Disney's ESPN Could Benefit From Aereo

The NFL and MLB submitted a friend of the court brief to the Supreme Court last week asking the Court to pick up the case of television broadcasters Twenty-First Century Fox (NASDAQ: FOXA  ) , CBS (NYSE: CBS  ) , Comcast (NASDAQ: CMCSA  ) (NBC), and Walt Disney (NYSE: DIS  ) (ABC) against tv-streaming company Aereo. The sports leagues said that they would be forced to move their content to cable if the court upholds the appellate court ruling in favor of Aereo.

This is an interesting development that expands on the complexities of the Aereo case. If the court refuses to take up the case or ends up ruling in favor of Aereo, this could be a huge win for Disney's ESPN while dealing a major blow to CBS, Fox, and NBC.

Tiny antennae, big lawsuit
Aereo is a clever company that captures over-the-air digital broadcasts using tiny antennae, then streams the feed to its subscribers' smartphones, tablets, and computers over the Internet. The company distinguishes itself from standard media streaming companies by assigning each subscriber his own antenna. It's this feature that, currently, allows the company to get its content for essentially no cost.


Source: Aereo.com

Other pay-TV operators and streaming companies pay big bucks for the content they send to users. Aereo represents a big threat to the $3 billion in retransmission fees network stations receive from pay-TV operators. Broadcasters, realizing this, sued for copyright infringement almost immediately after the service launched last year. The legal battle may ultimately reach the Supreme Court.

A threat to copyright holders
The NFL holds the copyrights to the most lucrative and expensive programming on television. Starting next season, CBS will pay $1 billion per year for broadcast rights, FOX will pay $1.1 billion, NBC will pay $950 million for Sunday night rights, and ESPN is paying a whopping $1.9 billion per year for Monday Night Football.

On top of that, the NFL has special deals with DIRECTV and Verizon. DIRECTV pays about $1 billion a year for the NFL's Sunday Ticket package, which allows them to broadcast every game to its subscribers. That contract expires after this season, and will likely bring in even more revenue for the league next year.

Verizon will pay $250 million to stream every game to its subscribers smartphones. Aereo is a direct threat to those revenue streams, and the potential for similar contracts, so there's a huge incentive for the league to move to cable where Aereo can't capture its content.

Moreover, as Aereo's technology is a threat to the huge revenue stream broadcasters get from retransmission fees, it's also a threat to the NFL and any content owners that license their programming to broadcast networks. Although there are threats from FOX and CBS that they'd move to cable if the court ruled in favor of Aereo, there are lots of hurdles for those companies to get over before they can make that happen.

Disney could capitalize
You may have noticed that ABC was absent from the list of over-the-air broadcasters with NFL rights. You may have also noticed that ESPN pays about twice as much as NBC for one game a week.

An Aereo win and a subsequent move by the NFL to cable networks would put ESPN at the forefront of potential suitors. ESPN's revenue from carriage fees is far and away the highest in the industry. ESPN brings in more than $6 billion in fees from pay-TV operators every year. Comparatively, SNL Kagan estimates retransmission rates for all over-the-air broadcast networks won't reach that level until 2018.

All three of Disney's over-the-air competitors have their own cable sports channels, but none have the pull of ESPN. Of course, moving the NFL broadcasts from over-the-air to those cable networks could improve their positions.

NFL rights are locked up by broadcasters through 2022, but a move to cable may violate certain terms in the NFL's contract with broadcasters, allowing the league to open up the contract to all bidders again, this time with ESPN on the same playing field. Although it's unlikely ESPN would be able to grab some sort of monopoly on NFL rights, it could certainly expand its offering to include games on Sunday as its competition loses bidding power.

What if Aereo loses?
If Aereo loses, it'll be interesting to see if the company stays alive or shuts down completely. It could negotiate retransmission fees with broadcasters -- like any other pay-TV operator -- and continue operating with everything else the same. In that case, the NFL may still move its content to cable in the future, but it won't be until next decade. In the meantime, Aereo could legally hijack its NFL Sunday Ticket product -- albeit for a price.

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