Is Aereo a thrifty pay-TV option or a fix in search of a problem?

Armed with almost $40 million in new financing and feeling optimistic about upcoming legal battles, Aereo, a new television distribution service that media mogul Barry Diller is backing, is planning a major expansion.

Currently available only in New York City, Aereo said earlier this week that it is going to launch in 22 cities this year including Boston, Chicago, Philadelphia and Washington, D.C., which will give the service access to about 100 million potential customers. It hopes to start up in Los Angeles in late 2013.


Aereo transmits signals of local broadcast stations via the Internet to smartphones, tablets and Internet-friendly television sets. Aereo costs $8 a month or $80 a year for a tiny antenna that receives the signals and a cloud-based digital video recorder that can hold up to 40 hours of shows.

As broadcasters including CBS, Fox and NBC sue to try to stop Aereo from retransmitting their signals without permission or paying for it, some media analysts are not sure there is a market for Aereo even if it emerges victorious in its legal fight.


“Aereo announces more funding for a service no one really wants,” wrote Frost & Sullivan analyst Dan Rayburn in a recent report.

Rayburn’s concerns are that there is not a demand for a service with such small offerings and that the cost of marketing and promoting Aereo will overwhelm its resources.

“Consumers are not looking for a service that only gives you eight channels,” Rayburn said in an interview, adding, "$38 million is a drop in the bucket to get into this business.”

Sanford C. Bernstein analyst Todd Juenger also isn’t sold on Aereo.


“I have never fully understood the consumer proposition,” Juenger said. “For people who are cost-conscious, why not just buy an antenna and get broadcast for free. ... Is it worth $8 per month just to have mobile access and some sort of cloud DVR function?”

While Aereo’s big pitch is broadcast stations, it is trying to get cable channels, too, and has struck a deal to carry the business news channel Bloomberg TV. But since the parent companies of NBC, CBS, Fox and ABC also own some of the most popular cable channels, it is unlikely that Aereo will really compete head-to-head with established pay-TV providers.

Aereo has been called a “disruptor” by some media analysts, a phrase chief executive Chet Kanojia regrets.

“I don’t start something to be a disruptor; I am going after a consumer segment that is currently underserved,” Kanojia said in an interview. 


Kanojia said he thinks consumers under the age of 30 who are not heavy media consumers but want access to broadcast channels for sports and big events will jump at the Aereo option. He also bets that heavy media consumers will like Aereo’s DVR capacity.

“We can get 5% to 6% of the market,” Kanojia said referring to the nation’s roughly 100 million pay-TV homes.

Aereo has been up and running in New York since last spring, but the company hasn’t disclosed subscriber numbers. Word emerged in its legal battle that at one point 3,500 people had signed up for trial subscriptions. Kanojia acknowledged that “the next step is to build general awareness.”

Analyst Rich Greenfield of BTIG is a big believer in Aereo’s appeal, particularly to young and frugal consumers who don’t want to spend close to $100 for cable TV.

“I think the product will sell itself for the under-35 set,” Greenfield said. “Could you imagine when they launch in a college town like Boston?”

Kanjoia said he doesn’t think about what would happen should the broadcasters prevail in court against Aereo.  “The technology has tremendous value,” he said.


Barry Diller likes being the disruptor

Aereo wins first legal battle against broadcasters

Cablevision takes side of broadcasters in Aereo fight

Follow Joe Flint on Twitter @JBFlint.

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