Aereo is a mouse of a company, but it’s frightening a lot of Big Media elephants. After launching in New York nearly a year ago, the service — which streams broadcasters’ over-the-air signals to subscribers who typically pay $8 a month — just announced an ambitious plan to expand to 22 additional cities this year with $38M in Series B funding led by Barry Diller’s IAC and Highland Capital Partners. It’s also beginning to move beyond broadcast: Founder and CEO Chet Kanojia is talking to pay TV channels and Hollywood studios about contributing to Aereo’s programming.
That worries virtually every major broadcaster: Networks and stations don’t receive a dime from Aereo and have sued, alleging that it violates their copyrights. If Aereo wins, then pay TV providers may be emboldened to reject broadcasters’ demands for rising retransmission consent fees — one of the fastest growing sources of revenues for station owners including ABC, CBS, Fox, and NBC. Aereo says that it’s perfectly legal to lease over-the-air antennas and add DVR-like capabilities to record shows, fast-forward and rewind.
I caught up with Kanojia last week at the International CES show in Las Vegas. Here’s our conversation, edited for length and clarity:
DEADLINE: You’re adding 22 cities this year. Is that it for now?
CHET KANOJIA: That’s Phase 1. That’ll hopefully keep us busy through the summer.
DEADLINE: And then?
KANOJIA: Then we’ll do more. We hope to do all the major markets as soon as we can. I think of 2013 and 2014 as build years for us. A lot of infrastructure build-out, get the customer adoption going, get the message right. That gives us a base to move to the next level. The next level may include digital programming, new channels, and who knows what.
DEADLINE: New channels, such as what?
KANOJIA: There is a lot of interest in bringing in content for cord-nevers. [People who never subscribe to pay TV.] There’s a substantial number of them. The median age for [new] cable subscriptions is, what, 29? It used to be 21, 22. All of that household formation along with the modest cord cutting that’s going on, that’s a fairly substantial base of people.
DEADLINE: What kind of programming would appeal to them?
KANOJIA: We don’t need to create another library. I think of what’s attractive on the Internet: news and certain categories. There’s interesting international programming that’s going to come in.
DEADLINE: Are there any deals that you’re working on and can tell me about?
KANOJIA: Nothing at the moment, no.
DEADLINE: How much nonbroadcast television will make its way onto Aereo?
KANOJIA: One already happened: Bloomberg TV. As we expand, it will be in every city. News is an important category. You start thinking about usage. You’ve got people in their offices, they used to have CNBC on television and the volume used to be cut off. Now you’ve got Aereo windows with Bloomberg running, a personalized thing. And I think movies make a lot of sense. We design products by personal conviction more than anything else, and I find libraries to be immensely frustrating. You just want to stumble onto things. This is why TBS and things like that have ratings.
DEADLINE: How have the studios responded to you?
KANOJIA: They have vast libraries sitting. The DVD business has pretty much evaporated. They have a desire to monetize.
DEADLINE: You’re considering linear, subscription movie channels. Why do they appeal to you?
KANOJIA: Even if you have a cable subscription, it’s so dammed clunky. We have a lot of households looking in and saying, well, for a second outlet or third outlet I can have Aereo instead of buying cable with a DVR and another cable box.
DEADLINE: Are there any lessons technologically that you’ve learned from your rollout in New York?
KANOJIA: Capacity management is an interesting challenge for us. That’s one of the reasons we’ve been so aggressive. For example, during Hurricane Sandy we got a tremendous amount of utilization. Cable was out and Aereo was the only (thing) you could get in New York for three or four days straight. Aereo was only out for four hours, not because we had a failure but because there was a connection failure in Manhattan. So that taught us a lot about how to manage capacity. We are beginning to understand how DVR utilization is performing. We’ve added some features that make it convenient for people to manage the recordings.
DEADLINE: You just received your series B funding. Will that set you up to expand in all of the 22 cities you just announced?
KANOJIA: That was the purpose of the additional financing. Expansion capital and start marketing. It will be very important. There’s a lot of strong word-of-mouth growth and we’ve been very happy. The thing that we pay attention to mostly right now is engagement, frequency of use, how long, consistency of use – those numbers are off the charts. Three-quarters of Aereo’s member base uses it every week, 3 to 5 shows. That’s people who have pay TV and people who don’t have pay TV.
DEADLINE: Three to five shows doesn’t sound like very much to me.
KANOJIA: For a web service? That’s great. I personally follow two or three shows. And if I can find something that enables me to follow those two or three shows at my convenience and just costs me $8 a month? Problem solved.
DEADLINE: All of this could come crashing down if you lose the lawsuits.
KANOJIA: You don’t start something like this because you’re sort of confident. You start something like this when you’re absolutely convinced with your own money, your own time, your own life, your own reputation — everything into it. Not just me; me and everybody else. We have that conviction. The future hasn’t been written.
DEADLINE: There’s a school of thought that if you win then broadcasters could get around Aereo by abandoning their stations and becoming cable channels.
KANOJIA: That was brought up during the digital transition. There was massive pushback to the idea. The public largess that’s been showered on them [from free use of the airwaves] comes with responsibility for programming in the public interest. And the idea that they would abandon that completely? I don’t see any lawmaker liking that. You’re basically saying the consumer doesn’t have access to all of the stuff that was built on the back of the public airwaves.
DEADLINE: They could go to FCC Chairman Julius Genachowski and say, “You want spectrum for wireless broadband? Here’s some for you to auction away. We’ll take some of the proceeds and we’ll be on cable and still reach maybe 80% of the market.”
KANOJIA: I’m not concerned. There’s a public expectation and a government expectation that programming should be free and available to consumers. If they don’t then someone else will emerge.… There’s a commercial aspect to this as well. Let’s say you moved all of this [broadcast programming] over to basic cable. Now basic cable rates, which are already onerous, would cost even more. All of the smaller networks that are there are going to get axed – which is already beginning to happen. And a segment of the population is going to say, I can’t afford a $200 month bill. You can’t treat it as an ever increasing source of profits off the consumer’s back. Aereo is, we believe, the first credible alternative that is going to force the issue of rational pricing and disaggregation.
DEADLINE: Why do you consider pay TV pricing to be irrational?
KANOJIA: If you try calling up a cable company and say, “I just want basic HD only,” the price would be about $85. You’d have to be part of basic digital of some sort. This coupling is purely artificial. There is no logic or reason from the consumer’s perspective. Finally now technology is catching up. Consumers didn’t vote and say, you go bet the farm (on programming) to 2025 and lock up the price.
DEADLINE: There’s a school of thought that if Aereo is successful then it will give cable operators leverage to tell broadcasters to forget their retransmission fees.
KANOJIA: I don’t see that happening. They’re all part of families. ABC has ESPN. There’s all this intermingled stuff. Our belief is that that’s not what the future is. The future is a very skinny live offering, and deep libraries.
DEADLINE: How many subscribers do you have?
KANOJIA: We haven’t discussed subscriber numbers yet. The speculation that’s been out there [a few thousand] is way off. But 50% of our sub-base is cord-nevers.
DEADLINE: Tell me who your customers are.
KANOJIA: They tend to be young, 37 and under – maybe stretch it to 40 and under. Digitally savvy, mostly professionals. There are some artificial things here because we’ve never marketed the product and I suspect most of our customers read TechCrunch or some other publication. For all we know they could be all lawyers. They tend to have other sources of content – Netflix, Hulu, Amazon Prime. The idea that the company enables them to pick and choose is very empowering. We get letters and checks mailed to us from all over the place including cities that we’re not in. They put an advance payment in to support the cause. That’s how passionate the base is. And I’m telling you, it’s not 50 people. It’s not 2,000 people. There are hundreds of thousands of people that are vocally passionate.
DEADLINE: While broadcasters challenge Aereo, they’re also suing Dish Network for marketing its Hopper with Sling DVR which can jump past ads on recorded shows and stream any of the programming that subscribers receive at home. What do you think of that product?
KANOJIA: I think it’s a great idea. There are some physical challenges: Most broadband networks are asymmetrical, the uplink is a lot slower than the downlink. So it’s hard for you to be able to get HD anywhere… But the fundamental idea of saying to the consumer, look, you’ve already paid for it. That makes total sense.
DEADLINE: Do you have a position on Dish’s dispute with broadcasters and the right of consumers to automatically skip over ads?
KANOJIA: I don’t. I do firmly believe this: The industry has not innovated in advertising. Why on earth do I have to watch 17 ads about 10-ton trucks when Lord knows I’m never buying a 10-ton truck? I’m sure it’s a fine truck. I just don’t need one. It’s time for some innovation. We like buying things. We like advertising – during the Super Bowl people love the commercials. Just make them relevant. Do something. That’s the frustration that consumers have that the Dish guys are addressing. They’re not anti-commercials. At least that’s my view.
DEADLINE: Broadcasters say that your business is built around the law, not around being an efficient service. The idea of having individual antennas is about getting around a very specific court ruling.
KANOJIA: When I started this there was a very simple idea which was, look, I can have my own antenna and so can you. There’s nothing that says a man can’t be in the business of providing real estate and location for everybody’s antennas. So we said if we do this, and we can do it right, there’s a great benefit that’s compliant with how the law’s written. I view that as compliance, not avoidance. You can’t penalize us for complying.
DEADLINE: Ideally you wouldn’t have an antenna for every household. That’s inefficient.
KANOJIA: But that’s the law. If they change the law, we’d be happy to change the technology to match. That’s how we look at it.
DEADLINE: So you found a loophole.
KANOJIA: How can that be a loophole? Every consumer having an antenna is not a loophole. That’s the design of the law. I can put up an antenna and so can you. Just because somebody comes along and says that technologically there’s a better way to solve the problem with a centralized infrastructure – by the way, it consumes a lot of power to do it that way. Our power consumption is 1/10 of what it would be if you were to do it in a set top box. And the cost is dramatically lower. At $8 a month we’re making money while giving you a cloud-based DVR that works on every device. Let me see any cable company match that. I would argue that the way we’ve done it is far more efficient. There are power savings, cost savings, all kinds of things.
DEADLINE: When you say you’re making money, can you give me any idea what your margins are?
KANOJIA: I can’t, sorry.
DEADLINE: You’ve said that Aereo’s going to serve more devices, including those that run Android. What’s next?
KANOJIA: We’re going to announce some things about low-cost set-top boxes that you can run Aereo on. We’re not building the boxes; we’re basically building applications for boxes and game consoles.
DEADLINE: How involved is Barry Diller in your day-to-day operations?
KANOJIA: He’s obviously an investor — a great adviser. He’s on the board. Tremendously helpful. Very actively involved.
DEADLINE: How often do you talk to him?
KANOJIA: It depends what’s going on. It could be once a week.