By Erin Geiger Smith and Ronald Grover
(Reuters) - An appeals court on Monday declined to temporarily shut down Aereo Inc, an online television venture backed by billionaire Barry Diller that broadcasters say is infringing their copyrights.
The 2nd U.S. Circuit Court of Appeals disagreed with the broadcasters, including Walt Disney Co's ABC and Comcast Corp's NBCUniversal, that Aereo should discontinue its service until litigation between the companies is resolved.
The television industry is closely watching the case to see whether it could disrupt the traditional TV model. The industry sees Aereo and other similar services as a threat to its ability to control subscription fees and generate advertising income, its two main sources of revenue.
Aereo does not pay licensing fees to the broadcasters, while paid TV operators, such Comcast and Time Warner Cable, shell out billions in retransmission consent fees to broadcasters.
"I can see cable operators trying to stretch out their retransmission negotiations as long as they can to see how this case is finally decided," said Alan Gould, an analyst with Evercore Partners who follows CBS Corp, Walt Disney and other large media companies that own TV stations.
Gould said analysts have modeled a large increase for networks "retransmission fees" - monthly fees based on how many subscribers each network reaches.
"Now it will depend on what happens when the trial begins," Gould said.
Retransmission fees make up a very small portion of a TV station's revenue stream, which is still heavily dependent on advertising sales.
Subscribers to Aereo can stream live broadcasts of TV channels on mobile devices using miniature antennas, each assigned to one subscriber. The service was launched in March 2012 in the New York area at a cost to subscribers of $12 a month. The company in January announced plans to expand to 22 U.S. cities.
Under U.S. law, copyright owners have the exclusive right to publicly perform their work, and broadcasters argue that Aereo's transmissions of television programs while the programs are airing is a public performance of the broadcasters' copyrighted works.
UPHOLDING LOWER COURT
The appeals court, upholding a lower court ruling, concluded that the broadcasters had not shown they were likely to prove their claims of copyright infringement because Aereo's transmissions are "unique copies" and are not "public performances" of the broadcaster's copyrighted works.
Aereo's technology consists of thousands of antennas housed in a facility in Brooklyn, New York, that are individually assigned to users so that no two of them share the same antenna at the same time.
In determining whether a performance is "public," it is important to determine who is capable of receiving the performance being transmitted, the court said.
Aereo's system creates a "unique copy" of a program and, when a user chooses to watch it, the transmission sent by Aereo is of that unique copy, the court said.
In a joint statement, News Corp's Fox, the Public Broadcasting Service and its New York station WNET, also plaintiffs in the litigation, called the decision "a loss for the entire creative community."
The "court has ruled that it is OK to steal copyrighted material and retransmit it without compensation," they said.
CBS, another plaintiff, said in a statement, "As the courts continue to consider this case and others like it, we are confident that the rights of content owners will be recognized, and that we will prevail."
ABC and NBCUniversal issued a joint statement noting the case is still in its early stages and that they are "confident" the "rights of content owners will be protected."
Shares of CBS, Comcast, Disney and News Corp were all lower in afternoon trading on Monday. CBS was down 2.2 percent and Comcast was down 1.25 percent, while News Corp was down 0.8 percent and Disney was down 0.4 percent.
Aereo's chief executive, Chet Kanojia, said in a statement that the appeals court decision "validates that Aereo's technology falls square within the law" and called it "a great thing for consumers."
Aereo had argued that its technology was designed to conform to court precedent, specifically a 2008 2nd Circuit decision in favor of Cablevision Systems Corp for its remote-storage digital video recorder (RS-DVR) system.
Two of the three judges on the appeals court panel that heard the case agreed with Aereo that its system conforms to the Cablevision ruling.
Appeals court Judge Denny Chin dissented, writing that he believes Aereo's transmissions constitute copyright infringement.
Aereo's technology platform is "a sham," Chin wrote, saying there is "no technologically sound reason" to use a multitude of antennas other than to take advantage of "a perceived loophole in the law."
The cases are CBS Broadcasting Inc., et al v. AEREO, Inc. and WNET, et al v. AEREO, Inc, 2nd U.S. Circuit Court of Appeals, Nos. 12-2807 and 12-2786.
(Reporting By Erin Geiger Smith; Additional reporting by Ronald Grover and Liana Baker; Editing by Steve Orlofsky and Leslie Adler)