Aereo is a service that rents a small antennae and DVR capabilities to users. It allows the users to access streaming content they would otherwise have to pay much more for if they had to go the satellite, cable, or telecom route. Broadcasters have sued Aereo for copyright violations, and now the Supreme Court will decide whether or not those allegations are true.
If the Supreme Court were to rule in Aereo's favor, the company would be one of the most significant disrupters in the TV industry in years. All of the business models of companies like Comcast (NASDAQ:CMCSA), DirecTV (NASDAQ:DTV) and CBS (NYSE:CBS) would quickly change in response to a positive ruling for Aereo.
Implications for the industry
There are two major implications for the TV industry if Aereo is ruled to be a legal business model. The first would be a benefit to cable, satellite, and telecom content distributors, as they would have the opportunity to provide the same service Aereo does. Some content distributors have reportedly already been in talks with Aereo to develop partnerships.
You can see how advantageous this would be to companies like Comcast and DirecTV, as they could offer services at prices far below the existing price points. It could also result in expanding their customer bases because of lower prices.
The challenge there would be the response of content providers such as CBS and Twenty-First Century Fox (NASDAQ:FOXA). Fox and others have already said that if Aereo wins the battle they'll only offer their content on cable channels. That's important because it means there would be no content for Aereo or anyone else to pick up and stream to others. Cable channels can't be accessed by an antennae in the way broadcast channels can. The problem with that option is that fewer people watch cable, and all of the major networks would take a hit with that strategy as well.
It's also hard to believe that CBS would be willing to become a smaller company in order to deal with a business like Aereo. Of course, it could easily become a smaller company if Aereo starts to take a lot of business away from it. This is why the battle is so fierce, as the stakes are so high.
For satellite content distributors like DirecTV, it would have a similar impact to that of cable companies like Comcast. In the case of DirecTV, it could either make a deal with Aereo or it could copy the company by offering low-cost content packages to existing customers. The reason that the packages could be low cost would be because it would no longer have to pay high-priced retransmission fees to content providers.
The other major implication for the TV industry if Aereo wins is in regard to retransmission fees. These fees are what content distributors like Comcast must pay in order to offer TV shows to consumers. Retransmission fees are the growth engine of content providers at this time, and if they were to be undermined then the entire TV content industry's revenue would shrink. This is because there is really no other major growth engine at the time to propel the industry forward.
Advertising will remain under pressure because it is gravitating toward digital ads that don't generate revenue in the same way that TV ads do. That's gradually changing with the willingness of marketers to pay more for digital video ads, but that is just getting going. Until more data can be measured and understood, it won't be a major game changer. Eventually it will make a big difference, but it won't make up for the loss in broadcast ads or come close to taking the place of retransmission fees if they are no longer part of the business model.
Where it goes from here
As you can see, the stakes in the Aereo case are high. The ruling could totally and completely change the existing business model of the overall TV industry. That would include content providers and distributors, which would have to quickly adapt to the new marketplace.
Since some distributors are already contacting Aereo to make deals, you can see how they're trying to pre-emptively deal with the new competitor if it wins in court. Distributors would also be hurt if they have to keep on doing business as usual, while Aereo would be able to offer a similar product at a fraction of the cost.
For content providers like Fox and CBS, it's all about retransmission fees. If they lose that as a revenue source, these companies would struggle to grow in any meaningful way in the future. As a matter of fact, the only question for them would be how much smaller they will become, not if they will get smaller.
Consumers don't hold the content providers and distributors in high esteem at this time, and if an alternative means to accessing content is provided at a much better price then it's inevitable that people will flock to those services. If that happens, it's the content providers that will take by far the biggest hit.
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Gary Bourgeault has no position in any stocks mentioned. The Motley Fool recommends DirecTV. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.