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Capacity Crunches Raise Question: Can Aereo Scale?

Recent capacity crunches in two major markets are raising big questions about whether Aereo’s cloud-based architecture and thumb-sized antenna arrays are scalable enough to handle the load should its broadband TV and cloud DVR service mix attract a mainstream audience.

Aereo’s platform doesn’t appear to be passing that test so far in New York and Atlanta.

Aereo confirmed late last month that it had outstripped its capacity limits in New York, the site of its first service launch back in 2012, and had temporarily stopped activating new customers. Coincidentally, the capacity limit was reached just days before the Feb. 2 Super Bowl matchup between the Denver Broncos and the Seattle Seahawks.

Last week, Aereo said it was also tapped out in Atlanta, where Aereo introduced service last June. New service signups in Atlanta were put on hold just before the Sochi Games got underway.

SEEN AS RETRANS HEDGE

While it’s questionable if Aereo will ever add enough customers to threaten traditional pay TV providers, its technical ability to capture free, over-the-air digital TV signals and deliver them to customers over broadband without consent poses a danger to broadcaster business models that still rely on retransmission dollars. Likewise, Aereo’s mere presence in a market gives cable operators a new form of leverage they can use in retransmission-deal negotiations.

On the capacity end, Aereo has since found a little bit of relief. Last Thursday (Feb. 6), it said it had added enough headroom to invite New York customers who were placed on a wait list to activate their service. But it has “not opened up the website yet to general sign ups, as we want to give those on the wait list priority,” Aereo spokeswoman Virginia Lam said.

She couldn’t say when customers on Aereo’s wait list in Atlanta would be receiving invititations to subscribe to Aereo, which starts at $8 per month.

Aereo has not identified the exact the nature of its recent capacity issues, which could be tied to physical facility space, its antenna arrays, the servers powering its broadband TV/ cloud DVR combo, a mix of those, or something else entirely.

The company said the shortages were due to high subscriber demand and were not linked to a lack of power sources.

That demand is hard to gauge because Aereo — which is preparing to face off with broadcasters in the U.S. Supreme Court over copyright-law challenges — has refused to say how many customers it has overall or in the markets where it has been running low on capacity.

Dan Rayburn, the executive vice president of StreamingMedia.com and a principal analyst at Frost & Sullivan, suggested in a blog post that that Aereo had signed up “less than 500,000” subs in New York, citing sources with ties to Aereo investors. He questioned if Aereo has the cash or the platform to create a national, mainstream service that can truly compete with, let alone disrupt, traditional pay TV players.

“With Aereo running out of capacity in NYC, it’s just another example of how their streaming TV service isn’t going to replace cable TV, for a large portion of the market, ever,” Rayburn wrote.

In an interview, Rayburn said he didn’t know what was behind Aereo’s capacity shortages, but said two elements of the Aereo ecosystem — bandwidth and transcoding gear — are likely not among the culprits because both are in great supply.

BIG PLANS, BIG CASH

But he said the recent problems in New York and Atlanta show Aereo will have a hard time building out an infrastructure that’s capable of supporting the tens of millions of subscribers it aims for with the cash it has raised so far.

Following a $34 million “C” round disclosed last month that’s earmarked to aid Aereo’s national expansion plans, the company has raised a grand total of $97 million.

Rayburn said it’s difficult to foresee Aereo grabbing a fair share of the market “when they can’t even get to 2 million [subscribers] without technical issues.”

Infrastructure challenges aside, he also questioned whether Aereo would have enough cash to generate the kind of marketing firepower it would need to compete head on with telcos, cable operators and satellite-TV providers.

“What will be the cost to Aereo to acquire a single subscriber?” he asked. Aereo, Rayburn added, faces “a whole business and economic problem.”

Aereo said it plans to launch in San Antonio, Texas, on Feb. 19, adding to a list that includes Cincinnati, Boston, Miami, Salt Lake City, Houston, Dallas, Detroit, Denver and Baltimore. Future markets identified by Aereo include Chicago; Minneapolis; Madison, Wis.; Cleveland; Providence, R.I.; Philadelphia; Pittsburgh; Kansas City; Washington, D.C.; Raleigh-Durham, N.C.; and Birmingham, Ala.

TAKEAWAY

Aereo is feeling the strain of scalability in New York and Atlanta, where it has put new service activations on hold after outstripping its capacity limits.