Aereo Is Rattling the Network TV Cage

by Jonathan Berr | April 10, 2013 12:00 pm

An upstart company has forced Fox into a dangerous bluff.

Aereo, backed by billionaire mogul Barry Diller, is a service that enables users to stream broadcast television signals without paying the retransmission fees that net the media companies billions each year. Even scarier for the industry is Aereo’s rock-bottom price of $12 per month.

The company, which has big expansion plans this year, argues there is no need to pay the fees because customers already own the dime-sized antennae that pick up signals over the Internet. So far, the courts have backed Aereo, which explains why the media companies are turning to the court of public opinion.

Speaking before a conference sponsored by the National Association of Broadcasters earlier this week, News Corp (NASDAQ:NWSA[1]) Chief Operating Officer Chase Carey sounded the alarm bells, raising the possibility of converting the Fox broadcast network into a pay channel.

What the people who covered Carey’s remarks didn’t note was how crazy that would be for News Corp.

If Carey made good on his threat, the audience for Fox would plummet, as viewers would balk at the prospect of paying for something that has been free for decades.

Fox would bleed money as its viewership fell, because most television advertising is sold in advanced based on guarantees of the audience that it expects to watch the show. If the ratings for the show fail to match the network’s estimates, advertisers are entitled to what is known as a “make-good,” essentially free commercial time.

There’s big money at stake here. Fox sold about $2 billion in ads ahead of the current television season.

Walt Disney’s (NYSE:DIS[2]) ABC, Comcast’s (NASDAQ:CMCSA[3]) NBC and CBS’s (NYSE:CBS[4]) flagship network would face the same issues if they went down the path that Carey outlined. Executives at these networks, though, are sympathetic to his views because they’re worried about what Aereo represents.

The era of network television is coming to an end. Viewers want shows they want when they want them — they don’t want networks dictating those terms. Exactly how the industry will evolve in the coming years remains unclear, but the seeds of change have been sown.

Consumers are starting to balk at paying for programming that they never watch — and in the case of sports, at shelling out big bucks for it. As evidenced by Cablevision’s (NYSE:CVC[5]) suit against Viacom (NASDAQ:VIAB[6]), cable and satellite providers aren’t thrilled about having to carry less popular channels in order to carry more popular ones. The current model where consumers pay for packages of channels seems both antiquated and unfair.

As the Aereo situation shows, the media conglomerates are especially screwed by these developments. The local television stations they own reaped $2.36 billion in retransmission fees last year and stand to make $6 billion by 2018, according to data from SNL Kagan cited by The New York Times.

Given the changes coming to the media industry over both the short- and long-term, investors should stay on the sidelines until the fates of the content kings become clear.

When that will happen is anyone’s guess.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.

Endnotes:
  1. NWSA: http://studio-5.financialcontent.com/investplace/quote?Symbol=NWSA
  2. DIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIS
  3. CMCSA: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMCSA
  4. CBS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CBS
  5. CVC: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVC
  6. VIAB: http://studio-5.financialcontent.com/investplace/quote?Symbol=VIAB

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