Electricity Use Impedes Aereo’s March; Streaming-Video Service Has Other Challenges Besides Broadcasters’ Lawsuits

Electricity Use Impedes Aereo’s March

Streaming-Video Service Has Other Challenges Besides Broadcasters’ Lawsuits

SHALINI RAMACHANDRAN and AMOL SHARMA

Updated Oct. 28, 2013 7:50 p.m. ET

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Aereo CEO Chet Kanojia holds one of his company’s miniature antennas as he stands next to a power-hungry server array of antennae. Associated Press

Aereo Inc.’s upstart TV streaming service has provoked a legal onslaught from broadcast networks. But even if it wins that fight, it still has to overcome more-pedestrian issues, like making sure it can pay for the electricity it needs. The service depends on tiny antennas assigned to each of its individual users, who rent them to stream broadcast TV channels over the Web. Each of those antennas, which Aereo warehouses in centralized facilities, uses five to six watts of power. On their own, that isn’t a whole lot—a typical set-top box rented by cable operators to customers can use four times as much, or more. But the power for a cable box is paid by consumers, whereas Aereo is footing the bill for every subscriber.

And that is beginning to add up. Aereo won’t specify how many subscribers it has, but a walk-through of its Brooklyn facility by The Journal showed equipment that appeared to be supporting somewhere between 90,000 and 135,000 in New York, its longest-running market. Aereo declined to comment on that estimate although Chief Executive Chet Kanojia said he can easily ramp up to support up to 350,000 subscribers in New York.

In power terms, that translates to between 1.75 and 2.1 megawatts, nearly as much power as it would take to light up two NFL football stadiums. Paying for 2 megawatts costs about $2 million a year in New York, estimates Gabe Cole, CEO of technology consulting firm RTE Group Inc., who said New York is one of the most expensive markets in the country in which to buy power.

Power is “one of the biggest challenges” the company faces, Mr. Kanojia said, adding that one option he is considering is getting off the grid and generating power using fuel cells.

The more obvious threat is the broadcasters’ legal fight that has dogged Aereo at every turn, even as it has steadily expanded across the country. With six outside law firms on tap, and financial backing from Barry Diller‘s IAC/InterActiveCorpIACI +1.30% Aereo has been staying ahead of the legal challenge.

Major broadcasters, which say the service is stealing their content, have appealed to the U.S. Supreme Court for intervention. Aereo, which has won several rounds in lower courts, says it is on firm legal footing, because its $8-per-month service merely facilitates any individual’s right to watch and record free over-the-air TV. The service says it complements other Web video services, like Netflix Inc. NFLX -4.28% ‘s

Mr. Diller acknowledges that the Aereo project is still “high stakes and speculative,” but he remains optimistic. “I assume we’ll have problems in the beginning and that they will work themselves through,” he said in an interview. Asked if he frets about the legal uncertainties, Mr. Diller said “not a nickel. We’re not holding back because of a legal anvil above our heads.”

Aside from New York, Aereo so far operates in only seven markets. Mr. Kanojia said Aereo will likely fall three short of its goal of expanding to 22 markets by year end. Still, that means launching in at least one new market a week between now and the end of the year. The company will announce a new round of expansion in January.

In cities outside of New York and Boston, Aereo initially built capacity for only 10,000-15,000 customers, part of a deliberate strategy to open new markets quickly rather than build up its customers in individual markets. Mr. Kanojia said building a nationwide brand will allow for efficiencies in digital ad-buying and pave the way for future partnerships with retailers or TV set makers. It also helps keep operating costs including electricity bills under control.

“It’s better for us to get 10,000 subscribers in 50 markets than 500,000 in New York City,” he said, adding that keeping up with growing demand for the service, including dealing with customer care and getting equipment as well as power, is a “huge struggle” right now.

Aereo’s antennas are densely packed into mini-fridge sized electronic boxes stacked on top of one another—technology that consumes a lot of power relative to its space. Once a subscriber clicks on a particular channel on Aereo, an individual antenna “wakes up” and tunes to the frequency of the requested TV signal. The signal is then sent to Aereo’s also power-hungry transcoding equipment that converts the signal to a more efficient digital format to be streamed over the Web.

Mr. Kanojia is making plans to deal with the electricity consumption challenge. One possibility is to combine the antennas and transcoding equipment, which would help reduce power needs.

He also hopes that reliance on the power-guzzling antennas will diminish over time, as the company adds content other than over-the-air TV, like Web content or cable channels, which are sent via fiber-optic cables. Aereo carries Bloomberg TV and has struck deals with other news providers that Mr. Kanojia declined to identify.

Other challenges loom. Pay-TV operators and TV networks are releasing apps, like Walt Disney Co. DIS -0.38% ‘s Watch ABC, that stream channels to mobile devices. That could undercut the appeal of Aereo, which also streams broadcast TV signals to mobile devices. Pay-TV subscribers, who make up 50% of Aereo’s users, have access to the new apps.

Mr. Kanojia brushed off the competition, emphasizing that Aereo is “an attack on the TV bundle.”

Breaking free of bundled channels was the reason that Atlanta resident Todd Talbert signed up for Aereo about two months ago, after canceling an over-$200-per-month DirecTV subscription. He was frustrated at being “nickel and dimed” and said he was “unsure why the public is being required to buy channels they don’t want.”

DirecTV said “you can’t compare the two experiences” and noted “this customer will no longer have access to…countless other perks” its customers enjoy.

Still, Aereo is already exploring other avenues for growth. Mr. Kanojia said he is in talks with a few wireless and wireline broadband providers about packaging Aereo with their broadband services. He said Aereo would give such operators a “wholesale discount.”

Mr. Kanojia is also holding out an olive branch to broadcasters, saying Aereo’s technology could help broadcasters generate ad revenue if they are interested in collaborating. He said they could potentially insert targeted ads to individual users in live and recorded programming to “create a Google-like” ad model for TV.

Dennis Wharton, a spokesman for the National Association of Broadcasters, a trade group that represents local TV stations, said broadcasters are “highly skeptical of future partnerships with any company whose business model is predicated upon reselling our highly-valued content without permission.”

The TV industry is “closed,” Mr. Kanojia said, and the only way to muscle in is by having “a technological advantage that forces the issue.” Otherwise, “there’s no seat available at the table,” he said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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