12 April 2013

It's Complicated: How Broadcast Networks Could Move to Cable

In the wake of Aereo's victory in the court of appeals in the broadcasters' lawsuit against it, News Corp CEO Chase Carey this week threatened to move its Fox broadcast network to cable if Aereo is allowed to continue to offer its service without retransmission consent agreements with the stations. Haim Saban of Univision and Les Moonves of CBS followed Carey with similar statements, "circling the wagons" in the words of The New York Times.
Aereo does not need such agreements because it is not providing a single, community antenna which rebroadcasts the stations to many subscribers, as cable does, but is rather renting antennas to individual subscribers and sending the feed to each subscriber from his or her antenna. To date, the courts have found that Aereo is not providing a "public performance" of a broadcast station, which requires the station's consent, but rather a private performance, the same as one would get in one's home with an antenna on the roof.

The threat to Fox (and all the other broadcasters) is that the multichannel TV distributors are generally paying cash fees for the stations' consent to retransmit the signals. The threat to the broadcasters is less the success of  Aereo, which likely has a modest number of subscribers, but more the possibility that the big distributors (e.g., Comcast, Time Warner Cable, DirecTV) will set up similar systems for providing local station signals. (Actually doing so might be pretty complicated for the distributors given their existing agreements for the broadcast stations, agreements for the same companies' cable services, set-top box capabilities, and their lack of an "antenna farm" of sufficient size to provide antennas for all of their customers, particularly in their larger systems).

What is undeniable is that without retransmission consent fees, the stations would be far less profitable. This revenue stream, which was a long time in coming, is now baked into every broadcasters' financial projections and expected to grow.

Carey is envisioning a system where this move is done in cooperation with the local Fox affiliates.

How would that happen?
  1. The local Fox affiliate would have the exclusive right to distribute Fox programming to all multichannel systems to which it currently distributes its signal.
  2. Fox and the stations create a second feed of the local station which would likely include all of the local news programs from the station, but little of the high-cost, high-value programs (e.g., NFL games, American Idol). The second feed would be distributed over-the-air.
  3. The first feed, which has the mix of programs currently on the station, would be distributed only via multichannel distributors who had retransmission consent agreements with the station.
  4. The advertising time in both feeds would be sold by the network and the stations, as is done currently.
For the stations and the network, this approach would preserve the leverage of negotiating with the multichannel providers over the highest value Fox broadcast programming and, presumably, preserve the stream of retransmission consent fees (although, now that this programming is not available over-the-air, it would more properly be called affiliate license fees, just like it is with a cable network like CNN or ESPN). The advertising sales businesses (national and local) would suffer a bit -- about 85% of households have multichannel subscriptions, so only those households would get the Fox NFL games and that means there would be fewer potential viewers for the ads in those games. My guess is that retransmission consent/affiliate license fee revenue retained would be larger than the lost advertising revenue, so, in the minds of the network and stations, they are better off taking this hit on advertising revenue than losing the second revenue stream.

The obvious loser is this scenario is the household that relies on free over-the-air television. They would still receive an over-the-air service, but it would be a lot less attractive than it is currently.

However, it is hard to imagine that this change in broadcasting could occur in this way without the issue becoming a political one. The broadcast stations receive free spectrum from the government ("the public airwaves") to supply the free service that they have been supplying for decades. To, in effect, change the deal, all at once, by taking the high profile programs away from the public seems likely to generate concern, as both an owner of Fox affiliates and the president of the National Association of Broadcasters noted, in a way. 
Fox Gone Cable, the former tagline for FX -- eerily prescient?
Carey's suggestion that Fox will "go cable" may be more a threat to play with Congress -- require Aereo to negotiate with us (if we can't stop Aereo via the courts), or we'll take away free TV -- than a viable strategy. After all, Congress could alternately decide to simply eliminate retransmission consent and make all broadcast stations subject to must carry, the way this issue is handled in several other countries.

It is interesting that nowhere does Carey suggest that the Fox stations would give up their broadcast licenses with this move to cable. If they were to do so, it is not hard to imagine there would be a long line of other companies interested obtaining them.

The viable strategy that is available to News Corp (and the other major broadcasters) is to simply shift individual programs over time to the cable networks that they already own. This would continue the trend of the past two decades, particularly in sports, where many of the high profile events have moved from broadcast to cable, with Disney's shift of Monday Night Football from ABC to ESPN in 2006 is just one of many examples.

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