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Walk Like A Duck: Could Aereo Still Compete As A Cable Company?

Aereo LogoMuch ink has been spilled and much anger vented over the Supreme Court’s ruling that Aereo violates the copyrights of major TV networks because it resembles a cable TV service. The majority opinion, which can be found here, stated that how Aereo delivered TV programming to its customers did not matter, because “given Aereo’s overwhelming likeness to the cable companies targeted by the 1976 amendments (to the Copyright Act), this sole technological difference between Aereo and traditional cable companies does not make a difference here.”

In other words, because broadcast networks lobbied Congress almost four decades ago to change copyright law because of cable-related Supreme Court rulings against them — specifically, Fortnightly Corp. v. United Artists Television in 1968 and Teleprompter Corp. v. CBS in 1974 — Aereo must abide by the intent of Congress.

The biggest complaint is that the result of that intent is a chilling effect on innovation. In this statement, Aereo CEO Chet Kanojia asked, “Are we moving towards a permission-based system for technology innovation?” Mike Masnick of Techdirt noted that this “quacks like a duck” test provides no proper guidance for other potential innovators in the TV industry, and that even Hollywood publications were decrying the decision as chilling to innovation and harmful to consumers.

In other words, pretty much everyone — even Hollywood’s closest observers — recognize that this ruling was a disaster towards true innovation, and are hoping against hope that these companies that have spent decades fighting innovation will magically start innovating themselves, now that they wiped out the upstart competitors. I wouldn’t hold my breath. The purpose of this fight was to kill innovation, and that’s not going to spur the networks to innovate. They think they wiped out this threat.

Writing for GigaOM, Jeff John Roberts noted that the victory for the networks is simply a victory for the status quo of television.

In crippling Aereo, you see, the six judges made a choice to entrench the current, badly broken model of TV. That model has let the TV business largely defy the logic of digital distribution, and instead impose a form of cartel pricing on consumers — requiring people to buy a slew of channels they don’t want in order to watch the handful of ones they do.

Have any doubts about the effect of the court’s decision? Just look at how the share price of old-line TV companies popped on Wednesday on the news that the Supreme Court had chosen to bless and protect the status quo.

But while CBS and ABC investors may be throwing around high fives at the sop from the Supremes, the average consumer just took a bath. Not only did the court just stick it to them by protecting the TV industry’s bundle rip-offs, consumers also lose access to a marvelous technology.

Here’s the problem I have with this notion: technically, the Supreme Court didn’t really kill this marvelous technology. They simply made it more expensive. After all, this ruling suggests that because Aereo resembles a cable TV service and is subject to the Copyright Act, it can remain in service so long as it pays the proper retransmission fees to the networks.

This is an important distinction, because Aereo’s one-antenna-per-customer setup was designed so that it wouldn’t have to pay those fees, which are of increasing important to broadcast networks. According to research by SNL Kagan, broadcast networks are due to receive more than $3.6 billion in retransmission fees in 2014. That number could climb up to $6 billion by 2018. Make no mistake, the networks fought Aereo in large part to protect that income stream.

Why are retransmission fees so important? For starters, consider how much the networks are paying the NFL for broadcast rights for each season between 2014 and 2021:

Network
Rights Fee
(in millions)
ESPN
$1,900
CBS
$1,000
FOX
$1,100
NBC
$950
TOTAL
$4,950

NFL games are the highest-rated programs on broadcast television these days, and because of that, they serve as a marketing platform for other programming. As a cable company, ESPN can collect carriage fees to pay for the NFL. If the broadcast networks could do the same, they can offset the cost of their biggest property, profit from the advertising, and promote their other shows, which would be well-covered by advertising.

So let’s consider what would happen if Aereo decided they would be willing to pay those fees. Let’s say they went to the networks and said, “Okay, we’ll give you the X number of dollars per customer that the cable companies are giving you in each market.” What would Aereo look like then?

For starters, Aereo’s monthly fee would probably have to triple. CBS reportedly asked for $2 per month from Time Warner Cable during their dispute last year. If Aereo paid each of the big four networks $2 a month and managed to hold everyone else to a combined $2 a month, then its $8-per-month service would suddenly cost roughly $20 per month.

Even at that price, however, Aereo is still surprisingly competitive with most cable company services, because of all the features that customers would get with Aereo, such as:

1.) The ability to watch TV anywhere. Got a laptop? Aereo would work with that. Got a Roku? Aereo would work with that, too. Smartphones? Tablets? No problem. Most cable and satellite companies won’t let you watch TV where you want, when you want, on whatever device you want without purchasing extra equipment like a Slingbox, and even that might not offer the same level of service that Aereo could.

Of course, you could buy an antenna, a TiVo and a Slingbox to create your own service, but then you’re shelling out at least $600 for both the equipment and TiVo’s “lifetime subscription”, and you would likely want to upgrade much of that equipment in 4 years, anyway. Even then, Aereo at $20 a month is an intriguing proposition. Plus, people who live in apartments that can’t get reliable antenna signal would welcome Aereo’s service.

2.) A built-in DVR. Aereo’s basic service included the ability to record up to 20 hours of TV on a cloud DVR. (We can presume the cloud DVR is still legal, thanks to this Cablevision ruling.) An enhanced $12-per-month service could record 40 hours of TV.

According to the FCC, the average monthly fee for basic cable is now $22.63. Now take a look at how much Time Warner Cable charges for Starter TV with an HD DVR:

TWC starter package

Comcast, meanwhile, charges $12.90 for “Limited Basic TV”, and another fee upwards of $20 for its X1 DVR. Some customers have reported that a $100 service charge is required for X1 installation. Even then, the service lacks the flexibility of Aereo. (Not that you’ll find much of this information out on Comcast’s web site, which is so determined to sell you a bundle that it won’t even let you add Limited Basic TV to your shopping cart.)

Still think an asking price of $20 per month makes Aereo uncompetitive with cable?

3.) Highly detailed viewership information. This is the big selling point to networks. Aereo can provide them detailed information on who’s watching what and when — information that would be highly valuable for advertising purposes. That information plus retransmission fees might convince the networks to stop fighting Aereo and start working with it…

…if it weren’t for the fact that the broadcast networks are all owned by the same corporations that own the vast majority of cable networks.

Perhaps this is why the networks fought Aereo so hard. Protecting the retransmission fees of the broadcast networks wasn’t enough. CBS, Comcast, Disney, Fox, and Time Warner all wanted to protect the carriage fees of their cable channels, too. After all, why would Disney want to make it easy for people to watch ABC without getting them to pay for ESPN? When more than half of all cable customers say they would ditch cable if there were a legitimate competitor out there, why give those customers that possibility?

This is the main reason why Aereo will likely shut down, rather than pay the networks their retransmission ransom. Aereo could survive this ruling and could potentially grow into a legitimate alternative to cable, but thanks to the Supreme Court, it would require a much bigger financial outlay and a harder sell to customers, many of whom reacted so badly to Netflix’s price increases a few years ago. Chances are Barry Diller isn’t willing to finance this idea long enough to find out if it could still work. We’ll have to wait and see if someone else might.

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