Fitch: if Aereo prevails, pay-TV operators could gain retrans leverage

MIchelle Clancy | 18-07-2012

As the disputes drag on between broadcasters and online streaming TV operator Aereo, with Aereo recently winning a legal step, Fitch Ratings has weighed in, saying that the outcome of the case could alter the face of retransmission negotiations.

Cable operators will likely gain material negotiating leverage, the Wall Street analyst said, should Aereo set a precedent for streaming local affiliate broadcast feeds over the Internet without paying retrans fees.
Backed by Barry Diller, Aereo offers $12 per month subscriptions in New York City and streams feeds from local TV affiliates over the Web. However, unlike other companies like ivi Inc, which have lost legal battled on the same grounds, Aereo gives every subscriber a small dime-sized (17.91 mm) antenna.
Therefore, it argues, the service qualifies as a free over-the-air broadcast, not subject to retransmission fee agreements.
It recently won the right to continue operating when a federal judge rejected a preliminary injunction bid from ABC, CBS, NBCUniversal, Telemundo, FOX, Univision and PBS demanding that Aereo cease operations due to copyright infringement.
The media companies said that they would appeal the decision, but meanwhile the lawsuits continue to move forwards. It is likely that the case will be decided in a jury trial, many months from now.
"The Aereo case calls into question the whole retransmission consent model," Fitch said. "Pay TV providers (cable companies, satellite companies, and telephone companies) currently pay the broadcasters retransmission consent fees to include local broadcast content in their respective video services. We believe retransmission consent is arguably among the fastest-growing operating expense for pay-TV providers. On the other hand, it has been a material boon to the broadcast networks, as the fast-growing, high-margin revenue has provided an offset to stagnating advertising revenue growth."
If the case is ultimately ruled in Aereo's favour, Fitch says that other pay-TV providers could leverage the threat of offering a similar service to significantly lower their retransmission payments. A worst-case scenario for the broadcast networks would be cessation of retransmission payments altogether, with pay-TV providers establishing models similar to Aereo.
"Should Aereo ultimately prevail, we believe this could accelerate cord-cutting as a subset of the market will find an Aereo account and streaming video-on-demand (SVOD) services (Netflix, Hulu) a viable substitute for a full cable suite," Fitch said. "However, we continue to believe that a significant portion of the population will continue to ascribe substantial value to a full roster of cable channels and the wide array of new content available in one spot. Free-to-air broadcast television has always been available, and pay-TV penetration is still approximately 90% of TV households."