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Aereo and the Cost of Disruptive Innovation

On Saturday, June 28, 2014, Aereo suspended operations after the Supreme Court ruled that it had violated copyright law by capturing broadcast signals on tiny antennas and delivering them to subscribers for a fee. Most agree that it’s gone.

The arguments on both sides were plenty strange from the beginning. Was Aereo like a cable company? Was it a farm of rabbit ears, a copy shop with a library card or a valet parking service?  Is the cloud a storage locker?  Is the elephant more like a tree or a snake?  Major headspin. The Supreme Court went with the cable company analogy. But now that it’s over, a question remains. Is there anything in Aereo’s argument that can be used by other disruptive businesses to exempt them from regulatory schemes arguably designed to protect existing business interests?

What is Disruptive Innovation?

Disruptive businesses are generally defined as those that succeed by creating new markets and value networks, and in the process upend existing ones. Who is disruptive? Aereo was named as one of the top twelve last year. Facebook, Twitter, Pinterest,  Airbnb and Uber frequently make the list. What challenges do disruptive businesses face? Making money is one, of course, but as recent news makes clear, litigation is another cost of disruption.

ABC argued that Aereo violated the Transmit Clause of the Copyright Act of 1976 and threatened the billions of dollars ABC receives from cable and satellite companies for the right to retransmit their programming. The network argued that Aereo was like a cable company and should pay the same fees. Airbnb recently faced a challenge in New York State, where the State Attorney General argued that Airbnb hosts were like hoteliers and should so pay the hotel tax. In Dallas, the City Council recently moved to regulate Uber cars like other taxis and limousines. Commentators have suggested that Pinterest may, like Aereo, be violating the Copyright Act, but this time because of Pinterest’s foot-dragging on requests to take down material on objections made under the Digital Millennium Copyright Act, or DMCA.

The Common Thread

In each of these situations, either the regulator, or the plaintiff claiming the benefits of regulation, has argued that the disruptive business is like an existing business or industry, and so should have to comply with the same rules. The upstart, rather than arguing about the merits of the regulation, has argued about the strength of the analogy. A is not equal to B. This is where the head explodes.  Aging lawyers eschew head explosions.

But the really headstrong want to know more. Is there something to the argument that disruptive businesses like Aereo, Airbnb, Uber and Pinterest really are different?  Each has taken the position (or in the case of Pinterest, might do so) that the product being sold is not the ride, the room, the TV show or the picture, but the method of accessing it. It’s the difference between selling doors and selling the opportunity to step into a space that becomes available when the door swings open.

Aereo argued that it simply supplied the equipment (dime-sized antennas) that allowed subscribers to access the “public performance” of broadcast TV shows. Uber argued that it is a tech company that just makes it easier for drivers and passengers to connect. Pinterest might argue that it is a transformative search tool that simply drives traffic to original sources, the digital equivalent of an index.

So, far, this argument has not worked, and we may be approaching a decision point about whether this position is admirably tenacious or a symptom of mental illness. Perhaps the way to answer the question is to look at the next looming challenge.

Implications for Businesses that Depend on Cloud Computing

This was a worry raised in Aereo’s oral argument. Cloud computing is expected to create nearly 14 million jobs globally and $1.1 trillion a year in revenues by 2015. Since we are reasoning by analogy, could owners of copyrights now argue that cloud storage providers are like Aereo? In his dissent, Justice Antonin Scalia makes the slippery slope argument. (How are Supreme Court Justices like skiers?)

Inapt analogies seem to be a big part of the problem. Clearly, if businesses based on innovative technology want to make the argument that they are very different from existing businesses and so should be regulated differently, they have to do a better job of explaining the technology. Some of the Court’s language about the “iDrop in the cloud,”  is truly cringe-worthy, but you can’t blame them.  Supreme Court Justices are smart people. They like to learn things.

More to the point, however, why have disruptive businesses gotten lost in a thicket of analogy?   Perhaps it is time to tackle the problem head on and discuss the substance of the regulation — not the fact of regulation, but the balance of interests.

Access to information, art and entertainment is a social good.  So is getting paid for producing these things. There is no point in pitting the interests of the producer against the interests of the audience. There is a natural alliance between the two.  Creators make things in order to share them for a fair price. If disruptive businesses want to do more than flame out in spectacular fashion, they may need to focus their arguments on the way in which current regulatory schemes,  whether copyright law or taxi and limousine regulation or hotel regulation, distort the relationship. That could be a heavy lift.

Nasir Pasha, Esq.

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Managing attorney and co-host of podcast Legally Sound | Smart Business

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