Monday, August 05, 2013

Aereo: If you can't beat 'em, buy 'em?

Let's set the War of Retransmission between Time Warner Cable (TWC) and CBS aside for a minute, and consider another battle that CBS is fighting: The one with Aereo, the company (backed by IAC/InterActiveCorp) that's deploying hundreds of thousands of tiny antennas in cities across the country to allow consumers to watch broadcast television over the Internet. So far, Aereo has prevailed in court against CBS, Fox, ABC, Univision, NBC and local broadcasters.

Aereo is paying nothing for retransmission rights, and if it prevails in lower court, the television networks will have a potentially years-long court battle to shut the service down, followed by fighting to enact legislation against Aereo if the court battle fails. In the worst case, Aereo could provide a model for anyone to get into the over-the-top Internet television business without paying a dime to broadcasters.

Let's return to the War of Retransmission. Earlier today, Time Warner Cable made CBS an offer: Instead of including CBS as a standard part of all of its cable packages, TWC would make CBS and its related channels "a la carte," just like HBO or CBS's Showtime. CBS could charge whatever it wants, TWC would collect the fee and pass 100% of it back to CBS.

That brings us to an important point: Broadcast retransmission and cable network licensing fees can't continue to go up indefinitely. We are very close to the point where multichannel video services will be too expensive for the majority of consumers. When that happens, we'll see millions--yes, millions--of cable, satellite and IPTV customers downgrading their service, and quite a few of them cancelling service altogether.

There are two trends that could result in very undesirable outcomes for broadcasters:
  1. Aereo may have a legal way to distribute broadcasters' video without paying them anything for retransmission rights, and
  2. Broadcasters don't have much more room to increase retransmission fees before cable operators and their customers walk away.
Here's a heretical approach that could well solve both problems: A group of broadcasters should buy Aereo, and use it as the basis for their own multichannel video service. By most accounts, Aereo's customer software is well-designed, and the company is scaling up to serve the 60 largest U.S. markets. With Aereo, broadcasters could quickly put a national video distribution system into place. As for the problem with rising retransmission fees, broadcasters could figure out just how much consumers are willing to charging them directly.

Instead of Aereo's current pricing model ($8 to $12/month,) a broadcaster-owned Aereo could offer channels on an a la carte basis--and consumers could buy the channels that they want. Those broadcasters (and cable networks) that want carriage on Aereo without getting direct compensation could make their channels available as part of the basic Aereo package (which would be priced at perhaps $5 per month) at no additional cost to subscribers. Broadcasters could make all of their digital subchannels (the extra channels made possible by digital television in the U.S.) available through Aereo, either at no charge or as part of their main channel subscription. They could also offer their own bundles and packages in order to launch new channels or increase viewership of existing ones.

The next step would be to add cable channels to Aereo. Some of the most popular free and paid cable channels are owned by the major U.S. broadcast television networks, including ESPN, The Disney Channel, Fox Sports 1, FX and Showtime. The only broadcast network that probably wouldn't participate is NBC (which owns USA, Bravo, Syfy, E! and others) because it's owned by Comcast, but given NBC's ratings in recent years, that's no loss. With Aereo in broadcasters' hands, it would no longer represent a threat, but instead would be both an offensive and defensive weapon: Offensive, in its ability to attract revenue away from existing video distributors, and defensive, by being offered to consumers for free in markets where a cable operator or other video service is threatening to drop a broadcast network over retransmission fees.

Do I think that a group of broadcasters is likely to buy Aereo? No. Do I think that they should seriously consider it? Yes.
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