Cable and Satellite Companies May Use Aereo for Leverage
The basic business model of Aereo is it provides an antennae to each individual customer in order for that person to be able to capture content from the four major broadcasters. From there the content can be streamed to a variety of screen options.
The sudden rise of Aereo and its business model has resulted in yet another competitor to broadcasters. These broadcasters are now battling the company over whether or not it has the legal right to exist.
It has further muddied the content waters, with companies like Comcast caught on both sides of the issue. Comcast would benefit on the cable side of its business because of possible lower retransmission fees, but possibly lose out on the content side of the business because of its ownership of NBCUniversal, which may lose revenue because of downward pressure on retransmission fees.
Although this is unlikely to have any material effect on the stocks of broadcasters in the short term, over the longer term is is definitely a potential disruptor This is assuming that Aereo and similar businesses are allowed to operate.
Is Aereo a real lever?
The question is whether or not Aereo can be considered a real lever for content distributors. I believe the answer is yes. A major reason is the aggressive legal attacks that were initiated on it by the major content companies in an attempt to stop it before it gains traction and market share.
CBS , Disney, and Twenty-First Century Fox , among others, are seeking to get a ruling against Aereo that would shut it down.
At this time, if Aereo is allowed to continue then CBS would be the hardest hit because it commands the largest share of viewers. Its market share commands retransmission fees of over $250 million annually. Disney and Twenty-First Century Fox are pretty close behind, generating about $250 million in retransmission fees; this is expected to double in a couple of years, possibly climbing to a combined total of about $6 billion by 2018. Comcast's NBCUniversal isn't in near as strong of a position, as it generates about $200 million in retransmission fees annually at this time.
If retransmission fees are aggressively implemented by broadcasters, we'll probably see some major action taken by content distributors to combat that. This is because it would result in churn and lower earnings.
Aereo could be partnered with, of course, assuming that it is ruled to be legal. Likewise, cable and satellite companies could create similar services to sidestep the giant broadcasters. It isn't likely to trickle down to smaller cable companies because of prohibitive costs.
The reason for this battle, and the value of Aereo as a lever, is because of the skyrocketing cost of retransmission fees for the cable, satellite, and telecom industries.
This is complex because companies like Dish Network have stated that satellite and cable companies need to take a stand against the rising price of retransmission fees. Dish sees the fee growth as unsustainable. Eventually that will be true, as content distributors will have to pass on the higher costs to customers which will in turn result in an increase in churn.
DirecTV, Time Warner Cable, and Charter Communications have already stated that they are seriously considering adapting a similar business model to Aereo.
Dish Network hopes that the noise will come to the attention of politicians, causing them to revisit the retransmission fees issue. The idea is that if consumers complain loud enough, lawmakers may put a limit or cap on the fees. At the very least they might slow down the pace of increasing prices.
Broadcasters are pushing hard to keep control of the retransmission fees because they are major revenue catalysts for the next two to three years. This is because TV ad revenue is expected to remain level at best.
Broadcasters threaten a reverse lever
To add even more volatility and complication to the narrative, CBS and Fox have threatened to change to a cable model if the Aereo business model is allowed to continue. That's interesting because it's a reverse lever. If the companies were to use a cable model, there would be no signal to capture. Under that scenario Aereo would have no way of accessing Fox or CBS content. Without the content, Aereo wouldn't have anything to stream or sell to customers.
For that reason, cable channels aren't able to be accessed. This means that companies using cable aren't under any competitive pressure from the Aereo business model, only the major broadcasters are.
The outcome is uncertain for now
Eventually the Supreme Court will decide the fate of Aereo. If past court successes are any indication, it has a good chance to be considered a legal business model. It is at that time cable and satellite companies may be able to negotiate from a more equal footing than they are now.
Most of this depends upon whether or not the assertions being made by the various parties are posturing, or if they are serious responses to the situation and how it plays out.
If Aereo is ruled against by the Supreme Court, the point is moot. If it is given the go ahead to proceed, the business content providers and distributors will no longer operate the same.
Taking into consideration all the variables, I think that Aereo will help cable, satellite, and telecom companies. Even so, retransmission fees will continue to rise over the next year at least since it will take time for the company to scale.
There is also the possibility that content distributors will adapt their own Aereo model, of course. This would help their own cause in the retransmission fees war.
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The article Cable and Satellite Companies May Use Aereo for Leverage originally appeared on Fool.com.Gary Bourgeault has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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