pay. BarryDriller’s Alki, on the other hand, has offered to pay retransmission fees.

If they build it, will anyone watch?

The legal snafus that have greeted new services like Aereo and FilmOn are part of a long-running pattern in which incumbent broadcasting interests want to control platforms against new disrupters.

In this case, however, copyright and copycats like BarryDriller may not be Aereo’s biggest problem. Instead, there is a question of whether the service will be viable from a business perspective. Aereo, which for now is only available in New York, is experimenting with new pricing incentives to get people to try the service but for now its prospects look uncertain at best.

Dan Rayburn, an analyst with Frost & Sullivan, recently told the LA Times that Aereo was “dead in the water for multiple reasons” even if it can win its court challenge.

Part of Aereo’s problem may be that there simply may not be that many situations where people want to pay to watch broadcast TV on a mobile device.

Here’s the legal complaint, which asks the defendant to hand over the BarryDriller.com name and to pay damages to Diller:

(Ed note: an earlier headline suggested it was Aereo who filed the suit. It is Barry Diller who is suing).

Diller v BarryDriller