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An idea that could have made Aereo a winner

Aereo's CEO said the company had no Plan B if the Supreme Court decided against it, and when that fate was determined by the court on Wednesday in a 6–3 decision, Aereo backer Barry Diller of IAC sounded the death knell shortly thereafter, telling CNBC, "We did try, but now it's over."

A lot has been made of Aereo's disruptive potential, but Aereo's business model was always "dead" as far as its potential to upset the world order.

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Aereo did have an entry wedge: It provided a service to people disenchanted with incumbents and the cable bundle. This niche has grown from being nonexistent in 2010 to 5 percent of households in 2013.

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The industry had an entry barrier: The cable companies made substantial infrastructure investments in network and service that Aereo would never have been able to duplicate.

Aereo also made an end-run around the infrastructure investments by capturing free broadcast transmissions and using the Internet to retransmit them.

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But Aereo's end-run was never going to disrupt the cable firms, because it would not require a new investment that cable providers must make to match Aereo's offering. Aereo's service only worked for households with broadband connections—which are provided by the cable providers! In addition, the cable providers have the broadcast programming. Thus, Aereo's innovation reinforced the world order.

Aereo's real dent in the status quo affected networks. Not through lost advertising revenue—while Aereo viewers can fast-forward through commercials when watching delayed programming, viewers can do this with recorded cable as well. For live programming, they have to wait through the commercials just as they do for cable. So networks get the same advertising revenue per viewer for cable or Aereo. Better still, Aereo increases total advertising revenue because it brings back viewers who cut the cable cord.

"Currently, low-income households (less than $30,000 annual income) have 80 percent cable penetration yet only 40 percent broadband penetration. This seems absurd, since Internet is substantially less expensive than cable, and the complementary technologies for each service—a television for cable, and a personal computer for Internet—have comparable prices." -Anne Marie Knott, professor of strategy, Washington University Olin School of Business

Aereo's threat to the networks lay elsewhere: If the Court had ruled Aereo wasn't violating copyright, the networks would have no basis for charging retransmission fees to cable providers. These fees have reached $4.3 billion annually and are expected to reach near-$8 billion by 2019, according to SNL Kagan. That is a significant revenue source, and the broadcaster stocks rallied immediately after the ruling.

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The interesting question is whether the cable providers would have waged a battle against Aereo if the ruling had gone the other way. Aereo wasn't really applying price pressure. The price for basic cable (roughly $50) is actually below Aereo's "bundle" price ($8 to $12 for its service plus the roughly $50 fee for a broadband connection). This lack of price pressure explains why it was a battle over network fees in ABC vs. Aereo rather than a battle over a truly disruptive innovation.

The Supreme Court decision specifically cites Aereo's "overwhelming likeness" to cable TV in reaching its decision. The majority wrote of Aereo's technology and its ability to reroute the broadcast signal through the Internet: "We do not see how this single difference, invisible to subscriber and broadcaster alike, could transform a system that is for all practical purposes a traditional cable system."

Poor man's bundle—Aereo's missed opportunity

Departing from Diller's dire response about the company's future, Aereo's CEO said after the Supreme Court ruling that the company was disappointed in the outcome but that its work was not done.

Here's where I think Aereo should have focused its work from the get-go if it wanted a better chance of success with regulators, and on behalf of making a real difference with consumers.

I think Aereo had a better case to be built around a social issue: lack of Internet penetration in rural areas and small cities across the U.S. For all the attention that Aereo's TV service received, Americans still pay for cable TV. It's broadband that many households are still willing to go without.

Aereo could have tried to create a service that bundled broadband with TV at a price comparable to basic cable. While this would likely have no appeal for affluent customers who already have broadband—Aereo's only customer base—it could have offered a solution to the digital divide. Currently, low-income households (less than $30,000 annual income) have 80 percent cable penetration yet only 40 percent broadband penetration. This seems absurd, since Internet is substantially less expensive than cable, and the complementary technologies for each service—a television for cable, and a personal computer for Internet—have comparable prices.

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Aereo is potentially more attractive than basic cable or antenna to these households because it can capture broadcast programming from cities with the most stations (Los Angeles, for example, has 80 broadcast channels). Thus, people who favored cable because the alternative was a limited number of local channels may find Aereo more attractive than both. After all, the average household only watches 17.5 of the 189 channels it receives. If so, then an Aereo bundle may force the penetration rate of Internet among low-income households to match the rate of cable penetration.

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It was feasible the cable providers might even have partnered with Aereo because their revenues for basic cable are comparable to those for broadband. There is no way to know, but maybe the Supreme Court and other branches of government could be influenced by a socially appealing argument in favor of the technology's diffusion.

Justice Scalia said in a dissent from the majority opinion—in which he argued that Aereo's business shouldn't be allowed but the court was making new law rather than applying existing law in its ruling, "It may well be that Congress will take a fresh look at this new technology, just as it so often has examined other innovations in the past."

In ruling against Aereo's technology, the majority said it would not prevent the introduction of new technologies: "We agree that Congress, while intending the Transmit Clause [of the Copyright Act] to apply broadly to cable companies and their equivalents, did not intend to discourage or to control the emergence or use of different kinds of technologies. But we do not believe that our limited holding today will have that effect."

If Aereo built a business model around the digital divide, it still wouldn't be a major disruption of the status quo. But it would have been a nice example of an entrant forcing the market to satisfy a disenfranchised niche and maybe could have helped to solve a broader social issue as well.

By Anne Marie Knott, professor of strategy, Washington University Olin School of Business

Disclosure: CNBC's parent company, NBCUniversal, is among the broadcasting and cable companies that opposed Aereo on copyright claims before the Supreme Court.

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