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Upstart Aereo Makes Air Waves

No one can say with certainty whether upstart over-the- top TV provider Aereo will blow apart the current U.S. broadcasting system as we know it.

But one thing is for sure: All parties in the fight are posturing and protecting their positions.

At the National Association of Broadcasters convention in Las Vegas last Monday (April 8), News Corp. chief operating officer Chase Carey said his company would consider transforming its Fox broadcast network into a pay TV channel if Aereo, which gives access to TV networks over the Internet, were ultimately to prevail.

CAREY SOUNDS ALARM

“We will not sit idly by and let people steal our signal,” he said.

In a statement, Fox later elaborated, adding that it will continue to fight for its rights in court and through all available political avenues.

“We have no choice but to develop business solutions that ensure we continue to remain in the driver’s seat of our own destiny,” Fox said. “One option could be converting the Fox broadcast network to a pay channel, which we would do in collaboration with both our content partners and affiliates.”

Aereo won the initial round of the battle on April 1, when a U.S. appeals court refused to issue an injunction that would temporarily shut down the service while ongoing copyright infringement litigation moves forward. That litigation isn’t expected to go to trial until later in the year, and it could take months before a final decision is issued.

Broadcasters have been up in arms since Aereo launched about a year ago. The Aereo service essentially captures broadcast signals via banks of tiny antennas that are dedicated to each individual subscriber. Because its customers lease each individual antenna, Aereo claims its service does not constitute a “public performance” of copyrighted content and is therefore legal.

Broadcasters have taken the opposite position and are demanding the service either be shuttered or forced to pay the requisite retransmission-consent fees.

EXPANSION PLANS

Aereo is currently only available in New York — it won’t say how many subscribers it has — but it expects to launch in 22 cities across the country by year-end. Some published reports have put its subscriber figure at around 3,000.

“Aereo has invented a simple, convenient way for consumers to utilize an antenna to access free-to-air broadcast television, bringing television access into the modern era for millions of consumers,” Aereo spokesperson Virginia Lam said in a statement. “It’s disappointing to hear that Fox believes that consumers should not be permitted to use an antenna to access free-to-air broadcast television.”

While the service has yet to make a significant dent in the more than 100 million TV households across the country, it presents a real threat to one of the most lucrative and profitable revenue streams for broadcasters — retransmission-consent fees.

Retransmission consent has been a thorn in the side of distributors who have lamented the huge increases in payments over the years. SNL Kagan has estimated that retrans fees rose six-fold between 2008 ($500 million) and 2013 ($3 billion); the take is expected to double to $6 billion by 2018. With Aereo in the mix, cable operators, telcos and satellite-TV service providers could have a valuable bargaining chip in future negotiations with broadcasters.

In a research note after Aereo’s April 1 court win, BTIG Research media analyst Rich Greenfield wrote that Aereo’s biggest immediate value to distributors is in the additional leverage it could give them come retrans negotiation time.

“As long as Aereo exists for consumers, it significantly changes the leverage imbalance that has dominated retrans negotiations,” Greenfield wrote. “The more markets Aereo expands to, the greater the retrans leverage shifts.”

But for broadcasters, retrans has been a savior during times of depressed ad revenue and has emerged as an essential component of their business. And even though two top broadcasters — CBS and Univision — threw their support toward Carey, it was guarded at best.

CBS CEO Les Moonves told the The New York Times last week that he “wholeheartedly supported” Carey, but quickly added he didn’t think the network would get to the point of actually converting to pay TV. Univision chairman Haim Saban said in a statement that the Spanish-language broadcaster is investigating all of its options, including converting to pay TV.

For many observers, Carey’s comments were another attempt to force regulators to take a greater role in the debate. Leaving the 10% of TV households that rely exclusively on over-the-air TV in the dark would only serve to agitate the millions of consumers in those homes.

In a blog post last week, Public Knowledge senior staff attorney John Bergmayer called Carey’s NAB comments “empty threats, calculated to serve a political purpose. They are not preannouncing business plans.”

The broadcast business is just too lucrative, Bergmayer added, and if Fox or any other network chose to abandon the public airwaves, there would be a long line to take its place.

Other broadcasters privately shared that opinion.

BACKING BROADCAST

“The truth is, these broadcast stations are still the best distribution there is,” said one veteran broadcast executive who asked not to be named, pointing out that where a network uses cable to fill in markets without a broadcast affiliate, the ratings are often a fraction of what they are where a local station is available.

Although an Aereo victory could mean that some of the best programming could move from broadcast to cable, a la Monday Night Football, the executive said, he believes the Supreme Court will ultimately decide in broadcasters’ favor on the copyright question.

Broadcasters also have other options in the event of an Aereo victory. The broadcast executive said networks could try to persuade Congress to impose a retrans obligation via reauthorization of the Satellite Television Extension and Localism Act, must-pass legislation that both the Commerce and Judiciary committees have to deal with. He called it the perfect vehicle for a legislative fix if the court case goes against broadcasters.

John Eggerton and Broadcasting & Cable deputy editor Michael Malone contributed to this report.

TAKEAWAY

Broadcasters are taking note of the threat over-the-top provider Aereo poses to their lucrative retransmission-consent revenue stream.