Can This Surprisingly Simple Game-Changer Really Do That?

by Hilary Kramer | April 12, 2013 10:44 am

Not that long ago, if I had asked how you watch TV, you would have thought I was crazy. There wasn’t any choice as to how. TV was TV.

But the game has changed when it comes to watching our favorite shows, and it is now a legitimate question. Stations still broadcast over the airwaves, though they use a digital signal now. You also have cable and DVRs to record content. Then there’s the Internet, and Apple’s (NASDAQ:AAPL[1]) iTunes, Amazon (NASDAQ:AMZN[2]), Hulu, Netflix (NASDAQ:NFLX[3]) and others.

Now there’s a little start-up company called Aereo that’s trying to change the game again, and the way they’re going about it is astonishingly simple.

One of the main reasons people subscribe to cable is to get live programming like sports events and local news. Most everything else is available digitally through other avenues for a lot less money, though you sometimes have to wait a day. Aereo has the brilliant idea to use antennas to pick up the local broadcast signal and then offer it to people online. They’ve designed antennas so small that they fit on the tip of your finger, and they place a bunch of these antennas in data centers, which allow them to send the programming over the Internet. Subscription plans range from $1 a day to a full year for $80 (which comes to less than $7 a month). A customer could combine that with plans like Hulu’s and end up paying less than $20 a month for their TV content. You can see why the cable companies are shaking in their boots.

Aereo’s ideas has scared the “bigwigs” so badly that they’ve put their fierce competition aside and joined together (we’re talking rival networks like NBC, ABC, and FOX) to sue Aereo out of existence. They claimed that Aereo’s service violated copyright laws, but Aereo countered that it was not stealing, only allowing consumers to use its antennas to access shows on public airwaves. And so far, the courts are agreeing with Aereo, knocking down several of the networks’ lawsuits.

So what can we as investors learn from this “digital David and Goliath” story? A few important points come to mind:

    1. Sometimes simple is better. I am all about game changing technology: self-driven cars, robotics, you name it! Having said that, sometimes the best ideas don’t require a Ph.D. in rocket science. (We’ve all had those moments where we learn of a product and think, “Why didn’t I think of that?”) In Aereo’s case, they saw a voice in providing live local programming over the Internet and came up with a simple, cost-effective way to do it by accessing shows already on the public airwaves.
    2. Lawsuits don’t always mean a loss. Aereo isn’t a public company yet, so we couldn’t invest even if we wanted to. And even though the company has been successful in court so far, I’m not yet willing to say it will inevitably prevail in the end. Still, lawsuits aren’t a reason to automatically reject a possible investment. I’ve seen both sides in my years of investing: Lawsuits that hit stocks hard, and lawsuits that proved to be buying opportunities.

      Two examples that come to mind are Tyco (NYSE:TYC[4]) and Bank of America (NYSE:BAC[5]). Both companies were slammed by lawsuits, and I bought both during the turmoil. You may remember TYC’s huge scandal back in 2002 when it was found out that the CEO and his management team had stolen over $100 million dollars. Not surprisingly, lawsuits followed, and the picture was pretty bleak for a while.

      But a new CEO with a stellar reputation was brought in who not only righted the ship but grew Tyco’s businesses, and I eventually doubled my money. Bank of America was hurt by the financial crisis and accused of fraud in 2010. But I really liked the stock in late 2011 when it was around $5.50, and today it’s over $12. It is important to pay special attention to legal matters, but remember that they are just one of many factors to consider when evaluating a possible investment.

    3. If the big companies are nervous, there may be something there. As you can see, the networks are nervous in this particular case. If they didn’t think that Aereo stood a chance, they wouldn’t be suing the company so aggressively. They know that if Aereo succeeds, their customers could trip over themselves cancelling cable to sign up for cheaper streaming services. And this can be a sign for other industries. When a small company is seen as a threat by the big guys, there just might be something worth looking into.

I’m a research fanatic. Call me crazy (you won’t be the first!), but I love digging down into the nitty gritty of what makes a company tick. Many times it’s a dead end; other times you find a diamond on the rough. Either way, it is important to do the work, to look at all aspects of a company and not immediately discount it because of lawsuits or because the idea seems too simple.

There is really only one deal breaker for me, and that’s ethics. If I find myself distrusting management, I don’t want my money invested in that company, and I’m sure you don’t either.

  1. AAPL:
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  5. BAC:

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