09 January 2013

Aereo's 22 Market Expansion - A Necessary Step

Yesterday at CES, Internet-delivered TV provider Aereo announced plans to launch its service in 22 additional markets this year (All Things D story). Currently, Aereo provides service only within the New York City DMA. Not coincidentally, Aereo announced an additional $38 million in financing.
The expansion of Aereo's footprint makes it more competitive with the incumbent pay TV providers (cable, DBS, telco), but the nature of its product makes it a relatively poor substitute for the multichannel service to which most households subscribe.

Aereo's current service has the following characteristics:
  • includes all the broadcast channels
  • provides DVR functionality
  • includes Bloomberg TV
  • is delivered devices with a web browser (e.g., computer, tablet, phone) via HTML5
  • can be delivered to a traditional television set via Aereo's Roku channel or via AirPlay functionality (from iPhone, iPad, iPod touch or Mac) using an Apple TV
Aereo is a pretty attractive alternative to the consumer options which provide the most similar viewer benefits:
  • broadcast television with an antenna
  • a stand-alone DVR (e.g., Tivo, Windows Media Center)
Tivo's monthly fee is $15. There is no recurring monthly fee for an antenna or the DVR functionality of Windows Media Center, although there is an upfront cost to both of them, which might be substantial, particularly in the latter case if one needs to buy a computer (rather than repurpose one he or she already has). In this context, Aereo's $12 per month cost is reasonable. The easy delivery to browsers rather than TV sets is, right now, probably a significantly smaller segment of the market than the alternative, but it is not hard to imagine that there are some customers who might prefer it and that group is certainly growing.

The other "cable alternative" would be to subscribe to DVR service and the basic tier of service from your cable company. The basic tier (a/k/a lifeline, broadcast basic, or in the FCC patois Basic Service Tier)  typically runs in the ballpark of $18 per month and DVR service is likely around $20 including the cost of the rental of the DVR itself (this combination is never marketed by a cable/DBS/telco provider, but it is at least theoretically possible to buy it if one were to call up, ask for it specifically and be persistent). Aereo's $12 service looks like a pretty good value relative to this, especially for the computer and tablet-oriented.

As a substitute for a traditional multichannel subscription, Aereo's offering is a poor fit. Despite the rapid growth of TV viewing via computers, tablets and phones, the vast majority of viewing is still on a television set. Alos, a key part of the value of a multichannel subscription is the availability of basic (ESPN, TNT, USA, Fox News, etc.) and premium (HBO, Showtime, etc.) cable programming. I believe that fewer than 10% of customers who have a multichannel subscription only have the most basic level of service or what could be considered "antenna service" (a lot of these customers may be in "classic" cable markets -- places where getting a decent broadcast signal with an antenna is difficult or impossible -- e.g., the valleys of Pennsylvania, rural areas in Oregon, Manhattan). 90+% of customers buy multichannel television to get additional viewing options.

All of this is not to say that Aereo has no future. The addition of Bloomberg TV to the lineup shows that Aereo is open to offering additional channels. However, the choice of Bloomberg, which is live streamed 24/7 at http://www.bloomberg.com/tv/ , doesn't add as much value Aereo's subscription as a service that was not otherwise so available -- e.g., Food Network or Lifetime or E!, much less the proverbial 800 lb gorilla of cable programming, ESPN. I would be stunned if the Aereo folks do not know this.

However, none of the major cable programmers are ready to sell their services direct to Aereo whether it is because 
  • they fear upsetting their primary customers (cable, DBS, telco), or 
  • they are restricted from selling to an internet-delivered service because of "streaming restrictions" in their affiliation agreements with one or more distributor-affiliates, or
  • they do not have the rights (from their program suppliers) to distribute one or more programs via the Internet.
There are a few things that could change the situation for Aereo:
  1. As the FCC clarifies the definition of Multichannel Video Program Distributor, it is possible that online video providers like Sky Angel (whose lo-o-ong simmering case is pending) will be considered MVPDs. This would effectively render the "streaming restrictions" and rights issues highlighted above moot.
  2. As time passes, the regulatory apparatus is likely to make "streaming restrictions" illegal (rationale: they are anticompetitive) even without a wholesale redefinition of MVPD.
  3. Aereo's subscriber base could grow, making the risk of alienating their incumbent customers (i.e., cable, DBS and telco) more worthwhile for certain programmers.
  4. Research could show that Aereo's subscriber base is not competitive with the incumbent providers, but is tapping a different market which would make the incumbent providers slightly less uncomfortable about the competition.
In any event, part of the equation for Aereo to becoming an attractive business (or at least a viable one) is to create enough scale to cover the likely considerable fixed cost of developing their system and company. Being in more markets is a necessary next step to doing so.  

some prior posts about Aereo:
Aereo Adds First Cable Channel - Bloomberg TV (14 Dec 2012)

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