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Even With A Supreme Court Win, Aereo Still Might Lose

Jan 11 2014, 7:11am CST | by

Even With A Supreme Court Win, Aereo Still Might Lose
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The battle between broadcasters and Aereo, a startup that offers television programming over the internet, will be resolved by the Supreme Court later this year. If the court rules for the networks, Aereo will join a long list of companies that tried to upend the video business with interesting technology only to be thwarted by a thicket of copyright laws. Even a win, though, doesn’t clear the path for Aereo. Instead, it might begin a process in which free, over-the-air programming — which is watched by relatively few Americans already — largely disappears once and for all.

Currently available in 10 metropolitan areas, including New York, Boston, Houston and Atlanta, Aereo’s service allows you to watch and record programs on your computer, tablet or smartphone for $8-12, per month, depending on whether you want to be able to record two shows at the same time. In order to keep the service inexpensive, though, Aereo doesn’t offer cable channels like ESPN or TBS. Instead it offers the major networks (CBS, ABC, Fox, NBC); whatever else can be picked up by an antenna in your area; and a couple of less pricey channels like Bloomberg. (In a future installment, I’ll take a deeper look at the service itself, which I’ve had a chance to test.)

Whether you get your TV via cable or satellite, those channels have become an increasingly expensive part of your provider’s programming costs. In a dispute last year, Time Warner Cable was without CBS for a month and lost 300,000 subscribers battling over an increase in monthly fees from 50 cents to $2 per customer. Eventually Time Warner had to cave. The increase CBS requested was, on its face, astronomical, but it helped bring the network in line with other channels, which range from around $1-5 per month, typically. While it’s fashionable to make fun of the broadcast networks for their increasingly aging audiences, the fact remains they draw far more total viewers than a TNT or FX. CBS, for example, averaged 12 million viewers for its lineup last Thursday. The only series on cable that has ever beaten that number would be the latest season of AMC’s The Walking Dead.

For CBS and its cohorts, the fees it now collects for “retransmission” total around $4 billion annually, according to SNL Kagan, which tracks the industry closely. The right to collect those fees is a function of the 1992 Cable Act, a law that was mostly about increasing competition in the industry. More than 20 years ago, no one could anticipate that it would eventually lead to this kind of toll collecting on the part of the broadcasters.

Of course, consumers have been free to avoid paying simply by hoisting an antenna and grabbing the signals for free. With the advent of digital television, that’s become harder for some and easier for others. It’s never been especially easy in Manhattan, where tall buildings often block the signals and cable caught on very quickly when it became available decades ago. That said, before Aereo, it’s not as if many people anywhere were using this method. Of the roughly 114 million TV homes in the U.S., 103 million pay for cable or satellite. Some of the rest are DVD or Netflix-only homes, leaving fewer than 10 million relying on antennas at this point.

Which brings us back to Aereo and what happens if the company prevails at the high court. Fox COO Chase Carey made it clear over the summer he’d take his network and make it a cable-only channel if that happened. Nearly one-fifth of Fox’s TV revenue comes from those retransmission fees and if Aereo wins, the cable companies have suggested they’d stop paying and create an Aereo-like service of their own. The easiest way to stop that would be to take Fox off the air. CBS chief Les Moonves suggested he’d do similarly.

Realistically, neither has to completely follow through on the threat to protect their revenues though. Instead, they merely need to hollow out the broadcast offering sufficiently such that paying cable and satellite customers won’t tolerate it. What might that look like? Say The Big Bang Theory gets one new episode a month over the air, but four of them on cable. Or American Idol preliminaries are free for everyone, but the top-12 rounds are only on cable. The NFL and MLB have already stated they won’t keep their product on over-the-air TV at all anymore if its not supported by the current framework of retransmission. (A major reason CBS, NBC and Fox can all pay billions to the leagues for football and baseball is they all collect billions from the cable companies.)

Significantly, the Supreme Court here can only go so far. One of the major things at stake is the decision in the Cablevision case, which affirmed that company’s right to create a “cloud DVR” service that let customers record programs on a central server for playback in the home. Google, Yahoo, Facebook and Pandora are among the tech companies worried that a decision overturning Cablevision would be detrimental to cloud computing, so they are working with Aereo on this one, filing friend of the court briefs that support Aereo’s case.

The court could, in fact, go further and overturn the retransmission fees established by the 1992 act. It seems an unlikely outcome and one that would almost certainly push the networks to make the conversion Fox’s Carey suggested. But the court doesn’t legislate on its own. So it can’t force a negotiated outcome nor recommend one. There isn’t going to be a decision here, for example, that brings Aereo and CBS to the table to agree to some rate structure under which Aereo would pay retransmission fees and continue to operate its service. Some outcomes make that possible even without the court’s help; bad blood makes it unlikely.

Finally, there remains a $100 million question (that’s the amount invested in Aereo so far): Is this even an appealing service? I’ll talk more in a future post about what’s great — and not so great — about Aereo. But given who watches the broadcast networks (mostly old people), and given who is likely to adopt a cloud-based TV service that currently allows playback mostly on tablets and the Roku (mostly young people), is this really something that’s headed for mass adoption anyway? It could allow a few people that haven’t cut the cord to do so, but that seems like a small market given most would-be cord cutters are likely not being held back by the one set of channels they currently can get without cable. It also seems unlikely to bring too many people without TV into the market. That leaves some fraction of 10 million homes as possible customers once Aereo is in their markets. Even with a court victory, Aereo is going to be sailing into the wind.

Follow me on Twitter and on Facebook. Find the rest of my Forbes posts here.

Source: Forbes

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