April 10, 2013 5:51 pm

Television set for a revolution

An upstart could determine the model of the US content machine, says Andrew Edgecliffe-Johnson
James Ferguson illustration CBS Fox©James Ferguson

Never underestimate the power of a large group of committed couch potatoes. About 90 per cent of Americans pay for television, giving them scores of channels to choose from, but four free-to-air networks they can pick up with a “rabbit ears” aerial still account for 96 of the top 100 primetime programmes.

Audience inertia and brand loyalty built over decades mean that ABC, CBS, Fox and NBC still account for 40 per cent of all primetime viewing. Their unique ability to attract mass audiences, particularly for live sport, has kept TV advertising healthy even as advertising dollars fled other media for Google and Facebook.

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Broadcasters once offered signals to cable, satellite and telecoms groups for free, in exchange for perks such as prominent positions in their onscreen channel listings. In the past five years, however, their business has been transformed as they discovered they had the power to demand that distributors pay to retransmit their programming.

This has created a second revenue stream of “retrans” fees worth more than $2bn a year, which could jump to $12bn, says Rich Greenfield, a BTIG Research analyst. “It’s a good gig if you can get it,” Verizon’s Lowell McAdam remarked this week. Yet three of America’s biggest broadcasters said they might give that gig up.

Chase Carey, Rupert Murdoch’s deputy at News Corp, threatened to pull its Fox network off the air and convert the home of American Idol and The Simpsons to a cable channel to foil the “pirating” of its content. Les Moonves, CBS chief executive, told The New York Times he had looked into taking some local stations off the air. Haim Saban, chairman of Univision, said the Spanish-language network might also switch to cable, even though Hispanic viewers rely more heavily on aerials than other Americans.

The target of their ire is the start-up, Aereo, which offers high-definition streams of broadcast channels to smartphones, tablets and laptops. For $8 a month subscribers can record shows and pause live TV using a digital video recorder in the cloud. The twist is that each customer rents a tiny remote aerial. In New York, thousands are pointed at TV masts on the Empire State Building; Aereo plans to replicate the model in 22 markets this year, from Chicago to Washington.

With $60m in financing and an undisclosed but probably trivial number of subscribers, Aereo might be little more than an oddity were it not for the fact that its biggest backer is Barry Diller, the man who launched Fox for Mr Murdoch.

Yet 17 broadcasters are suing to shut it down. The legal fight offers more than just the prospect of a tug-of-war between moguls: Aereo may be tiny, but its fate could determine the future economics of the US content machine that feeds screens around the world.

The broadcasters claim Aereo violates copyright by rebroadcasting signals without consent. Aereo claims it has simply invented a more convenient form of rabbit ears, and says having a TV aerial is every American’s right.

Behind the posturing, the legal dispute hinges on whether Aereo’s streaming counts as a public or private performance of copyrighted content. Two New York courts have sided with Aereo, but further legal battles lie ahead – possibly all the way to the Supreme Court. A courtroom loss would sink Aereo.

Yet broadcasters’ threat to pull their signals shows how threatened they feel. “TV is a business that operates on scarcity,” says Michael Wolf of Activate, a consultancy; if broadcasts are freely available on any device, it will be impossible to keep charging for them. Network owners’ fear is not Aereo itself but the risk that distributors co-opt its technology and end the flow of fees.

Distributors have every incentive to try this gambit, given that retrans fees could cost them almost $5 a subscriber a month within five years, eroding their margins. There is as much at stake on the broadcast side, as such fees are pure profit: analysts expect retrans to account for 30 per cent of CBS’s earnings next year.

Mr Carey admits that turning Fox into a cable channel is not plan A, and broadcasters clearly hope that a rhetorical escalation now will avert the need to change a thing. Their threat is not entirely empty – broadcasters might make more money as cable networks – but it is the least plausible plotline.

A broadcaster converting to cable would have to win over local affiliate stations, advertisers, sports leagues and viewers. Leagues want the largest possible audiences. Good luck getting the Super Bowl without broadcast’s reach.

Fewer than one in 10 Americans still rely on rabbit ears, but depriving them of favourite shows would invite uproar. They would not stay on their couches for long, and a fight with Congress would be wounding for the broadcasters.

Lobbying has begun, and the industry’s fate may rest on a legal loophole. But broadcasters are on weak ground: Aereo did not break the finely balanced TV ecosystems; broadcasters did, with their push for a new revenue stream. They are also not on the viewer’s side in this fight.

Like Netflix’s streamed series, Hulu’s on-demand shows, iTunes’ downloads, YouTube’s original content and Dish’s ad-skipping set-top box, Aereo offers consumers something new, affordable and appealing. These services nibble away at the traditional TV model.

A nation of couch potatoes will not change its viewing habits overnight, but media groups should know that standing in the way of consumers’ ever-increasing expectations of digital convenience rarely ends well. Viewers love a legal drama, but broadcasters risk forgetting who holds the remote-control.

andrew.edgecliffe-johnson@ft.com

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