Would the big U.S. TV networks sell their stations?

Earlier today, TVNewsCheck ran a story about the positions of the Big 4 U.S. television networks (ABC, CBS, Fox and NBC) on ATSC 3.0. The Advanced Television Systems Committee (ATSC) administers the U.S. standard for digital terrestrial television broadcasting, and ATSC 1.0 is the system currently in use. ATSC 3.0 is intended to implement capabilities that are limited or missing in the current standard, including support for image resolutions beyond HD. Most importantly for many broadcasters, however, is that ATSC is intended to bring mobile TV reception to parity with the fixed HDTVs that we use today, The broadcasting industry realizes that an ever-increasing percentage of its audience is watching television outside the home on smartphones and tablets, but today, access to those devices is mediated by the mobile phone carriers (AT&T, T-Mobile, Sprint, Verizon, etc.). Broadcasters want direct access to those devices and viewers, and are hoping that ATSC 3.0 will give them that access.

The transition to ATSC 3.0 won't be without problems: Broadcasters spent many billions of dollars on new cameras, production equipment and transmitters to move from analog to digital television. Moving from ATSC 1.0 to 3.0 probably won't entail that level of investment, but it will still be expensive for broadcasters. In addition, smartphone manufacturers, mobile phone carriers and consumer electronics companies will have to be convinced (or required by law) to support the new features of ATSC 3.0 in their products. That will take time--potentially as long as ten years.

According to TVNewsCheck, both ABC and CBS have gone on the record as withholding their judgment on ATSC 3.0. Both NBC and Fox support ATSC 3.0 in principle, but both are waiting for more details of the standard to emerge before making a commitment. That led me to wonder whether the network broadcasters actually want or need to make the investments needed to support ATSC 3.0 in the television stations that they own.

All of the top four commercial television networks in the U.S. own and operate several television stations in major cities; in the industry, these are called O&Os (for Owned & Operated.) For example, all four networks own and operate stations in New York, Los Angeles, Chicago and Philadelphia. In Dallas-Fort Worth, all but ABC own and operate their own stations; in San Francisco-Oakland-San Jose, all but Fox own their own stations. The local stations are a big source of revenue and earnings for the networks; for example, in 2013, CBS's network had gross revenues of $8,645 billion and operating income of $1.593 billion, while its local Owned & Operated stations, both television and radio, gross revenues of $2.696 billion and operating income of $807 million. On a percentage basis, the local stations, while not the most profitable unit of CBS, made a much bigger profit than the network (30% vs. 18%.)

On the surface, it seems obvious that CBS, and the other big networks, should keep their stations. However, when you look further, the choice becomes less clear:

• The major networks could easily get $1 billion or more for each of their stations in the top U.S. markets, and those sales would be taxed as long-term capital gains, not ordinary income.
• The networks are already getting a significant amount of their income from retransmission fees charged to cable, satellite and IPTV video operators. They get those fees directly from the video operators in the markets where they own stations, and indirectly in other markets through the fees that they charge their affiliates for carrying their programs. If the networks sell some or all of their stations, they would get affiliate fees from those stations without any of the costs of operating the stations.
• If the networks no longer own over-the-air stations, they would no longer be directly subject to FCC rules. That means no more multi-million dollar fines for "fleeting expletives" or unplanned nipple slips. The networks would still have to abide by FCC content rules to protect their affiliates, however.
• Over 90% of U.S. households already get their television via cable, satellite or IPTV. Over-the-air reception is increasingly an anachronism.

As little as ten years ago, it would have been unthinkable for the Big 4 networks to sell their stations--if anything, they aggressively wanted to buy more. However, since then, we went through the 2008 Great Recession, which hammered local ad revenues. Network television viewership has been declining for several years, and ratings for many of today's successful network series would have guaranteed their cancellation just a few years ago. Now, many industry analysts are forecasting that digital will supplant broadcast television as the biggest recipient of advertising revenue within the next few years. If the Big 4 have the choice between spending billions of dollars to upgrade their stations to comply with ATSC 3.0, or making billions of dollars from the sale of their stations, it's looking increasing likely that sales, at least of their smaller-market stations, will make more sense.

Broadcasters to FCC: No, we won't tell you the details of our retransmission deals

The Wrap reports that the Federal Communications Commission has put its review of the Comcast-Time Warner Cable merger on hold for the second time. This time, the delay is due to the refusal by ABC, CBS, NBC, Fox, Viacom and Discovery to supply the agency with details of their retransmission agreements with cable, satellite and IPTV operators. The reason that the FCC wants the retransmission information in the first place is that opponents of the merger have charged that the combined company would have too much power over program suppliers (including the broadcast and cable networks.) The networks have agreed to provide the U.S. Justice Department with the data because it will be kept confidential, but FCC rules require that the data be made available to both supporters and opponents of the Comcast-TWC deal, so that they can use it in their briefs. Only the general public is prohibited from seeing the data.

The six networks have very good reasons for wanting to keep their contracts secret, because once buyers of their content learn how much other companies are paying, they'll want to renegotiate their contracts down to the lowest price. On the other hand, four of the six companies (ABC, CBS, Fox and NBC) are granted licenses by the FCC to broadcast over-the-air. Unlike mobile carriers such as AT&T, Sprint, T-Mobile and Verizon, television broadcasters get their spectrum for free. So, they are in essence underwritten by U.S. taxpayers for the multi-billion dollar value of their airspace. (Update, November 5, 2014: The FCC has released a "price list" in conjunction with its plan to get broadcasters to relinquish their spectrum so that it can be used for other applications. The FCC values the nationwide recovery of as much as 126 MHz of spectrum at a maximum of $38 billion dollars.) In addition, whenever a retransmission dispute between a broadcaster and a cable, satellite or IPTV operator results in the broadcaster removing their signals from the video operator, the public is stuck in the middle. Therefore, I believe that there's a strong argument for public disclosure of broadcast retransmission deals, above and beyond the Comcast-Time Warner Cable case.

My suggestion is that, if broadcasters want to prohibit anyone outside a handful of government employees from seeing their retransmission deals, they should be forced to pay the full market value for their bandwidth, just as mobile operators do. If they don't want to do that, they always have the option of relinquishing their frequencies and feeding their programs directly to service providers and to consumers over the Internet. CBS threatened to do exactly that if the Supreme Court ruled against it in the Aereo case, so it's clearly an option that's been considered by broadcast networks. If they want to operate in secret using the public's airwaves, they should pay for the privilege.

Aereo avoids a preliminary injunction

Aereo, the New York-based Internet rebroadcasting service backed by Barry Diller's IAC, has won a round in U.S. District Court. According to Reuters, Judge Alison Nathan rejected requests by ABC, CBS, NBC, Fox and other networks and local broadcasters for a preliminary injunction to halt Aereo's service. The broadcasters argued that they would suffer irreparable harm if they didn't get an injunction, while Aereo argued that it would suffer irreparable harm if the injunction was issued. The judge decided that the "balance of hardships" didn't tip decidedly in the broadcasters' favor, and denied the injunction.

Update, July 12, 2012: CED provided more details of Judge Nathan's decision. She wrote that she most likely would have upheld the broadcasters' request for a preliminary injunction, but couldn't, due to the ruling of the U.S. 2nd Circuit Court of Appeals in Manhattan in a case challenging Cablevision's RS-DVR system. In that case, the court found that Cablevision's network DVR system didn't violate broadcasters' and cable networks' copyrights. Aereo is relying on the Cablevision decision in its defense, and Judge Nathan wrote that the arguments made by the broadcasters were "profoundly similar to those already considered and rejected" by the Court of Appeals.

Broadcasters have already begun the process of appealing Nathan's decision, but assuming that Judge Nathan's decision is upheld, they're going to have to come up with a different approach to the case.

Aereo: Another "cable killer"?

Companies have been trying for years to offer cable television-like services over the Internet, without having to either get permission from broadcasters or pay them to retransmit their shows. FilmOn and Ivi are two companies that tried last year, but are both currently "off the air" as the result of court injunctions. Aereo, a New York-based company, is the latest to try. The company launched its service today in New York City. According to the company, Aereo is designed specifically to get around the legal limitations that shut both FilmOn and Ivi down.

Aereo will stream the signals from 20 New York City-area broadcast stations to its subscribers for $12/month, and will include a network-based DVR service that was upheld as legal by the U.S. Supreme Court last year in a case against Cablevision. All the major broadcast networks, including ABC, CBS, Fox, NBC and PBS, will be included, but cable-only networks such as USA, TNT and CNN won't be. That's one big difference between Aereo's service and those of FilmOn and Ivi, both of which offered a selection of basic cable networks. In addition, Aereo will initially only be available in New York City, and Aereo will only carry signals from local television stations--another difference from its predecessors, which made signals from stations in Los Angeles and New York available to subscribers around the U.S.

Aereo is doing one more thing that it hopes will make its service ligitation-proof: For every subscriber, Aereo will install a tiny, thumb-sized antenna in an undisclosed location in New York City. (Correction, February 15, 2012: Aereo is going to allocate each subscriber their own antenna from a pool of antennas while they're using the service, not install a dedicated antenna for every subscriber.) The idea is that each subscriber will receive the signal from their own antenna, not from a "community" antenna, and therefore, Aereo isn't a cable system and isn't bound by cable retransmission rules. It's an interesting way to try to get around the regulations, but whether the courts will agree is an open question.

Aereo has one more card to play: One of its investors is IAC, and company Chairman Barry Diller will join Aereo's Board of Directors. Diller is a former VP of development at ABC Television, former Chairman and CEO of Paramount Pictures and former Chairman and CEO of Fox, where he founded the Fox Television Network. At one time he owned USA Network. Diller is one of the best-connected executives in the media industry, and he has the experience in running and working with television networks and movie studios that neither FilmOn nor Ivi had. However, it's unclear if that's going to be of any help if the New York television stations go to court against Aereo.

Update, March 1, 2012: The Hollywood Reporter reports that not one, but two, lawsuits were filed against Aereo today to stop it from launching on March 14th. The first lawsuit, asking for a permanent injunction and statutory damages, was filed by Fox, Telemundo and PBS and their New York affiliates. The second lawsuit, asking for pretty much the same thing, was filed by CBS, NBC and ABC and their local affiliates. The Hollywood Reporter says that the two lawsuits are likely to be consolidated.

If you live in New York, have poor television reception and don't care about cable networks (or can get what you want from Netflix), it may be worth considering Aereo as an alternative to cable. If you live outside New York, don't hold your breath--Aereo's unlikely to spread to other cities until the courts determine whether or not its service is legal.

Theater owners' true concern about Premium VOD

Fox, Warner Bros., Universal and Sony found themselves at the center of a firestorm last week when word got out that they had agreed to make some motion pictures available to DirectTV, Comcast and VUDU (an over-the-top Internet video service owned by Walmart) for premium VOD play 60 days after they premiere in theaters. Subscribers to those services would pay $30 per movie and would have 48 hours to watch them from when they purchase.

The National Association of Theater Owners protested the studios' decisions, saying that making movies available at home so soon after they open in theaters will "...fundamentally alter the economic relationship between exhibitors, filmmakers and producers, and the studios." On Sunday, the Chairman of Fox Filmed Entertainment replied, saying that only a small number of titles, primarily those that "don't realize their full potential in theaters", will be made available for early VOD.

Here's the underlying issue that theater owners are really concerned about: Their share of ticket sales from films increases the longer that a movie stays in theaters. The first week that a movie opens in a theater, the studio gets 80% to 90% of the boxoffice. In six weeks or so, the theater and studio are splitting the boxoffice receipts 50/50. If a movie stays in a theater for several months, the theater can take 80% of the boxoffice for itself.

Neither movie studios nor theater owners are concerned about true "bombs" going to premium VOD. What theater owners are truly concerned about is that movie studios will make titles that could last for months in theaters available through premium VOD, thus decreasing theater owners' opportunity for profit. If premium VOD becomes very popular, theater owners are concerned that they'll lose their exclusives on all profitable films after 60 days.

My personal opinion is that the premium VOD option may be a mirage. The premium VOD offering appeals to people who really don't want to go to a theater but are willing to pay a fairly huge premium in order to see a movie at home, perhaps two months before they can buy it on DVD or Blu-Ray for the same or less money, and 90 days before they can get it for $1.00 at Redbox or from Netflix. So, the theater owners and studios may end up fighting over nothing, but don't be surprised to hear and see a lot about this over the next few months.

Broadcasters and Cable Operators: Hypocrites on the Hill

Broadcasters and cable operators are facing off today in hearings at the U.S. Congress over compensation for broadcast retransmission rights and the ability of broadcasters to withhold their programming from cable, satellite and IPTV service providers. The broadcasters are being represented by Fox/News Corp. and Univision, and the cable operators by Cablevision and Time Warner Cable.

Today's hearings were triggered by the standoff between Fox and Cablevision that led to Fox's television stations and most of its cable channels being unavailable to Cablevision subscribers for almost two weeks. The broadcasters, led by Chase Carey of News Corporation, want the government to keep out of the negotiations and impose no requirements for binding arbitration. The cable operators want broadcasters to be required to make their programming available so long as negotiations are continuing, and want binding arbitration at a minimum, if not outright controls on the prices that broadcasters can charge for retransmission rights.

Let's take the broadcasters' side first. They don't want any government interference in or controls on their negotiations. However, their right to set prices for and control retransmission of their programming was established by the U.S. Government in the 1996 Telecommunications Act. Prior to that, they had no choice but to provide their programming to any cable operator who wanted it and was willing to pay the U.S. Copyright Office for the right to use it. If the government hadn't "interfered", broadcasters wouldn't have the rights that it doesn't want the government to interfere with.

In addition, other than a modest fee for a license issued by the U.S. Government, broadcasters don't pay a penny for the bandwidth that they use. If they had to pay the true market value for the bandwidth they use, broadcasters might have a stronger argument, but they're getting the bandwidth that makes their businesses possible for free.

Now, consider the cable operators. The rates that consumers pay for cable service have been going up steadily for years, faster than the rate of inflation, even before the current round of retransmission negotiations. Cable operators have managed to rid themselves of most local controls over their pricing, and they steadfastly refuse to implement a la carte pricing, which would allow consumers to pay for only the channels that they want to watch. The result is that cable (as well as satellite and IPTV) subscribers are forced to pay for dozens of channels that they never watch and wouldn't miss if they weren't available.

Broadcasters want the U.S. Government to subsidize their bandwidth and give them the right to charge for their programming, but they don't want government interference in their negotiations with cable operators. Cable operators plead poverty but have been raising rates for years, and refuse to give their customers the right to pay for only the channels that they want to watch. Both sides are hypocrites.

Ivi TV: Let's see how long this lasts (Updated with new information)

Ivi, Inc., a Seattle-based company, has launched what it calls a "revolutionary" live television application. For $4.99 (U.S.) per month, they will stream the live feeds from 16 over-the-air television stations in New York City and 10 from Seattle straight to your computer. Their feeds include ABC, CBS, Fox, NBC, PBS, Telemundo, Univision and other affiliates, as well as independents.

Update, 14 September 2010: Ivi seems to be trying to take advantage of U.S. Copyright law that was written well before the advent of the Internet, while simultaneously avoiding FCC rules that make the company's plans patently illegal. (Keep in mind that I'm not a lawyer, so I'm bringing a layman's knowledge to the situation.) In the Code of Federal Regulations, Title 37, Section 201.17, "cable systems" as defined by this statute are entitled to retransmit ("secondarily transmit") television stations' signals under a statutory (or "compulsory") license. The cable system pays a royalty based on its revenues to the U.S. Copyright Office. This portion of the statute was written in 1978, almost 20 years before the commercialization of the Internet, and it didn't contemplate a technology that would make a national cable service feasible outside of FCC regulations.

The FCC has its own rules on permission and compensation for retransmitting the signals from broadcast television stations. Here's a direct quote from the FCC's Fact Sheet on Cable Carriage of Broadcast Stations:

The Communications Act prohibits cable operators and other multichannel video programming distributors from retransmitting commercial television, low power television and radio broadcast signals without first obtaining the broadcaster's consent. This permission is commonly referred to as "retransmission consent" and may involve some compensation from the cable company to the broadcaster for the use of the signal.

If ivi is a cable operator or other multichannel video programming distributor, the FCC's rules require the company to get permission from broadcasters before they retransmit their signals.

Under Title 37, Section 201.17, ivi claims that it's a cable system and has a right to a statutory license to television stations' programming, no matter where they're located. However, ivi claims that it's not subject to regulation by the FCC, and therefore is not a cable system. CFR 37 Section 201.17 says that cable systems are entitled to statutory licenses, even if they're not defined as cable systems by the FCC.

So, what's likely to happen? My suspicion is that there are many high-paid attorneys at the television networks and cable operators working on this right now. One option would be to get the U.S. Congress to amend or repeal Section 201.17, since the FCC's rules supercede it. Another option would be to get the FCC to rule that ivi is a legitimate cable operator, and the fact that it owns no plant doesn't mean that it's free from FCC regulation. A third option would be for programming suppliers (the major networks, movie studios and syndicators) to file suit against ivi, charging the company with interfering with their exclusive distribution contracts with local television stations outside the New York City and Seattle markets. These suppliers could petition for an emergency injunction to shut down ivi's service.

Ivi might have a better case than I anticipated when I first wrote this post, but I still believe that it's only a matter of time before it gets shut down. It may take a year or two for the necessary statutory changes to be put into place, but a preliminary injunction can be put into effect in a matter of weeks, or even days.

Hulu Plus begins testing, and it's an OMG experience

You may remember when the company that became Hulu was first announced by NBC Universal and News Corporation. Critics derided the company and said that two non-tech media firms could never build a compelling online video service. Google called it "ClownCo." But when Hulu actually began beta testing, virtually all of the critics changed their tune overnight. It was head and shoulders above any online video service available at the time.

Rumors have been flying for months that Hulu would introduce a paid subscription service, and yesterday, they did just that, announcing Hulu Plus. The new service will be priced at $9.99 per month, and it provides full access to all the current year's episodes of shows from ABC, Fox and NBC, as well as complete libraries of episodes of some series. One of the biggest complaints that users have had about Hulu has been spotty availability of episodes--some series would only have three or four episodes from the current season available, others would only have a single episode available for a limited time, and so on. By and large, Hulu Plus appears to eliminate these problems.

I've had a chance to try out the free preview of Hulu Plus on both an iPad and iPhone 4 (it's available from the iTunes App Store,) and like the original Hulu, it's an OMG experience. I tested it on a WiFi network, so I can't speak to its quality when viewed using AT&T's 3G network, but the video quality is superb and the user interface is well-designed.

Some reviewers are already calling it a cable or TV Everywhere killer, but Jason Killar, Hulu's CEO, is trying to nip those ideas in the bud. TV Everywhere has a big advantage in that it carries content not only from the broadcast networks but from the major cable networks as well. Hulu may well extend its array of content providers, but the company has to be careful not to over-expand and dilute the revenue shares that it has promised to its investors and primary content providers. Similarly, Hulu Plus is strictly an on-demand service; if you want to watch a live sports event, or see a series episode on the day and date that it's originally broadcast, you'll need a cable, satellite or IPTV service provider.

In any event, I wasn't particularly excited about Hulu Plus until I had a chance to try it out. I'm very likely to be parting with $9.99/month once the service becomes available.