The Company That Wants to Drag TV Into the Future

Source: AllAereo | YouTube

The television industry has never been one to warmly embrace change. Just ask the pioneers of the VCR and DVR business.

But as America becomes a country of second (and sometimes third) screens, broadcasters, cable and satellite companies are being forced to rethink how they interact with customers. With so much competition for people's time and attention, good programming is no longer enough to turn heads.

Dish Network and startup Aereo have differing ideas about how to improve the model – and both companies are dedicated to following them. But to move the industry into their visions of the future, they're going to have to drag it kicking and screaming.

Both companies hope to shift the paradigm of the traditional television model – and both are facing massive legal challenges in the process.

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Dish's battles are the most public. The company's introduction last year of the Hopper DVR, which came with the controversial (to networks) and praised (by consumers) AutoHop feature (allowing viewers to automatically skip commercials on select recorded programming). The company's addition of its "Sling" technology to the Hopper this year -- letting viewers watch live television on their smartphone or tablet -- has only escalated the rhetoric on both sides.

Fox, CBS and NBC (the parent network of CNBC) have sued Dish for copyright infringement and breach of contract over the AutoHop feature– saying it "will ultimately destroy the advertiser-supported ecosystem" the networks depend on for revenue. Dish has counter-sued all of the major broadcast networks, seeking a judgment that the service doesn't violate network copyrights or contracts. (Last November, a U.S. District judge refused to issue an injunction to shut down AutoHop.)

"We see the advertising model changing," said Charles Ergan, Dish co-founder and chairman in a recent conference call. "With the advent of the Internet and the way you can target commercials, we think we can't, as an industry … put our head in the sand to that. … All models of DVRs [and] all pay-TV providers skip commercials. Customers skip commercials. We can't ignore that fact."

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Legal issues aside, viewers seem to be responding. In 2011, Dish lost 166,000 subscribers. Last year, it added 89,000, giving it a year-over-year improvement of 255,000 customers.

"We think it's essential from a long term viability standpoint that we continue to innovate," said Dave Shull, senior vice president of programming and content acquisition. "And there are some risks with that, but we think they're worth it."

Some of the other advances the Hopper promotes have already forced changes at competitors. Late last year, DirecTV introduced a new DVR – dubbed the Genie – that boosted the number of simultaneous high definition recordings, boosted storage space and offered a whole-home DVR option. (All of which are Hopper features as well.)

Comcast, meanwhile, is in the process of rolling out its X1 set-top box, which lets viewers transfer select TV shows and movies to a mobile device for offline viewing. The company is also boosting the size of the hard drives in some DVRs.

Aereo, similarly, is hoping to mobilize television, but is going about it in a different manner. The company, whose backers include media mogul Barry Diller, lets people watch live over-the-air TV online and on their smartphones – without the need for a subscription. (Those wishing to pay a monthly charge, though, can record programs for later viewing.)

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Technologically, Aereo has set up several large antenna arrays in Brooklyn, each filled with thousands of mini-TV antennas (which fit on the tip of the finger). Each of those arrays can receive local over-the-air TV broadcasts. Aereo users are individually assigned their own individual mini-antenna.

Last July, Aereo scored a key victory when a federal judge refused to block the service at the request of NBC, ABC, CBS, PBS, Fox and other content providers. (The decision is being appealed.)

While Aereo is confined to the New York City area now, it has plans to expand to 22 cities – including Atlanta, Washington, and Denver -- by the end of 2013, having just gained an additional $38 million in funding.

Watching live TV on a mobile device might sound odd to some, but it aligns with changing consumer behavior for the 18-to-30-year old crowd, says P.J. McNealy of Digital World Research.

Because TV manufacturers failed to take advantage of the Internet and mobile fields early on, the door has openedc for competitors – and moves by businesses like Dish and Aereo are likely to continue to push other cable and satellite companies to change their relationship with customers, no matter how much it upsets content providers.

"Because consumers today are now familiar with being able to communicate, socialize, consume, purchase or entertain with devices such as phones or tablets, the pole position of the TV as the center of a consumers' entertainment world has diminished," said McNealy.

"While the TV and consumer electronics industry has tried to move into the digital world, the mobile world has taken advantage of the transition of analog to digital to move entertainment out of the living room and onto alternate devices."