A Much Bigger Win for Consumers in Long Run

By Tom Gibbs - July 20, 2012 | Tickers: CBS, CMCSA, NWSA, TWX, DIS | 0 Comments

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Everybody loves a good underdog story, and last week’s denial of a temporary injunction against Aereo’s entry into the TV-streaming service market highlights the continued difficulties that broadcasters are having in the rapidly evolving entertainment market. 

What Has Happened?

Backed by media mogul Barry Diller, Aereo, which grants consumers access to local broadcast TV shows via Internet streaming for a mere $12/month subscription, was originally targeted by large broadcasting conglomerates prior to the start-up’s launch this past February.  The rather daunting list of plaintiffs, including Comcast’s (NASDAQ: CMCSA) NBC, News Corp’s (NASDAQ: NWS) Fox, CBS Corp (NYSE: CBS), and Walt Disney Co. (NYSE: DIS) alleged that Aereo violated their copyrights because the firm did not get permission to retransmit such signals or pay for the content watched by its subscribers.  The so-called “retransmit fees,” alongside television ad revenues, are one of the important top line sources for these content kings. 

Aereo’s service is unique in the fact that it generates subscription revenues by renting out small digital antennas to individual consumers.  The antennas, which are harbored within the corporation’s own data centers and act independently from one another, essentially act as DVRs for each unique consumer without having Aereo to publicly transit the broadcasted programs to its subscriber base.  Even though it is likely that the plaintiffs will continue down the litigation path, the recent court decision makes it seem increasingly unlikely that they will be able to succeed in getting Aereo to pay for the content that its consumers are able to view on laptops and mobile devices. 

Following the court ruling, Diller announced that Aereo, which is currently located solely in the New York City market, would make a rapid expansion of the service into other large U.S. cities.  He expects that Aereo will hit “most major U.S. markets” within the next year and a half. 

The Start of Something Much Bigger

Aereo might only be a pesky thorn in broadcast networks’ sides right now, but the company’s expansion following its first legal win highlights a potentially crippling problem for companies like Comcast, CBS, and News Corp as entertainment options for consumers further promote cable cutting trends. 

Retransmission fees, for example, might not represent the bulk of such networks’ top lines, but they do offer an attractively growing revenue stream.  Media analyst SNL Kagan, for example, estimates that Fox, CBS, NBC, ABC, CW (partially owned by Time Warner (NYSE: TWX)), and Univision will collectively rake in almost $3 billion in retransmission fees by 2015.  Up from $1.4 billion in 2011, the revenue growth experienced from the collection of such fees is expected to grow just shy of a 20% CAGR through 2017.

News Corp’s Fox, which has been one of the most aggressive retransmission fee collectors over the past several years, enjoyed a 100% year-over-year increase in these fees between Q2 2011 and Q2 2012.  Fox, which has been growing these revenue streams much faster than the average player in the industry, is expected to rake in more than $250 million in such revenues from distributors plus an additional ~$40 million from Fox affiliates in 2012.  The figures are expected to grow to $460 million and $340 million, respectively, through 2015...by no means chump change.

Retransmission fee collection has become even more important to the networks’ mid-term growth story due to the recent sluggishness of television ad spending.  Out of the major networks, only Fox saw a gain in ad sales in 2011 – and this was partially due to its airing of the 2011 Super Bowl.  CBS, ABC, CW, and NBC (which was coming off of the airing of the 2010 Winter Olympics), for example, saw ad sales decline 3.3%, 3.9%, 11.6%, and 12.9%, respectively, last year.  With very modest ad spend growth rates projected over the mid-term, these networks need to recoup lost revenues through any means necessary. 

Not Putting Up With the Antics

One of the primary drivers behind the cable cutting trend and the subsequent pairing of supplementary services like Apple’s itunes, Netflix, Amazon Instant Video, Coinstar’s Redbox, and potentially Aereo in the near future are the passing on of additional content costs to consumers.  TV distributors are forced to pay these media companies on a per channel, per subscriber basis each month, and must hike cable/satellite subscription costs in order to offset the cost increases. 

Some companies have not been successful in completely offsetting these costs however, and it has come to the point where airing such content is a losing proposition.  Recent blackouts of AMC, which owns popular show titles including Mad Men, The Walking Dead, and Breaking Bad, have occurred on Dish Network.  Likewise, DirecTV’s recent tussle with Viacom has prevented subscribers from tuning into key channels like Comedy Central, MTV, Nickelodeon, and VH1. 

Not only are the ever-increasing cable/satellite bills turning off consumers to such entertainment consumption avenues, but the continual bickering between the content owners and the content pushers (and the subsequent blackouts) is making some of the industry’s newest offerings more attractive alternatives. 

Aereo, which as of today still only offers its service in the New York City area, is still but a rather insignificant start-up that has yet to prove its full potential on a nationwide basis.  The corporation’s initial legal success against the heavy-hitting broadcast networks, therefore, might be an enjoyable novelty win “for the good guys,” but it comes with minimal consequences for the networks over the next several quarters.  No, if anything, it is the entertainment-hungry consumers that are the biggest winners as the three-way content battle continues to rage.  The number of choices for consumers will only continue to increase, and the opportunity to access adequate and lower-cost entertainment will become more prevalent.

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