In a post yesterday, I mentioned Aereo TV, a new Barry Diller-backed business launched last year, calling it an example of a start-up that is “barely legal by design.” Since the courts are about to make a ruling that will profoundly affect its prospects, it might interest you to learn more about how its entire business is engineered to exploit existing copyright law.

First, this service takes full advantage of unchallenged U.S. law that makes over-the-air television free to anyone who puts up an antenna and connects it to a receiving device. Unlike countries such as the U.K., for example, the U.S. has no television license tax. Broadcasters in the U.S. make their money based on advertising, plain and simple.

Second, it relies on the seminal 1984 Sony Betamax case, in which the U.S. Supreme Court ruled that using a home videocassette recorder to “time shift” programming received over the air for later viewing did not violate copyright law. Even though the VCR was technically making a copy of the program without a license to do so, the Court found that copying fit into a narrow exception to the otherwise exclusive rights of the copyright holder — an exception known as a “fair use.”

Since the programming was being made available at no charge, the Court reasoned, making a copy simply to watch at another time did not disturb the market of the copyright owner — the key to fair use analysis. While the VCR was capable of illegal uses — notably making more copies and selling them to others — the studios who sued Sony had asked the court for an outright ban on the device, a request the Court rejected. If some VCR owners were going beyond time-shifting, the Betamax decision held, then the plaintiffs needed to sue those individuals and not the maker of the device.

Both the reasoning and the borders of the Betamax case have proven difficult for courts to fully unravel, and innovators have been exploiting that confusion ever since. If a home VCR used for time shifting was legal, for example, why not its digital equivalent, the DVR? And if viewers were exercising “fair use” with VCRs in their home, why not a DVR located

offsite but controlled by the consumer through the cable system?

Those were questions addressed in a 2008 case brought by television networks against cable provider Cablevision, which had created a service known as the “Remote Storage” DVR. The system configured virtual DVRs for each Cablevision customer — essentially cheap high capacity hard drives — maintained at Cablevision’s facilities. Operated by customers through their cable box, the remote DVRs separately recorded and stored the program selections of each individual customer, then replayed them at the customer’s convenience.

To fit within the Betamax decision, Cablevision designed its RS-DVR system to store individual copies of the program, even though from an engineering standpoint it would only have needed one to handle the replay. If a million customers each asked Cablevision to record the season finale of “Top Chef,” well, Cablevision’s remote DVRs would make a million separate copies of the show as it was aired and store them on the remote DVRs. When each individual later pressed play, they were watching the copy “they” recorded. Just like a home DVR.

The plaintiffs in the Cablevision case argued that the remote DVRs were really just a ruse to let Cablevision offer their content as on-demand programming without paying extra for it. The difference between a home VCR and a remote DVR was legally significant, they said. Indeed, it was the difference between fair use and an unauthorized rebroadcast. But the court agreed with Cablevision, and allowed the service to continue.

That gave Aereo the opening they needed. Aereo, like Cablevision, runs data centers that receive and record TV programs, in Aereo’s case based on customer programming entered via the Internet. Unlike Cablevision, however, which captured content it was already receiving from its channel partners, Aereo TV simply gets its content from the airwaves.

To preserve the “fair use” defense of the Betamax and Cablevision cases, however, it does so by maintaining hundreds of thousands of tiny antennas (each about the size of a dime) — one for each of its customers. It’s just like having your own antenna and a DVR at home, the company argues, except that the antenna and the DVR are both remote, and you control both through the Internet and not your television. It’s not just timeshifting. It’s “placeshifting.”

Just as Cablevision only needed one copy of the programming stream, Aereo only needs one antenna. The individual antennas and the software to manage them are there solely to satisfy the legal requirement that the individual consumer make and access her own personal copy.

So what’s the real innovation here? Is it the company’s unique combination of cheap, miniature antennas and cheap data storage controlled by proprietary software and combined to create a cloud-based service that piggybacks on the customer’s existing Internet connections to simulate a small cable company? Or is the innovation the close reading of relevant case law, and a business model that just barely extends existing precedents to allow Aereo to operate without paying any licensing fees to the content providers?

Of course there are larger trends at work here. Consumers raised on the Internet’s “pull” model of content delivery are starting to revolt against the pre-packaging of channels offered by cable and satellite providers. Some consumers — soon, perhaps, most — prefer to get their programming a la carte, and on whatever devices they happen to have in front of them.

As Internet TV devices and services from Apple, Roku, Boxee, Slingbox, Hulu and others test out new ways of distributing and monetizing television programming, Aereo argues that it’s just pushing the envelope slightly, and in a direction the courts have already determined is legal.

Too far, according to local broadcasters, who sued the company almost from the moment of its launch. Broadcasters say the company is retransmitting their programming without paying fees required by law for cable and satellite providers. Aereo says it’s just helping its customers exercise established fair use rights using the latest technology, for which the company charges a correspondingly modest fee.

Who’s right? Digital rights advocates at the Electronic Frontier Foundation, for one, are siding with Aereo. Calling the broadcasters’ arguments “depressingly familiar,” EFF says the case is really about who gets to profit from new technologies that make TV watching better. The broadcasters, the group says, argue that every innovation someone else invents is theirs to control; that “they have a right to the profits generated, and a veto power over features.” Aereo is just a rerun of Betamax, the group argues, and Aereo should win.

Not so fast. Many local broadcasters are already struggling to stay profitable and relevant as fewer and fewer consumers get their programming over the air. They increasingly rely on the FCC-regulated retransmission fees paid by cable and satellite packagers, a trend that will only increase as more network programming becomes available on the Internet and the need for local affiliates shrinks further. If Aereo succeeds and more viewers cut the cord with cable and satellite, many of the stations Aereo relies on may not stay in business. Obviously that doesn’t help anyone.

Legal hair-splitting aside, in other words, what’s clear here is that the supply chain of the content industry is coming apart. No one knows yet who will be left standing when a new one is ultimately forged, or in what position they’ll find themselves. Both sides here are counting on the courts to protect their position. If Aereo’s only innovation is to gingerly pluck legal loopholes to accelerate the destruction, broadcasters are equally guilty of using the law — in this case FCC regulations going back to the early days of cable television — to hold them off until they can figure out what else they can do in a future content ecosystem.

This isn’t a fight about control of new technology that makes television better. It’s about which law will determine the winners and losers in an industry where disruptive change is inevitable: Betamax and Cablevision on the one hand, or the FCC’s retransmission rules on the other. Neither, of course, was intended or anticipated to decide the future of Internet television. Once again, technology change has outpaced legal change, causing yet another collision at their accident-prone intersection.

So far, Aereo has won the early skirmishes in the lower court, fighting off a request by broadcasters for a preliminary injunction. (For a similar service offered on the West Coast by another startup, the maverick has lost the early rounds.) But in the fall, a federal appeals court in New York took up the Aereo case. A decision is expected sometime soon that will likely save or sink Aereo. The company, meanwhile, has announced plans to expand its service to 22 additional markets.

Interestingly, the three-judge appellate panel included, by chance, Judge Denny Chin, who was the trial judge in the 2008 Cablevision case. Chin had ruled against the Remote Storage DVRs, but his detailed opinion was harshly rejected on appeal. Now Chin is himself an appellate judge, and one of the three votes that will decide Aereo TV’s fate.