Wall Streeter sees renewed interest if Aereo grows

As Aereo’s legal case winds its way through the courts, one Wall Streeter wonders if broadcasters should revisit the idea of converting to cable networks.

The notion gained currency in 2009 as the economy tanked and broadcast economics looked grim, especially for fourth place (at the time) NBC. But the worst of the recession passed, CBS started reaping big bucks from retransmission, and such talk faded.

In an analysis Friday, Sanford Bernstein analyst Todd Junger acknowledged the many impediments to a move, including economics, diversity and the public interest, but noted that “in a world where Aereo (or equivalent) was thriving and stealing away pay-TV subscribers and the retrans that goes with them, the math would be different.”

“Faced with this prospect, we believe the broadcast networks would be better off converting to cable, preserving their bundled economics and working as hard as possible to minimize the negative impact of losing the local presence,” he said.

Barry Diller-backed Aereo, which launched in New York last year, beams broadcast shows to its subscribers via dime-sized antennas. It survived an initial legal challenge when a judge denied an injunction request by broadcasters. More recently, it’s come under some criticism in the courts, but the battle is far from over. And Junger noted that new disruptive technologies will keep popping up.

In a chart outlining pros and cons of broadcasters converting to cable, the plus column included additional pay-TV subscribers if over-the-air disappears, affiliate fees, national ad revenue, spectrum proceeds and lower cost of local content acquisition like news or syndication.

The con side is longer, including potential loss of 10% of over-the-air viewers, loss of retrans and reverse compensation, loss of local ad revenue at owned-and-operated stations, the cost of 24-hour national content, the loss of a local branding presence as well as public policy and national security concerns.

“We’re not arguing that this should happen, or even that it’s likely or that it would be good economics or public policy,” Junger said. “In fact, the presence of regionalized NFL Sunday football alone and its dependence on localized distribution probably makes this a non-starter for CBS and Fox.” But he said it’s not impossible to conceive of a workaround for that where every game is broadcast on its own digital cable channel and made selectively available to subscribers in the applicable local markets.

Aereo’s legal case hinges on whether the courts rule its service is retransmission, which would be illegal without paying a fee, or simply a new form of antenna.

Last month, Aereo inked a deal with Bloomberg TV. If it continues signing distribution deals with cable network groups unattached to a broadcast network, “It’s not a stretch to argue that bundle could have reasonable consumer appeal,” Junger said.

Variety just reported that Sony is in talks to start its own over-the-top pay-TV channel.

“The more real the prospect of Aereo becomes, or any other similar concept which might come forth in the future, the more likely the networks might dust off their old spreadsheets and reconsider the ‘broadcast to cable’ conversion math,” Junger said.

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