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Barry Diller, Broadcast TV Killer?

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It's funny to think that Barry Diller, one of the chief architects of the current network TV structure, might turn out to be a key figure tearing it down. Diller's InterActiveCorp. (NASDAQ: IACI) was the lead company in a $20.5 million round of financing for a startup called Aereo, a company that will soon offer a way for its subscribers to get broadcast TV on the cheap.

Aereo's service, the company says, brings HD-quality video feeds from 20 or so TV stations to any web-enabled device via a small antenna the size of a dime. The package includes all major broadcast networks plus PBS and local channels, in addition to a cloud-based digital video recorder that can hold up to 40 hours of programming. But don't expect to get HBO or your favorite Pay Per View event for pennies; Aereo's monthly subscription fee of $12 only buys the channels that have traditionally broadcast for free.

So, outside of the DVR feature, why pay for the service at all? Because these days, most Americans get even their "free" TV as part of a costly package from their cable or satellite operator. Even "basic cable" offerings can easily cost over $100 per month. As it's often one of the top household expenses, it's a ripe candidate to be axed when savings need to be made. Thanks to services like Netflix (NASDAQ: NFLX), users can get many of the choice cable TV offerings online without having to wade through a lot of programming they don't want. Web movie/TV providers are also a heck of a lot cheaper: Netflix runs at about $20 per month for a very broad slate of film and television shows, and a user doesn't have to wait until a particular time or make sure their DVR is properly set in order to catch a program.

The major networks still broadcast over the air, so in theory all a user has to do to get those free channels is grab an antenna and hook it up to the TV like in the good old days. But who wants to monkey around with such clumsy equipment? Aereo's antenna is a tiny thing; the days of high-risk visits to the roof in order to plant a big metal stake on the house are over.

Aereo's main challenge in offering its service won't be the technology or the lack of premium channel content. It'll be the inevitable lawsuits from broadcasters and cable providers who stand to lose a lot if the service becomes popular. For the former, a new and lucrative source of revenue has been "retransmission" fees -- the monies they charge for cable and satellite operators to carry their channels. Consulting firm SNL Kagan estimates that the big four free TV networks plus smaller player CW and top Spanish-language broadcaster Univision collectively stand to rake in around $3 billion annually from such charges in the near future.

One of the most retransmission fee-hungry broadcasters is, ironically, the one Diller helped create -- News Corporation's (NASDAQ: NWS) Fox. SNL Kagan assumes that Fox will pull in nearly $300 million for 2011 retransmission charges, and that's just the start of the party. That number is estimated to grow much fatter, to $900 million by 2015.

Like the broadcasters, the cable and satellite providers will also feel threatened if Aereo becomes popular. If they're paying hundreds of millions of dollars to carry Fox and ABC and Univision, they'll figure, why should an upstart get the same deal for nothing? One company in particular that would have a serious beef with the startup is Comcast (NASDAQ: CMCSA). The firm is both a broadcaster and a provider, as it owns the bare majority of NBC and is simultaneously the largest cable company in the country. CMCSA has produced excellent results of late (for details, read The Motley Fool Blog Network contributor timbrugger's take on its impressive 4Q here) and very much wants to keep the train rolling.

So expect the big players in the media space to keep a close eye on Aereo, and to place more than a few calls to their teams of lawyers. We can safely assume that, with Diller and IAC on board, Aereo is also lawyered up and will be ready for a legal contest even before the company's service makes its limited rollout in New York City next month. If the firm can clear the hurdles the broadcasters and providers throw in its way, it stands to make a nice profit (as does its funders like IAC). But those hurdles are likely to be numerous and very big.

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