Aereo’s big bet to break the TV industry: CEO Chet Kanojia explains

The digital age lets us consume media how and when we want, and in the format of our choosing. If we want to hear a song, for instance, we no longer have to wait for it on the radio or buy a CD stuffed with filler we don’t want to hear. The old content models have evolved except for one glaring exception: television.

The TV business is still based on an archaic business model that forces customers to buy arbitrary bundles of channels. Fans of arts programming, for instance, often have to shell out $5 a month for football shows — even if they hate football.

This isn’t a technology issue. It’s instead the problem of what media doyen Peter Kafka calls the “TV industrial complex” — a cabal of broadcasters and cable distributors that refuse to surrender their bundled TV business model.

That’s why upstart Aereo, which uses tiny antennas to stream TV signals to mobile devices, is so intriguing to watch. The company is offering a Aereo devices in actionway for people to watch shows where and when they want — and has so far withstood the TV industry’s lawsuits. Yesterday, we showed off photos of Aereo’s tech. Today, we’re exploring the vision and strategy of the man who wants to kick in the door of the TV industrial complex once and for all.

The quest to end an “abusive” system

Chet Kanojia, who is speaking at paidContent Live in April, is a soft-spoken engineer who likes stylish shoes. At 43, he’s already built an advertising company, Navic Networks, and sold it to Microsoft(s msft) — and presumably made himself a fortune. When we chatted at Aereo’s site in Brooklyn this week, the first thing I wanted to know is why he picked this fight. Why, that is, did he decide put so much energy into Aereo when the TV industry might crush the company in a second like it has done to others before?

Chet Kanojia“I had the option to be a VC, to do nothing or to do something really really meaningful,” said Kanojia. “In my heart of hearts, I belive that when businesses are created or preserved with analogue mentalities, they’re artificially constrained and ripe to to be recast in a different way.”

He adds that he loves TV content like 60 Minutes, Parenthood and Downton Abbey. But he is exasperated by the TV industry’s ossified pricing model.

“Why can’t there be a simple way to pay for this? It’s just irrational that it should cost hundreds of dollars a month. It’s an abusive system set up in an artificial way.”

Broadcasters like NBC and Fox, of course, would argue that we need a system that provides revenue to produce the content that people like so much. In recent years, these networks have been leaning on distributors to pay them for carrying over-the-air channels — and presumably think Aereo should too.

Kanojia is having none of it, saying the broadcasters are already making money from public spectrum through advertising and that it’s unreasonable for them to ask for more. Also, Aereo is not part of the regulatory regime that requires big TV companies to offer their channels for sale to cable and satellite distributors; this means that, for now, Aereo is unable to sell channels like ESPN(s dis) (owned by ABC) to its customers.

Kanojia adds that pure “a la carte” TV is not the only solution to the TV muddle. He would also settle for “rational bundles.”

A high stakes bet

Aereo’s disruptive potential lies in the fact that, unlike other forms of pay TV, subscribers can add or drop it without the hassle of set-top boxes or contracts. For now, Aereo is available only in New York City but is about to roll out to 22 new markets across the country for the same price of $1 a day or $8 a month to watch and record shows. Kanojia believes this will change people’s conception of how we get access to television.

“You can come in five or ten times a year and a pay a dollar. We have lots of habitual one dollar buyers. It’s a massive dent in the psyche.”

For Aereo to have a long-term impact, though, it will still have to survive an ongoing legal gauntlet. On this front, it has a decent chance because Fat cat, moneyinvestors and lawyers designed the company as a high-stakes bet, counting on a 2008 appeals court ruling that said private remote DVRs don’t violate copyright (you can read the legal details here). After broadcasters sued it last year, Aereo won the first round and the case is now on appeal.

The price tag for the loser will be high. On one hand, media mogul Barry Diller and others have put at least $58 million into Aereo, money that could evaporate if Aereo is shut down. On the other hand, GigaOM Pro analyst Paul Sweeting (who has written about Aereo) said the initial court decision was a “disaster” for the networks and that a loss at the appeal level will open the floodgates.

“If the networks don’t win, what it means is that all you have to do is bounce a signal off a cloud-based DVR and you can do what you want,” said Sweeting by phone.

Whatever the outcome of the court case (which could go to the Supreme Court if courts in New York and California continue to disagree), Kanojia thinks he will have made an inexorable dent in the current tv structure. He also thinks the litigation will help other pioneering TV companies.

“The legal situation is unfortunate, but it forces clarity and that’s a good thing.”