• United States

A Supreme Court win for Aereo would take the fight out of broadcasters

Jun 23, 20145 mins

Aereo's good-enough TV could inspire cable subscribers to cut the cord, making broadcasters dependent on Aereo for advertising revenue.

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Credit: REUTERS/Jonathan Ernst

If Aereo prevails in its Supreme Court case, Fox executive Chase Carey threatened to end over-the-air OTA broadcasts. It’s all bark and no bite. Aereo streams television programming over broadband that household users would otherwise receive free with an antenna, but don’t because they can’t pick up the signal. What has upset the television industry is Aereo’s claim that its specialized antenna exempts it from paying broadcasters for their programming.

Given a green light by the Court, Aereo will begin to expand to more cities throughout the U.S., and it’ll be impossible for the broadcasters to stop them without losing advertising sponsorship of their programming. According to Nielsen, 6% of all U.S. households receive only OTA broadcast television. Advertising sponsors would stop paying broadcasters for advertising if these households were cut off, resulting in a loss of approximately 6% of the broadcasters and their local affiliate stations’ revenue.

In response to the possibility of Aereo’s Supreme Court appeal, Carey threatened, “We will move to a subscription model if that’s our only recourse.” In New Jersey parlance, this is a case of “says easy does hard.” The broadcasters would have to move to streaming over the internet to implement a subscription model. Not all OTA-only households could convert to paid subscriptions because they do not have broadband access. IHS estimated last year that 30% of U.S. households don’t have broadband, but for this segment that has more low-income households, the percentage of households without broadband is probably greater. This would translate into lost advertising revenue.

The downstream distribution of television programming to households isn’t the only obstacle; there is an upstream obstacle too. Local affiliate stations distribute locally produced news and programming to the cable and satellite networks for redistribution using over-the-air broadcast. Survey data showing that more than 70% of local programming is sent over the air to cable and satellite television networks is 10 years old. However, National Association of Broadcasters spokesperson Zamir Ahmed said that a very significant number of local affiliates still distribute over the air. Cutting off transmission means that a significant share of cable subscribers wouldn’t receive local programming, not only disappointing subscribers, but reducing advertising revenues still further.

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The biggest problem facing Carey’s realization of his vision of an internet streaming subscription business for OTA broadcasters is there isn’t enough capacity on internet access networks to deliver all the OTA programming. According to Sandvine, 61% of the internet access network is consumed by streamed video from companies like Netflix. While it might appear there is more capacity for added streaming, there really isn’t. In its June 2013 Cross Platform Report, Nielsen reported that the average consumer watched over 157 hours of traditional television per month. Nielsen also reported that the average consumer watched only 3.8 minutes per day of OTT TV, or about 2 hours per month, about 1.2%. Adjusting for Nielsen’s year-old data and Netflix and other streaming companies’ growth it could safely be presumed that streaming might now account for 3% of television viewing. If all 6% of the OTA-only households changed their viewing to the internet, the change would consume an additional 120% of the local internet access network capacity with streaming traffic. And if the FCC doesn’t resolve the net neutrality issue, like Netflix, broadcasters could be forced to pay a fast lane fee.

Aereo is the answer to the dilemma of households with cord cutting plans. Given good HDTV antenna reception, or an $8 per month Aereo subscription, users can access about 25 OTA television stations, including ABC, CBS, NBC, PBS and Fox. Premium channels like HBO, ESPN, and Showtime aren’t available without a cable or satellite subscription, but these cord-cutting Aereo households can receive primetime television, local and national news, and some live sports. Add a Netflix subscription and an AppleTV, Roku, or Chromecast to display these stations on a television, and you get pretty-good-TV – maybe good enough to convince cord-cutters to join the 5% of the households that Nielsen has identified as already having cut the cord.

If broadcasters do nothing they will lose $0.50 to $1.00 per month for each cable or satellite subscriber who cuts the cord, according to Richard Greenfield, Equity Analyst at BTIG Research. Greenfield points out, though, that broadcasters are concerned that Aereo’s court success would affect their future negations with the cable and satellite companies and dash their aspirations to grow these fees to $2.00 per subscriber per month. But advertising revenues that account for about 80% or more of broadcasters’ revenues wouldn’t be interrupted and could represent an opportunity for ad revenue growth, according to Greenfield.

Since the average cable and satellite subscriptions includes 189 channels over which the advertising dollars are distributed, with fewer OTA channels the broadcast networks could argue that, if approximately the same number of hours per month of TV are watched, they should receive a higher advertising rate per commercial for Aereo subscribers because their viewers’ time is concentrated over a smaller number of channels.

Broadcasters will lose retransmission fees, but for the bulk of their advertising revenues will follow the the cord cutters from cable and satellite to Aereo. Aereo may be able to deliver better analytics than the cable and satellite providers and Nielsen, and that will help broadcasters in their negotiations with sponsors to increase adverting revenues.


Steven Max Patterson lives in Boston and San Francisco where he follows and writes about trends in software development platforms, mobile, IoT, wearables and next generation television. His writing is influenced by his 20 years' experience covering or working in the primordial ooze of tech startups.