The Real Reason Why Broadcasters Shut Down Aereo

Streaming video is big business. Broadcasters want their share.

Jul 9, 2014 at 9:24PM

Last month, Aereo and its subscribers were dealt a death blow by the Supreme Court. The streaming television service was found guilty of copyright infringement against broadcasters like CBS (NYSE:CBS), Twenty-First Century Fox (NASDAQ:FOXA), Disney (NYSE:DIS), and Comcast (NASDAQ:CMCSA).

Many believed that the broadcasting companies filed suit to protect themselves against pay-TV operators that use tactics similar to those of Aereo to avoid high retransmission fees. Broadcasters have strategic measures they could take, however, to avoid such a fate.

The real reason why broadcasters shut down Aereo is because there's more money in it if they stream the video themselves.

TV -- now with 20% more ad revenue!
Chief Research Officer at CBS David Poltrack stated earlier this month that the broadcaster actually makes more money per viewer on streaming content than it does on traditional television. On average, the company makes 10%-20% more ad dollars per viewer on streaming content, and Poltrack expects that number to keep increasing.

Aereo brought more eyeballs to the broadcaster's shows, but those viewers technically still counted as traditional television viewers. Disney couldn't harness the power of the Internet to better target its ads to Aereo users like it can with the WatchABC app.

What's more, Aereo's DVR feature allowed subscribers to fast forward through ads altogether. The broadcasters' streams have compulsory ads regardless of whether they're live or time-shifted.

Broadcasters obviously have more to gain by offering more streaming content themselves rather than letting a company like Aereo do it for them. Nonetheless, they're remarkably hesitant to provide more access to their content. None of the major broadcasters offer live streams of their channels without a cable subscription.

No free TV!
Even though they can make more money on streaming audiences than broadcast audiences, the biggest reason why broadcasters are hesitant to offer streaming versions of their channels is because it weakens their positions with cable operators.

Presently, broadcasters are negotiating terms with pay-TV companies for over-the-top streaming. If anyone can already do that, what grounds do the broadcasters have to charge the cable companies for the privilege?

One operator has found a loophole that allows it to stream live broadcasts to its subscribers through a mechanism similar to that of Aereo. Fox is now taking steps to shut down that service after the ruling on the Aereo case.

Indeed, offering live streaming for free to anyone who wants it isn't a viable model for the broadcasters even if they make more ad revenue per viewer than they do on their free over-the-air broadcasts.

But what if they charged?
Aereo proved that people are willing to pay for better access to free over-the-air television. Tech-savvy cord cutters could hack together their own private cloud TV setups, but Aereo offered a convenience that people were willing to pay for.

The broadcasters can offer a similar convenience for a similar fee. Cable operators could receive a discount from the individual rate and include live streaming as part of their bundles. Everybody wins -- broadcasters get more money, consumers get more access, and cable companies get a better product.

Note that the only reason why this model works is because network broadcasts represent an anomaly in the unbundling problem. By their nature, over-the-air broadcasts can already be unbundled, and the people interested in such a product have probably already cut the cord. More importantly, networks make most of their money through advertising, so the premium for a-la-carte service over the bundle doesn't need to be too high.

Time to capitalize
The victory over Aereo was great for broadcasters, and the market rewarded them appropriately. Now it's time for them to capitalize on that and take more control of streaming television. They have an opportunity to significantly boost their revenues through better ad placement and additional fees on individuals and cable companies.

If they don't act, however, it's only a matter of time before consumers find a better alternative like they did with Aereo.

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Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. 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.

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