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Is Aereo Actually a Good Thing?

Streaming TV service may do broadcasters a favor by nudging them over to the cable business

When execs at several broadcasters openly intimated their willingness last week to convert their businesses to cable if the courts didn’t kill Aereo, it may have struck some as an overreaction.

(From the pages of the April 16 issue of Variety.)

After all, even the most generous assessment of the prospects for the Barry Diller-backed streaming-TV service would have to concede the federal appellate court’s refusal to grant the broadcasters’ request for a preliminary injunction was winning a battle in what will undoubtedly be a protracted war. And though it’s not Aereo’s first victory, few experts give its quest for legality much of a chance.

So why did News Corp. chief operating officer Chase Carey tell the crowd last Monday at the National Assn. of Broadcasters annual confab: “We will move to a subscription model if that’s our only recourse.” He was no outlier; executives at CBS and Univision issued statements echoing Carey’s threat later that day.

Of all the ways the broadcasters could have sent a message to the TV industry, to the courts and even to Congress, threatening to flee to cable could be interpreted as premature. Which has to make you wonder why Carey et al. went there in the first place.

It’s worth considering that we’re looking at this Aereo thing all wrong. While a news media that can’t resist dramatizing conflict depicts Aereo purely as the enemy, perhaps the venture also represents an opportunity. Because the more disruptive Aereo is made out to be, the more of an excuse the broadcasters have to exit their traditional business and transition to a more lucrative cable model.

To be sure, such a move would be a political hot potato. While only about 10% of the U.S. rely on over-the-air TV, transforming what has been a free public service for decades to a pay-only format would be savaged as a slight to the underclass who would be deprived of news and information at the local level.

But as long as Aereo exists, the companies that own broadcast properties can point their fingers and throw up their hands. Switching from broadcast to cable would neutralize Aereo, which would have nothing to retransmit.

The politically incorrect economic truth of the matter is that programmers don’t have much interest in reaching lower-income viewers because their lack of disposable income make them disposable to the advertisers who spend billions each year in commercials.

What’s more, a significant portion of these lower-income viewers would likely be forced to pay for cable.

The notion of a network converting to cable might seem impossible given the existence of its affiliate stations. They are often owned by the broadcasters’ parent companies, and doing their own programming at the local level, including sports telecasts that are a part of expensive rights deals with ironclad regionalized components.

But Lazard Capital Markets analyst Barton Crockett believes that regardless of whether stations are owned and operated by a broadcaster, pay TV distributors could be open to renegotiating carriage deals in a way that turns affiliates into regional networks.

“Going cable could be very accretive,” he said, noting News Corp. moving to a regional network model would also give the conglom more freedom to maneuver around caps on station ownership and newspaper/station cross-ownership.

Cable also has the advantage of looser content restrictions, an edge that has helped its ratings enough to make its most successful original series like AMC’s “The Walking Dead” become competitive with even the most popular broadcast series. Just imagine how much more impactful programming from an ABC or NBC would be if they didn’t have to worry about the FCC.

It used to be that advertisers were essentially the sole revenue stream for broadcasters. No wonder once the cable business came of age in the 1990s that its dual revenue stream of advertising and affiliate fees made it a superior model .

But the fiscal distinction between broadcast and cable has been blurred in recent years by the broadcasters’ ability to wangle for themselves a second revenue stream in the form of retransmission consent fees.

Number-crunching from Bernstein Research analyst Todd Juenger reveals that the losses incurred by vacating the broadcast model are more than recouped on the cable side. While he believes the dependence on sports and local branding make conversion unlikely, he calculated that distributors would likely shell out more in a liate fees than in retrans. And then there’s the windfall that would come from selling off station spectrum.

“There is a lot of game theory in laying out the scenarios of action and reaction, but there is enough logic here to suggest it wouldn’t be completely crazy for a cable operator to make a pre-emptive offer to broadcast networks in a given market to convert to a cable model,” he wrote.

Maybe instead of a lawsuit, the broadcasters should send Aereo a thank-you card.

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