South by Southwest (SXSW): Aereo vs. the Cable Bundle

To me, the most tantalizing thing about Aereo — the startup, backed by Barry Diller’s IAC, which let you watch live and time-shifted broadcast TV over the Internet on a TV or iOS device — isn’t the fact that the big TV networks are suing it. Nor is it the company’s technology, which involves pulling in TV signals using arrays of dime-sized microantennae on the roofs of data centers, with each antenna delivering broadcasts across the Net to a particular Aereo subscriber.

No, I’m most intrigued by the way Aereo CEO Chet Kanojia keeps predicting that Aereo and services like it will help bring on the demise of the cable bundle, which has so many of us paying well over $100 a month for vast quantities of channels we’ll never, ever watch.

To pick a self-referential metaphor, it’s as if you had to subscribe to an entire newsstand’s worth of magazines simply to get TIME delivered to your home. If that business model ever gives way to a more à la carte approach, I’ll be thrilled.

At South by Southwest Interactive in Austin, I checked in with Kanojia to talk about Aereo and the future of TV. I started by asking him when his service, currently available only in parts of New York, New Jersey and Connecticut, might reach my home in the Bay Area so I could try it out for myself; he chuckled and said that he hopes it might happen in the first half of this year — but for now, the company is focusing on the 22 cities it plans to add by the spring, none of which are on the West Coast.

So far, according to Kanojia, half of Aereo subscribers are cable subscribers, most often using the service on their second or third TV sets. (You can watch it on TV via a Roku box, or by using an iOS device with AirPlay.) The other half don’t have cable at all — in many cases they “got to their mid-20s without ever having made the leap.”

But by itself, Aereo is far from a comprehensive cable TV replacement: all it offers are local broadcast stations and the Bloomberg TV business channel. Subscribers, he says, use the service along with other sources of content, such as Netflix: “The gap we can’t fill is ESPN, obviously, but even pay channel stuff is showing up on iTunes eventually.”

Aereo is far cheaper than even the most basic of basic cable: it has offerings ranging from a free hour-a-day option to an $80 annual plan. But since it also offers far less stuff than cable, how could it help lead to the end of pricey cable bundles, a fact of TV life for decades? Kanojia says that several factors are at play.

For one thing, he says, the high-speed broadband which Aereo uses to distribute its service is inherently threatening to cable’s current business model, in which cable companies pay the proprietors of channels a fee for each subscriber. Until now, that approach has been irresistible to cable networks: “I’m getting paid for 100 million homes, even though only 500,000 people are watching. What’s my incentive to change? They’re not driven by consumer-centric behavior, they’re being driven by finances.”

“Like all things, they find a good formula and milk it,” he says. But Kanojia has “a completely made-up theory that when we reach ten times the bandwidth needed to move a medium, alternatives emerge.” The 15-to-20-Mbps broadband which is common today provides far more capacity than Aereo and other pay-TV upstarts need to provide a smooth experience.

Moreover, he argues, there’s a lot of pent-up resistance to cable bundles among consumers who haven’t had viable alternatives until now. He says that many people don’t really need or want hundreds of channels: “I don’t have enough mental bandwidth to think about fifty shows. I have five shows. And I don’t think I’m alone.”

Between Aereo and other services such as Netflix, Kanojia says, some people will be able to get their five shows without paying for cable. And Aereo may judiciously add other cable channels beyond Bloomberg TV to increase the chances that it can cover all of a TV watcher’s needs. It doesn’t want to end up replicating current cable bundles, “but if there was an opportunity to consider very intelligent packages, that would be useful to consumers, we’d do it.”

Even without disruptive competition such as Aereo, he contends, cable bundles as we’ve known them might collapse, in part because the only way cable companies can pay for expensive sports content is by raising prices or cutting back elsewhere. “The rising cost of sports is going to put pressure on everyone else. Seven, eight, ten-percent rate increases aren’t sustainable. I don’t see how non-sports, non-must-haves survive.”

Compared to the giant cable and satelite providers, Aereo’s costs are low — in part because it isn’t paying the companies whose content it’s redistributing, which is what spurred ABC, CBS, FOX, NBC, PBS and Univision to sue. (Aereo contends that consumers have a legal right to pull in TV over an antenna — even if that antenna is located on the roof of one of the company’s data centers.) “We can get ten thousand or twenty thousand users in a city and have an immensely profitable business,” Kanojia told me, though he also said he expects to have far more than that.

That’s assuming, of course, that the courts agree with Aereo’s interpretation of copyright law rather than that of the TV networks who’ve filed suit. I felt obligated to ask Kajnojia about the case, even though I knew he probably couldn’t say anything terribly specific about it.

He didn’t: “We just don’t know — it’s ongoing, it’s active. We wouldn’t be doing this if we didn’t like our chances. That’s all we know.” Here’s hoping that it survives — and that the future of TV bears at least some resemblance to the consumer-friendly panacea which Kanojia predicts is on its way.