This Little Company Just Beat Big Media in Court

Broadcast TV will probably never be free again, but at least the cost is coming down. In a potentially landmark decision, a judge in New York ruled that a startup called Aereo can continue to effectively provide low-priced access to major channels for its subscribers. The broadcasters operating those channels had sought a preliminary injunction against Aereo’s activities; the judge’s ruling looks like another small nail in the coffin of high-cost TV.

Cashing in through cable
Broadcast TV operators make the bulk of their revenues through two channels (sorry!) -- advertising and retransmission fees. Commercials are self-explanatory for anyone who’s ever spent more than a few minutes in front of a television set, while retransmission fees are unfamiliar to the bulk of the TV-watching public. Put simply, these are the monies paid by distributors, like cable companies and satellite providers, for the right to carry the channels operated by the broadcasters.

They’re big, big, money, and they’ve been getting bigger. Research firm SNL Kagan estimates that in 2011, News Corp’s Fox, alone, brought in $300 million in retransmission fees. And that company, along with Disney’s (NYSE: DIS  ) ABC, General Electric (NYSE: GE  ) and Comcast’s NBC, CBS, smaller network CW, and top Spanish-language broadcaster Univision, should collectively start to take in around $3 billion annually in the near future.

This is why all of them are really spooked about a service like Aereo. The company, lead-funded by IAC and headed by former Fox TV exec Barry Diller, broadcasts the signals of many of those firms’ public stations to its customers. Those customers pay $12 per month for a tiny antenna that connects to their wireless devices. The company’s servers also allow for DVR recording.

What Aereo doesn’t do is pay a red cent to the broadcasters for re-transmitting their content. That’s why those companies are  trying to prevent the upstart from providing the service, through legal moves like the preliminary injunction attempt.

Aereo 1, Broadcasters 0
This is the opening shot of what promises to be a long and bitter legal war between two well-armed and well-financed foes. The broadcaster alliance has plenty of experience fighting content issues, but can that win the day? Look at all the time and expense and legal maneuvering that the content industry has put into stamping out piracy, for example. For all that effort, movie and TV bootlegging is as prevalent as it’s ever been, if not more so.

Besides, the retransmitters have started to fight back with some effectiveness. The current high-profile example is satellite provider DirecTV, which dropped the numerous channels from Viacom that it used to beam, following a dispute over retransmission fees. According to DirecTV, Viacom was seeking a meaty 30% hike in those fees. The blackout was enacted several days ago; as of this writing, the two companies were still arguing about -- er, discussing -- the situation.

Earlier this summer, AMC Networks got into a tiff with the other big satellite provider, Dish Network (Nasdaq: DISH  ) . AMC’s big-ticket item is its signature channel, which features such popular offerings as the 1960s advertising agency drama Mad Men, zombie soap opera The Walking Dead, and is about to launch the final season of the edgy high school teacher-turned-drug kingpin saga, Breaking Bad. Dish’s beef was that AMC Networks was effectively forcing it to carry (and pay for, of course) the broadcaster’s less popular channels, such as IFC and WE tv.

Of course, customers can always ditch the $100-plus subscription fees charged by the satellite and cable providers. Netflix (Nasdaq: NFLX  ) , although not quite the high-flying investor darling it once was, is still managing to grow its subscriber base and post black net figures in most of its quarters. It’s got thousands of TV episodes and movies, and subscription fees are a fraction of the cost of cable or satellite. Hulu -- a joint-venture of units operated by GE/Comcast, News Corp and Disney -- charges a mere $7.99 monthly for access to its big and growing slate of TV shows and films.

A tough audience
It’s getting harder to profit from content these days, given the increasing opportunities that end users have to get their entertainment for a few dollars, or even free. The Aereo win is another headache for the media companies, and it could turn into a searing migraine if it’s vindicated in the ensuing court case.

If that happens, look for retransmission fees to nose downwards. The media companies will then have to do what they do best in order to make up for that revenue -- in other words, use their considerable creativity to find new sources of income.

The media fee killers, like Netflix and Hulu, are not the only entities harnessing technology to make a few bucks. We’ve identified a potential big opportunity in tech and, more pointedly, one company that’s very well placed to take advantage of it. Find out what firm that is in our FREE report “The Next Trillion Dollar Revolution,” available for immediate download right over here.

Fool contributor Eric Volkman owns no stocks mentioned in the story above. The Motley Fool owns shares of Walt Disney and Netflix. Motley Fool newsletter services have recommended buying shares of Walt Disney and Netflix. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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