With D-ecision Day Looming for Aereo and Broadcasters; What Follows for TV?

By Bob Wallace February 06, 2014

The future is uncertain for innovator/streamer Aereo as it faces a high-stakes Supreme Court decision that could make or break the firm. Broadcasters want a win because the upstart is challenging the broadcast business model by delivering their over-the-air TV signals via the Web and without compensation to a fast-growing consumer base for $8 a month.

Consumers -- long tired of paying far higher prices for the channels they view, and the continuing addition of monthly fees -- are hoping Aereo’s streak continues well into the future. Many wonder why entrenched, deep-pocketed broadcasters were beat out in the delivery of this innovation by a onetime tiny upstart that’s becoming a household name in major TV markets such as Boston, New York,  Dallas, Atlanta, Houston, Miami, Denver and Washington, D.C.

The Supreme Court decision, expected in October as the small window in April is closing, will do more than set a powerful precedent. It will go a long way to determining the near- and long-term future of pay TV. Why? Because the fighting between broadcasters and service providers over retransmission fee deals is intensifying, casting much of the pay-TV ecosystem in an unflattering manner to innocent subscribers often caught in the heavy crossfire.

Aereo Recap

The high-stakes fight currently underway in the nation’s courts is more about money than streaming. Aereo’s service uses tiny antennas in its network to take over-the-air programming signals and stream them over the Web for viewing by viewers PCs, Web-enabled tablets and smartphones (plus Apple TV and Roku). Aereo claims this is a “private performance” and therefore does not have to pay broadcast networks license fees. Aereo also provides a network/cloud-based DVR that enables subscribers to record and store content from the channels.

With both sides anxious for the highest court’s decision, what are the possible outcomes of the case?

Does Aereo have everything to lose and little to gain from the court hearing the lawsuit/case? Answer: not exactly.

Possible Outcomes

  • If the majority of justices rule in favor of Aereo, it clearly wins and sets a precedent that will go a long way to determining the future of TV.
  • If the eight justices (one has recused himself) are deadlocked at 4-4, Aereo wins as the law reverts to the lower court finding which has already gone its way.

Talk about disruption…Why would cable companies want to pay high prices for broadcast network challenges and lose customers by being seriously underbid to a large extent by Aereo, and any followers?

It’s more likely broadcasters would follow through on threats to move their coveted content to cable networks to stymie Aereo than risk cord-cutting fearful cablecos from offering content- and price-light options like Aereo to their customers.

Though the case has ties to copyright concerns from content owners that were against Cablevision’s plan to store content owners’ assets in their network/cloud (network DVR) for remote access and recording, service providers eventually won the day throwing open the door to services that Comcast and others are announcing.

Worst case scenario?

  • The Justices rule at least 5-3 against Aereo and the upstart, which is said to have at least 300,000 subscribers in New York alone, would have to find an innovative way to maintain some semblance of its service that didn’t violate the decision.
  •  It could cease operations. Perhaps it could keep its technology and redirect its efforts, or sell it for the cash.

Alternative Scenarios

  • What if Aereo wins or loses and is acquired by a major broadcaster or industry power? It’s crystal clear that the service is very popular and has already demonstrated, before a decision, to a growing audience that basic TV doesn’t have to cost a lot and be sold with other services that consumers don’t want.
  • Are big broadcasters only bluffing when they threaten to move coveted content to cable networks if Aereo wins? That would weaken the service but would also not be a “fun” result for broadcasters.
  • Another hypothetical question is whether Aereo losing with the Supreme Court would result in broadcasters moving beyond the stressed business case status quo and deliver offerings that have some of the DNA of Aereo’s and thus advance the evolution of TV. This would be a loss for Aereo financially but a big win in principle.
  • The broadcasters could win and do nothing, an outcome that would raise questions with a growing audience of Aereo subscribers and onlookers who wonder why TV service prices and business arrangements are the way they are today.

Win, Then Evolution?

If Aereo wins, and even if broadcasters don’t take defensive measures in response, it has work ahead to evolve its service to appeal to a broader audience. If the upstart’s first focus after a win is to continue its service rollout, expecting service enhancements and further innovation is probably premature. Aereo is already claiming challenges scaling to meet user demand.

Still, it’s important to identify what Aereo’s service isn’t.

What Aereo currently lacks most is sports programming. Unless a match, like last weekend’s Super Bowl, is on broadcast network TV, the upstart’s customers need another source. That typically means cable -- and not the entry-level package.

So many professional and college sports leagues have created regional sports networks (RSN), such as New England Sports Network (NESN), which carries the lion’s share of regular season games for the Red Sox, Bruins and Celtics. Sports programming is carried over cable channels so Aereo can’t offer it.

RSNs can be owned in part by cablecos, some of which last month added RSN fees to subscribers’ monthly invoices to help cover rising costs for sports programming everywhere. Operators have also created special sports programming packages for subscribers who don’t already have the top (priciest) channel lineup. All this is atop ongoing price increases blamed on rising content costs.

If you can get by with marquee sports events often but not frequently carried by the top broadcast networks, Aereo can work. If you demand more programming, you need something in addition to the firm’s streaming service.

And unless RSNs offered a workable carriage deal to Aereo (and anger longtime distributors), it’s likely the firm would steer clear of additional sports programming as even innovator Netflix has publicly stated it will do.

Original and Premium Programming?

Expecting original series from a provider streaming the signals of others would be a huge reach. Viewers seeking such programming will have to settle from what the over-the-air broadcasters offer or add an OTT service such as Netflix, Amazon Instant Video or Hulu.

Remember, Aereo also lacks the premium movie-turned-original series channels such as HBO, Showtime and Starz, among others.

Netflix shelled out $100 million for the award-winning House of Cards and has gained followers from the Orange is the New Black. That’s a gigantic price to pay for Aereo.

With Aereo, you also don’t get specialty channels, movie-turned original series channels, or cable networks to which broadcasters have threatened to move their over-the-air signals to thwart Aereo.

Addition through Subtraction

Given the groundswell of interest in Aereo’s service in major TV metro markets, consumers like it for what it doesn’t have; high prices, expensive content they can live without and an easy way to get local content and major network programming without the fees, equipment, other communication service and term commitments with penalties.

They also like the price flexibility to combine Aereo with other TV services such as OTT options and movie rentals from Redbox. With major sports channels and leagues exploring online streaming of increasingly coveted content, hardcore sports fans may be part of a second wave of Aereo customers.

The Bottom Line

The High Court’s decision – or deadlock – will result in a powerful precedent for the TV industry with far-reaching impact. It’s “all about the Benjamins” in this technology innovation-driven dispute, which will likely not be completely settled regardless of the ruling.

Edited by Rory J. Thompson

VP of Content

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