Every major TV broadcaster has unveiled, with the usual hype, its new summer programs. With just as much force but far less fanfare, they've also rolled out several high-stakes lawsuits against two firms -- DISH Network (Nasdaq: DISH) and Aereo, a company lead funded by the Barry Diller-led Interactive Corp. (Nasdaq: IACI). The two are currently promoting technologies considered to be direct threats to the networks' business. So the networks had better hope their lawyers are sharp enough to defeat or at least force a settlement with the two upstarts.
Fees? What fees?
Of the two, Aereo seems to present the biggest danger as far as the broadcasters are concerned. The company offers a single product, but what a product -- a tiny antenna that allows subscribers, for $12 per month, to grab a host of broadcast TV channels from larger antennas the company maintains. Those signals are beamed to a PC or tablet device. Subscribers are also able to store and retrieve programming on a cloud-based DVR.
Why is a little device like Aereo's antenna so scary for a broadcaster? Because if it becomes popular and widespread, it threatens to wipe out or sharply reduce retransmission fees. These recently enacted charges are what the broadcasters charge cable and satellite providers for carrying their channels. And they bring in pots of money. For example, according to research firm SNL Kagan, News Corp.'s (Nasdaq: NWSA) Fox likely roped in nearly $300 million in such fees last year.
Fox and the three other mainstream broadcasters -- Disney's (NYSE: DIS) ABC, Comcast's NBC, and CBS (NYSE: CBS) -- together with smaller network CW and the No. 1 Spanish-language broadcaster, Univision, collectively stand to make around $3 billion annually in retransmission charges, according to SNL Kagan. Annual revenues at the TV arm of Disney, for example, were around $18.7 billion across all of its channels last year, so retransmission fees give a nice boost to that top line.
Needless to say, Aereo pockets its full $12 fee, so according to the broadcasters the company is playing dirty by not passing along any of that fee to the networks for reselling their programs. In other words, Aereo is getting that programming for free. The broadcasters have banded together to fight this in court, and the first battle in that legal war will take place in Aereo's test market, New York City. This week, a federal judge will hear the broadcasters' request for a preliminary injunction against the firm.
Hopping into a lawsuit
The second key source of income for broadcasters these days is the more traditional one -- advertising. As if it weren't enough of a headache for these companies to be facing the potential loss of retransmission fees, this reliable old source of dosh is also under the gun. Earlier this month, DISH introduced a new feature for its DVR service called AutoHop. This little crowd-pleaser allows a user to effectively zap all the commercials in a recorded broadcast TV program, replacing them with a simple black screen for a second or two.
This isn't quite the seismic crush to the industry it would at first seem; AutoHop only eliminates commercials from broadcast TV programs, not those on cable channels. And it only works with recorded programming, so live -- and lucrative -- events like sports are unaffected.
Regardless, this is enough to spook the broadcasters. After all, advertising has been the meat and potatoes of their revenue dinner for a long time. CBS, for example, had a healthy first quarter this year due in no small part to ad sales. They were up 5% over the same period the previous year and were responsible for over 60% of the $3.9 billion in total revenue the firm took in for the quarter.
So they're jealously guarding that revenue stream, and they're not alone. Fox, CBS, and Comcast/NBC quickly joined forces in a suit (for some reason, Disney/ABC didn't jump on that wagon). Not to be outdone, DISH counter-sued the broadcasters, and the ensuing legal mess has the potential to drag on for some time, consuming valuable capital that could be used elsewhere.
Small but dangerous
Neither of these technologies is widespread... yet. Aereo's service area is, again, limited entirely to New York City, while DISH's 7 million DVR-using customers form a tiny fraction of broadcast TV's vast audience (plus only a fraction of that fraction uses AutoHop, which has been available for only a few weeks).
So the intention of the broadcasters appears to be, strike early and hard, and either shut down or delay the uptake of the new products as much as possible. Of the two, it probably has a better chance with DISH's AutoHop, since the company seems like the only satellite or cable provider willing to offer such a service (a Time Warner Cable executive is on the record as saying his firm isn't interested in challenging the broadcasters' ad revenue in such a way).
If the dispute gets too heated, DISH, in isolation, could see the networks refuse to provide it with at least a few of their many broadcast and cable channels. This could very possibly lead to a heavy migration of the company's subscribers. Look for DISH and the networks to settle in some way, perhaps by limiting the functioning of AutoHop or offering it to a small, selected group of subscribers.
As for Aereo, that battle could prove to be longer and more difficult. Diller is a feisty man who rarely backs down from a battle. On top of that, he loves tweaking the existing order, particularly in the form of the still tradition-bound world of broadcast TV. With a relatively light debt load, IAC also has plenty of money in the bank, and if that melts away, Diller will probably be happy to pony up some of his vast pile.
The outcome of these cases will be crucial for the business of all the networks, not to mention the satellite and cable companies that rebroadcast their programming, particularly if they're trying to do it free of commercials or retransmission fees. Keep your eye on this show -- the ending is going to matter.
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