The TV Cartel Is Starting To Crack

by Steve Wildstrom   |   April 3rd, 2013

Aereo antenna array (Aereo, Inc.)

By any reasonable standard, Aereo is a ridiculous service. But the rules and contracts that cover the distribution of television content are anything but reasonable. And that means that Aereo, silly as it is, could be the beginning of the end for the cartel of studios, sports leagues, broadcasters, networks, and cable and satellite distributors that has a headlock on content.

Aereo, which is backed by IAC/Interactive Corp. and its wily CEO, Barry Diller, invested a new way of distributing broadcast television. If you subscribe (currently available only in New York) for $12 a month, you are assigned a tiny TV antenna in an array of antennas (pictured above) in a Brooklyn data center. The content–all over-the-air broadcast stations in the area–is converted to an internet stream and delivered to your iPhone or iPad, computer browser, AppleTV, or Roku box. The service also functions as a DVR in the cloud so you can time-shift your viewing.

The silliness is that broadcasters ought to cut out the middleman and stream broadcasts themselves. But local stations can only stream their own content, mostly local news. Networks could stream a lot more, but only content they own outright or have the streaming rights for (a restriction that excludes most sports and much else.) Besides, local stations, networks, studios, sports leagues, and cable companies are locked into a system of contracts, often long term, which no one wants to break because, in the imortal words of Milo Minderbender*, “everyone has a share.”

It’s obvious why Aereo poses a threat to this cozy relationship. So its not surprising that pretty much every station in New York filed suit claiming that Aereo violated their copyrights. They argued that Aereo was essentially acting as a cable company and was required to negotiated what is called “retransmission consent,” a privilege that typically requires a hefty fee. But Aereo carefully exploited every corner and loophole in the law. Those individual antennas–technically quite unnecessary–allowed it to argue that it was merely piping over-the-air content to customers from their own antennas. And it made sure to deliver content only to subscribers within stations’ service areas, thereby honoring local exclusivity requirements,

Aereo won the first round of the legal battle when a district judge denied an injunction blocking the service. And in a potentially much more important decision, the Second Circuit Court of Appeals, in a 2-1 decision, affirmed the lower court decision. The only bright spot for the broadcasters was the dissent of Judge Denny Chin, who called the approach of individual antennas “a sham” and “a Rube Goldberg-like contrivance over-engineered in an attempt to avoid the reach of the Copyright Act and to take advantage of a perceived loophole in the law.”

It’s not clear what will happen next in the case. The TV stations could request an en banc review by the full Court of Appeals or appeal to the Supreme Court, but both are fairly long shots legally. Aereo CEO Chet Kanojia told The Verge he expects the broadcasters will turn to Congress for legislation blocking Aereo. Local broadcasters still carry considerable heft on Capitol Hill primarily because members count on local news to provide vital free media during campaigns.

Local broadcasters still carry considerable heft on Capitol Hill primarily because members count on local news to provide vital free media during campaigns.

But the loss of  the Aereo case is not the only ill omen for broadcasters and networks. Another major blow to the status quo was the success of House of Cards, the slick, high-budget original series on Netflix. While Netflix won’t give out viewer numbers, the company is clearly pleased with the effort and plans to expand it. Original internet programming that can compete straight-up with HBO and Showtime has to make those networks start rethinking their dependence on cable and satellite companies for distribution. For now, they make their content available online only to viewers who are already subscribers. They know full well that a lot of people are viewing pirated versions of their shows–the season premiere of HBO’s Game of Thrones set a BitTorrent volume record–and they know that subscribers are sharing their IDs and passwords with non-subscribers. For now, they are prepared to tolerate the loss (assuming that folks getting content illegally but for free would be willing to pay for it if it were available a la carte.) But this is purely an economic calculation, not a conviction, and will change when the economics tip.

The condition of the television business shouldn’t be confused with the collapse of the record industry. The music business was in trouble before it was hit with large-scale piracy and the record companies made things worse through denial, resistance, and the idiotic strategy of suing customers. The TV industry knows it has to move into a new era. But the current arrangements are highly profitable and it wants to proceed with all deliberate speed.

In the end, that may not be possible. Dish Networks CEO Charlie Ergen sees the end coming. “One of two things will happen,” he said at the D: Dive Into Media conference in February. The rising cost of content will present an incumbent distributor “with a deal they just can’t stomach” and they’ll blow the system up. “But more than likely, they’ll just die because somebody will come in underneath them on price. The likeliest candidates are Amazon or Netflix. Possible Apple. And Microsoft could do it.”

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*–If you don’t know who this is, you should stop whatever you are doing and read Joseph Heller’s Catch-22.”

 

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Steve Wildstrom

Steve Wildstrom is veteran technology reporter, writer, and analyst based in the Washington, D.C. area. He created and wrote BusinessWeek’s Technology & You column for 15 years. Since leaving BusinessWeek in the fall of 2009, he has written his own blog, Wildstrom on Tech and has contributed to corporate blogs, including those of Cisco and AMD and also consults for major technology companies.
  • Glaurung-Quena

    “But the current arrangements are highly profitable and it wants to proceed with all deliberate speed.”

    I think you meant to say “all deliberate slowness.”

    • steve_wildstrom

      I think my sarcasm was lost on non-U.S. readers. In 1954, the U.S. Supreme Court ordered local school districts to desegregate “with all deliberate speed.” In practice, that turned out to mean “as slowly as possible.”

      • http://twitter.com/qka qka

        As a US reader, I was not aware of the US Supreme Court usage. However, I did take it as a play on the use of deliberate as a verb, which refers to long and careful consideration.

  • Rich

    Steve,

    My understanding of the present system is that the public is unhappy with the cable companies because the cable companies will not sell their customers anything but large bundles of channels, when they would prefer to pick and choose what they buy. But the cable companies themselves are in the same position – the broadcasters will not sell them anything but large bundles of channels – and the cable companies can’t fight it because the broadcasters would cut them off, or delete important items like sports or very popular shows which their audience demands. As has been said, the broadcasters have content the public really wants and that has traditionally put the broadcasters in the driver’s seat.

    Referring to what Charlie Ergen mentioned, I don’t see how “somebody will come in underneath [an incumbent distributor] on price” because that would be offering the broadcasters less money and that’s less attractive. And even if the offer was accepted, all that would do is replace one distributor with another and the new distributor would be forced to accept the same bundle of channels. However if the new distributor were Amazon or Apple, they might have a bigger audience than any cable company and that could give them leverage with the broadcasters.

    Another thing that might work as a disrupting force is for Netflix, YouTube, and others to expand the original programming they’ve already started, and for this to become big enough that it pulls a significant chunk of the public away from the existing programming, so that the present content creators and broadcasters lose some of their clout. Then the present distributors could start to break up the bundles of channels.

    • Glaurung-Quena

      “But the cable companies themselves are in the same position – the
      broadcasters will not sell them anything but large bundles of channels”

      I wouldn’t let the cable companies off the hook — basically every player in the TV industry is enjoying the current state of affairs as it delivers very large profits, extracted from cable subscribers and passed up the food chain. Rogers Cable was willing to cut my cost of basic cable in half rather than lose me as a customer. There’s no way they’re losing money on that deal, so right off the bat the cable company itself is enjoying a 50% margin.

      I don’t think this vampiric system is going to be killed by some new startup coming along and “disrupting” things, but rather by a slow but growing trend of people deciding that they would rather wait and catch their shows on some other venue (whether the Pirate Bay or Netflix of just getting the DVD when it comes out a year later) rather than continue to send a thousand dollars a year to their cable provider. The sputtering economy, on the one hand, is causing more and more people to decide they can do without all those channels, and on the other hand, there are more and more alternative venues all the time for catching your favourite “must see” content.

      • steve_wildstrom

        Talking about cable profits is a very tricky business, as is usually the case in an industry where fixed costs are very high. The marginal fixed cost of serving a customer already passed by cable is close to zero; the added variable cost is the per customer/per month fees the MSO must pay for programming. So the marginal profit generated by that customer may be in excess of 50%, but you can’t extrapolate from that to say that the average marginal profit is anywhere near that high. It certainly doesn’t look that way from the carriers’ financial, but cable accounting is notoriously slippery.

      • Rich

        Aereo talks like they’re David who’s going to slay Goliath, but I think it may turn out the reverse of the Biblical story.

        • steve_wildstrom

          Aereo is a stalking horse for IAC/Interactive. I’m not sure that Barry Diller much cares whether Aereo succeeds long term, but I think he values its disruptive potential.

    • steve_wildstrom

      You’re right–the cable companies dislike channel bundles. And they think the networks charge way too much, especially for content hardly anone wants. But the squabbles within the industry, including occasionally nasty fights over retransmission that temporarily take networks off services, don’t change the fact that none of the incumbents wants fundamental change in the status quo.

      I think your last paragraph hits pretty the process Ergen suggests will eventually undermine the system. The toughest nut, though, is live sports and that will probably hold the system together for a while even as everyone complains about the price.

  • Neil

    Thank you Steve for this excellent report. Your opening got me riled up since I’m an Aereo subscriber ($80 annual subscription). I cut the cord in 2008 but after Hurricane Sandy I bought two LTE iPad minis (which give me 20 hours of Internet hotspot service) and Aereo (so I can watch local news during an emergency). Even though I originally bought Aereo for emergency use, I find that I use it nearly every day, mostly at home but sometimes at work too.

    Anyway, once you explained the contractual issues, I realized what you meant by silly. However, even if the local stations and networks could stream, Aereo still has a major advantage — it has all those channels in one place plus Bloomberg (the Bloomberg iPad app also streams live but it suffers from having to go to an app for just one channel). Aereo also enables you to turn of channels you don’t care about in its programming guide, which is genius.

    Aereo has one glaring problem. It’s currently a very good web app optimized for the iPad and iPhone but still a web app (i.e., slow). The company told me its working on native apps. It’s kind of surprising the service didn’t launch with native apps. I hope they arrive soon now that the service seems more viable on the legal front.

    • steve_wildstrom

      If all the channels were streaming, it wouldn’t be difficult to create an electronic program guide-like app that aggregated them.

  • Neil

    One more thing. Aereo’s launch in New York City was clever because as anyone who lives here knows antennas in apartments work poorly if at all. And you can’t place an antenna on the roof of your apartment building and wire it down to your apartment. Two individual antennas in a data center represent the only way many New Yorkers can get OTA broadcasts.