The spoiler: how an LA playboy threw a wrench into Aereo’s plan to take over TV

The television industry has its hands full, fighting forces that want to break up the lucrative “bundle model” in which consumers must pay for hundreds of channels in order to receive the dozen or so they actually watch. Bundle opponents include Senator John McCain, satellite TV provider Dish Networks(s dish) and an upstart streaming service called Aereo.

Aereo, which uses tiny antennas to stream and record shows to computers and mobile devices, has been a special worry to the TV industry because courts have said it’s protected by a loophole in copyright law. The industry, however, received an unexpected gift when an erratic billionaire named Alki David launched a streaming service of his own — without the legal firepower to back it up.

According to a source familiar with the case, Alki’s arrival came as a nasty surprise and wrecked a large part of the U.S. chessboard where Aereo’s investors want to remake the rules of TV. The billionaire doesn’t see it that way. Here’s how the drama that could change TV has unfolded so far:

Buttoned-up Barry takes on TV

On the surface, the story of Aereo is about a brave startup that uses tiny antennas to bring broadcast TV stations — which are free to receive in the first place — to laptops and mobile devices. The service allows people to watch and record local channels for $8/month and, unlike conventional TV subscriptions, lets customers come and go as they like without contracts or equipment.

But Aereo is also the tip of the spear for a bigger gambit by media mogul Barry Diller(s iaci) to blow up what journalist Peter Kafka calls the “TV Industrial Complex.”

This desire to remake TV led Diller to put $20.5 millon into Aereo’s fledgling service in early 2012. The money, Aereo antennashowever, wasn’t just an endorsement of Aereo’s technology; it was also an attempt to leverage a controversial 2008 court decision. The decision, which involved remote DVRs, inspired Aereo to create a “one antenna, one viewer” system that — in the company’s view — creates private TV streams that are legal under copyright law.

According to the source, who did not want to be identified, Aereo was “buttoned up” and ready for a legal fight even before it went live in New York City in early 2012. The company had court briefs at the ready, and made sure that all legally-discoverable facts of the case backed up its “private viewing” theory of TV streaming.

When to no one’s surprise the major broadcasters sued to shut it down, Aereo fought hard — and won. The company then won an even bigger ruling this April, when a split Second Circuit Court of Appeals upheld the decision, after finding that: “Aereo functions much like a television with a remote Digital Video Recorder (“DVR”) and Slingbox.”

Enter Alki

Alkiviades David — everyone calls him “Alki” — is a 45-year-old heir to a shipping fortune who likes to host Hollywood parties and dabble in the entertainment industry. He’s had small parts in films like The Bank Job, but also runs a U.K.-based company called FilmOn that plucks TV signals from the air and streams them to computers.

When FilmOn launched in the United States in 2010, Alki offered to pay retransmission fees like those that cable networks pay to broadcasters through a complicated regulatory system. The broadcasters, however, didn’t bite and sued him instead. They quickly obtained court orders and that was the end of it — until, that is, Aereo won in New York court two years later.

The Aereo victory irked Alki and prompted him to relaunch FilmOn’s TV service under new corporate names. The names, “Aereokiller” and “BarryDriller,” were not just a legal trick but also a finger in the eye of Diller, the media mogul who is backing Aereo. Predictably, the networks sued Alki all over again. (Diller sued too, over misuse of his name.)

According to the source familiar with the case, Alki’s approach to litigation is slapdash and reckless — the very opposite of Aereo’s buttoned-up style. As a result, Alki’s reborn Aereokiller was easy-pickings for TV industry lawyers who had no trouble persuading a Los Angeles judge to issue an injunction.

Click for larger image. Map by Rani Molla.

Rani Molla

“Bad facts make for bad law,” said the source, adding the ruling was a big blow for Aereo and its carefully planned legal strategy. This is hardly surprising; the injunction applies not just to Los Angeles but the entire 9th Circuit, which sprawls across most of the western United States (see map at right.)

The LA decision was a setback for Alki but even more so for Aereo, which declined to comment for this story. The playboy’s antics not only shut down an enormous market; they also provided a California-sized foothold for the broadcasters to launch what could turn into a Supreme Court challenge to the new technology. (The broadcasters also sued him in the District of Columbia last week, possibly in the hopes of getting to the top court even quicker; FilmOn has since retreated).

As for Alki, he doesn’t regret a thing.

Alki explains

Alki speaks in a posh but kind British accent and, in a recent phone call, his manner was gentle and patient. He shares Aereo’s frustration with the TV Industrial Complex but also see Diller and Aereo as parvenus next to his own operation.

“Barry and I share many mutual friends but have never met. I tried to reach out a few times before the launch of Aereo,” said Alki, adding that he chose to needle Diller with “Aereokiller” and “BarryDriller” because Aereo sounded too much like an earlier version of his streaming products called “Arrow.”

Alki makes a legitimate case against TV industry inertia and a Nielsen ratings system that, in his eyes, is considered broken by everyone in Hollywood.  He is rational on our call — even though that is not his reputation.

The source familiar with the legal case says Alki is an erratic, bull-in-a-china-shop strategist. A different source who knows Alki slightly recalls receiving a bizarre, rambling phone call at four in the morning. And an October profile in the Hollywood Reporter portrays Alki as a sincere but volatile personality who likes to cultivate controversy and run with outsiders.

“I haven’t drunk alcohol in 15 years. I like to have fun and play practical jokes,” Alki says. As for suggestions that he is derailing Barry Diller’s careful campaign to remake TV, Alki is all magnanimity.

“FilmOn has been in live TV much longer and is doing a better job … We’re not trying to ruin Aereo’s game. We’re very grateful for Aereo’s success with the [DVR] concept.”

It’s doubtful Aereo feels as generous but, for better or worse, the future of the TV bundle could well be determined by the playboy who crashed the party.

Next moves

In early January, Aereo announced plans to expand to 22 more cities with the help of $38 million in new funding from Diller and others. The expansion was supposed to take place in “late spring” but, as of June, Aereo has only expanded to Boston.

Gossip Girl on Aereo on iPadThe Aereo investors may be holding back on releasing more money, and turning on more antennas, until California’s 9th Circuit rules on Alki’s appeal later this summer — but that is only speculation. If the 9th Circuit follows the New York courts’ reasoning, and lifts the injunction, Aereo will have a green light on both coasts; most lawyers, however, say that’s a longshot.

As for Alki, he is busy issuing a strange stream of fulminations about the TV industry’s plot to get him.  On May 30, he shared what he says is a “death threat” that warns him to “leave the networks and Aereo alone.”

Consumers, meanwhile, are stuck with expensive cable bundles for the foreseeable future. Aereo has taken the most clever, calculated shot to date at the TV Industrial Complex but, for now, both Aereo and Alki are a ways from forcing the industry to sell rational bundles of channels at a rational price.