Analysts: Aereo May (Eventually) Cause Fox to Switch to Cable

Barry Diller
Barry Diller
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Wall Street observers Monday said that News Corp.'s threat to retool Fox from a broadcast network into a pay-TV channel in order to counter Barry Diller's Aereo was a real possibility, but would likely only happen as a last resort. Most predicted that the broadcaster would take its time and await future court decisions given the likely near-term financial hits of viewers and advertising caused by such a change. 

Aereo lets subscribers view over-the-air TV on Internet devices, and is facing lawsuits from each of the broadcast TV networks. At risk are hard-won retransmission dollars each of those networks earned in negotiations with cable and satellite providers, and a new approach to the business would be necessary.

STORY: Univision Says Aereo Could Force It to Go 'Pay-Only'

Addressing the situation at the National Association of Broadcasters's annual gathering in Las Vegas, News Corp. president and COO Chase Carey partly endorsed free TV, but issued a threat: "We can’t sit idly by and let someone steal our signal. We like the broadcast business, and if we can affirm our rights, that is a path we prefer to pursue.”

The stocks of most big entertainment companies owning broadcast networks were higher following the comments, perhaps a sign that there was no big concern on Wall Street about radically changing business models.

"I think it is quite plausible that Fox would do that if the courts fail to appreciate Aereo’s free-rider strategy," Wunderlich Securities analyst Matthew Harrigan said of Fox’s threat to move from free to pay TV. But the company’s finances "would probably hurt mildly" over the short term as it "would take a while for even higher subscription revenue to make up for losing off-air access."

He added, though, that the Fox network and TV station group accounts for a relatively small component of the entertainment company's valuation – roughly 10 percent of News Corp.'s stock value now, or an estimated 15 percent of the firm after the separation of its publishing assets.

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Sanford C. Bernstein analyst Todd Juenger, in a report at the beginning of the year, wrote that if all four big broadcast networks moved from over-the-air to pay-TV business models, lost retransmission fees paid by pay-TV firms and lower advertising revenue could be replaced by higher total revenue from affiliate fee and ad dollars, but only over time. 

"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," he wrote in a note, which he re-sent to investors Monday. "After all, if there were no free over-the-air signal, then there would be no Aereo."

One challenge for Fox and others would be the presence of regionalized NFL Sunday football "and its dependence on localized distribution," Juenger noted. "[This] probably makes this a non-starter for CBS and Fox although it is not impossible to conceive of a work-around where every game is broadcast on its own digital cable channel and made selectively available to subscribers in the applicable local markets," he said.

An NFL spokesman said only that "we are committed to our partnership with Fox.”

One big wildcard in any decision to abandon the broadcast model would be "the value, measured in ratings/[ad rates], of having the local station with local news, local personalities and community presence," Juenger also said.

He said he suspects that this factor would be "big enough to turn the economics negative" if broadcasters turned to a pay-TV approach.

"Without the local connection, and its powerful news lead-in/lead-out, we believe the broadcast networks would become indistinguishable over time from the large general entertainment cable networks (USA, TNT, TBS)," Juenger said. "The broadcast ratings advantage would erode, as well as the CPM premium. So in a world as it exists today, we suspect the broadcast model is safe."

STORY: TV Broadcasters Looking Into Aereo-Dish Network Discussions

However, in a world where Aereo or similar players can steal pay-TV subscribers and the related retransmission content revenue from broadcasters, "the math would be different," Juenger argued. "Not only would the broadcast networks lose the retrans/reverse comp from Aereo subscribers, they would also be losing affiliate fees for all the cable networks they also own."

His conclusion: "Faced with that 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."

Fox owns 27 local U.S. TV stations, just behind CBS Corp.'s 30. Among the other Hollywood conglomerates, Comcast's NBCUniversal owns 25 stations and Walt Disney/ABC operates eight.

Aereo criticized Carey's comments and highlighted its benefits to U.S. TV viewers. “Aereo has invented a simple, convenient way for consumers to utilize an antenna to access free-to-air broadcast television, bringing television access into the modern era for millions of consumers," it said. "Over 50 million Americans today access television via an antenna." 

So who would be affected by a switch? Research firms have different figures for estimating how many Americans can or do access TV over the air, though.

SNL Kagan says there are about 99.4 million pay-TV homes in the U.S. and only 16.2 million households that do not subscribe to pay-TV services, meaning they could get TV content via over-the-air antennas or broadband services. Pay-TV providers accounted for a market share of 84.7 percent of all occupied U.S. homes, according to its data. That is down from a high point of 87.3 percent early in 2010. 

According to Nielsen's January, 2013, TV Universe Estimates, there are 289.4 million people in the U.S., including 27.2 million people with broadcast-only services.

On its website, the NAB estimates 20 million over-the-air homes, or around 54 million people given that households often consist of more than one person. 

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“We need to be able to be fairly compensated for our content," Carey said Monday. "A dual revenue stream [with subscription fees and advertising] is critical."

Carey has his share of allies, one of them being Haim Saban, Chairman of Univision Communications.

"Simply put, we believe that Aereo is pirating broadcasters’ content.  As Chase Carey said, no broadcaster can afford to sit idly by and allow Aereo’s theft to continue unchecked,” Saban said Monday. “To serve our community, we need to protect our product and revenue streams, and therefore, we too are considering all of our options -- including converting to pay TV.  With Hispanics watching over-the-air news and entertainment at twice the rate of non-Hispanics, being forced to convert to cable would significantly impact our community.”

Aereo launched in New York about a year ago. Broadcasters soon filed a copyright infringement lawsuit. Last week, Aereo scored a big win at an appellate court, which ruled against enjoining the company from operating while the case is pending. A trial could take place next year.

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