Aereo

Aereo Announces More Funding, For A Service No One Really Wants

On a conference call this morning, Aereo announced they have raised another $38M in funding and plan to expand to nearly two dozen cities in the U.S. this year. The Barry Diller/IAC backed company takes live over-the-air broadcast TV signals via their antenna farm and streams them to subscribers PC/Mac, iPad or iPhone with subscription plans that range from $8 a month to $80 a year.

Anyone who has seen me write about Aereo in the past knows that I think Aereo is one of the most over-hyped companies in this space in a long time.  [See: "Barry Diller’s OTT Service Aereo Is Dead On Arrival"] Their CEO keeps talking about how Aereo is disrupting the traditional broadcast TV market even though as of May of last year, the company announced they had only 3,500 subscribers, many of which were still under the 90-day trial period. And in August of last year, someone inside IAC told me Aereo had less than 2,000 paying subscribers, a number I still have yet to see Aereo dispute.

Aereo calls what they are doing an “innovative new business model” even though they have no traction and as of today and only offer twenty English based content channels, of which I’ve only heard of eight of them. The service does not work on many devices, the quality of the video they deliver is not what most would classify as HD and the company still hasn’t disclosed any details on how the videos are encoded or delivered.

Once of the biggest arguments of why Aereo can’t disrupt the traditional broadcast TV model is that they simply don’t have deep enough pockets and they can’t do much with the nearly $21M their raised in their first round, something that was proven today with the fact they have already announced a B round of financing. Even with today’s announcement, the company has only raised just over $60M. Part of that money will go towards their legal bills as broadcasters have taken them to court over their business model since Aereo doesn’t currently pay any re-transmission fees and trying to expand into nearly two dozen cities will burn through a lot of capital.

It would take Aereo signing up 262,500 customers, each paying $80 a year, just to make back their original investment of nearly $21M and of course, none of that would be profit. Streaming consumer business models like this do not scale cheaply and you have to pump a lot of money into the service before you can get it to a scale. Just look at all of the other companies in the market who have some kind of video streaming service and the amount of money they have spent just to get their platform to the point of where they can guarantee a QoS that consumers have come to expect. That’s not going to happen even with $60M in funding.

Aereo has said that there is a, “significant portion of the population that is not interested in continuing the closed ecosystem of cable bundles”, but of course, they haven’t said what those numbers are and even if the percentage is high, Aereo’s current offering is not what consumers are looking for to replace the current cable model. Aereo likes to say their solution provides an a la carte model to consumers, a phrase that people in the media go wild over, yet Aereo is only offering eight channels anyone would actually watch. So there is nothing a la carte about having such a limited choice of content.

As I wrote in my last Aereo post, there are more than 100M consumers in the U.S. that pay for TV via cable and satellite and Aereo has implied that a big market to them would be about 300,000 subscribers. That’s not even one half of one percent of the total number of cable/satellite TV subscribers in America, yet they think their service will somehow “disrupt” the cable TV market or make cable companies change their practices? It’s not going to happen. It’s the whole reason why Aereo’s CEO “declined to disclose how many people had signed up for Aereo so far” when asked by the NYT. The number is so small because whether the technology works or not, in its current form, this is not a service consumers are willing to pay for.

You can see a list of the 22 cities that Aereo plans to expand to by visiting this page on their website.

Aereo Has Less Than 2,000 Customers, No Shot At Surviving

Last month when a federal judge ruled in Aereo’s favor denying the major broadcast networks’ request for a preliminary injunction to block Aereo’s streaming service, many in the industry wrote that it was a “significant milestone” and “major legal victory” for the company.

In reality, that’s far from the truth as anyone who has covered these kinds of lawsuits knows that prelimanary injunctions rarely ever get granted. Those who think Aereo is in the clear really shouldn’t be writing about this space. All Aereo got was a stay of execution, but they haven’t been found not guilty yet. Aereo still has to face the broadcasters’ copyright-infringement lawsuit and Aereo is only in round one of what is going to be a long legal battle. In reality, even if Aereo can win in court, the company is already dead in the water for multiple reasons.

By Aereo’s own omission, the company can’t survive a drawn out legal battle as they simply don’t have the money to support it. To date Aereo has only raised $20.5M and they have already set aside $3M of that just for legal costs. And if they want to survive and fight the broadcasters who plan to keep them busy in court, Aereo is going to need a lot more money. The major broadcasters know what is at stake in this fight, the hundreds of millions of dollars they each make every year from retransmission fees. So they will have no problem spending money to drown Aereo in legal costs, something Aereo has already acknowledged. As one reporter put it who was covering what took place during the hearing, they described the broadcasters as having a mass of legal counsel, at least “three long lines” of lawyers in court.

In May, based on court testimony, we know Aereo had 3,500 people in NYC who had signed up for the service, but we’re still under the 90-day trial period. Someone at IAC that I spoke to, which is the company that invested in Aereo, who wanted to remain annoyomous, said that so far, Aereo had well less than 2,000 users paying for the service. Aereo didn’t return my emails when I inquired about the numbers, but if Aereo wants to stick around and try and grow their business, they are going to need a lot more money. Multiple sources tell me Aereo has already burned through half their cash. While many say how excited Barry Diller is in this offering, if he’s really that interested, he’s going to have to put $100M into this company just to give it a shot at fightning the broadcasters in court and trying to grow and expand the business. Even tens of thousands of paying customers isn’t going to get this company anywhere near break even.

It would take Aereo signing up 150,000 customers, each paying $12 a month for a year, just to make back their original investment of nearly $21M and of course, none of that would be profit. Streaming consumer business models like this do not scale cheaply and you have to pump a lot of money into the service before you can get it to a scale. Just look at all of the other companies in the market who have some kind of video streaming service and the amount of money they have spent just to get their platform to the point of where they can guarantee a QoS that consumers have come to expect. And I’m not talking about content licensing costs, but rather the technical infrastructure needed to support such a service, let alone market it to consumers. That’s not going to happen with $20.5M in funding. And what do you think Aereo’s customer acquisition costs will be? They won’t be cheap, espeically with a user only paying $144 a year for the service.

Aereo seems more focused on wanting to fight the broadcasters, without the cash needed, and talking about good their “groundbreaking technology” is, instead of having any insight into the demands of consumers. What Aereo is doing isn’t groundbreaking at all, since anyone can get an atenna and get channels over-the-air (OTA). You don’t need Aereo’s service to make that happen and besides the one-time cost of the antenna, it’s free. I get that Aereo is offering viewing support to more than just the TV and some DVR functionality, but those aren’t features enough consumers are willing to pay for. You don’t launch a service in the market just because the technology exists to allow you to do it, you launch a service because there is a real demand for it from consumers. In Aereo’s case, consumers aren’t demanding what they are offering.

Aereo is quick to say that there is a, “significant portion of the population that is not interested in continuing the closed ecosystem of cable bundles”, but of course, they haven’t said what those numbers are. And Aereo likes to say their solution provides an a la carte model to consumers, a phrase that people in the media go wild over, yet Aereo is only offering about 15 english speaking channels. So there is nothing a la carte about having such a limited choice of 15 channels.

There are more than 100M consumers in the U.S. that pay for TV via cable and satellite and Aereo has implied that a big market to them would be about 300,000 subscribers. That’s not even one half of one percent of the total number of cable/satellite TV subscribers in America, yet they think their service will somehow disrupt the cable TV market or make cable companies change their practices? They aren’t being realistic and so aren’t many of the people who have written about Aereo’s service. I’ve seen reporters say that Aereo will “upend the TV industry” and even “dismantle” the television business. Really, the TV business is going to be “dismantled” by Aereo who by their own numbers says 300,000 would be a big market for them? Many people writing about companies in this industry need to stop as they are clueless as to what is really taking place. If they can’t include the numbers in their article to show the impact, it’s because they don’t know what the numbers actually are, which means they should not be in the business of saying one service will “dismantle” another. Find another industry to report on.

When I first wrote about Aereo’s service back in February and called it “dead on arrival”, naturally I got a lot of comments from people saying I was crazy and that it was a great idea and something people would want. Well, six months later, apparently less than 2,000 people in NYC are willing to pay fo it. Big surprise. It’s time a lot of people in this industry come down to reality and stop being out of touch with what is really taking place in the market, instead of always being so quick to think one service will displace another just because the technology exists. Far too many people and investors can’t remove their emotions from the picture when evaluating a service or technology like Aereo and don’t look at it clearly. In this case, it’s crystal clear, Aereo has no shot in the market and won’t survive. Even if Aereo wasn’t being sued, their entire business model would still be dead in the water.