CBS vs. Time Warner Cable: what’s at stake

CBS and TWC have settled their differences, but only after a month-long blackout of CBS (and Showtime) on TWC.

The dispute got ugly as time passed.  Toward the end, CBS personalities were appearing in ads offering to help TWC customers switch to other providers.  TWC was helping introduce customers to Aereo, the antenna company, as an alternate source of CBS content.  (The latter seems to me to have a strong shoot-yourself-in-the-foot aspect to it, although the networks hate/fear Aereo, so maybe it did something.)

According to SNL Kagan, the media guru that’s the source of most of the hard data in this post, in New York City, Verizon FIOS boosted its customer base by 16%+ during the struggle, presumably all coming from TWC.

The ferocity of the dispute and the length of time it took to resolve indicate the core issue–retransmission consent–is a key subject.  I think negotiations also underline the precarious position of the traditional cable content sales model.

background

Cable companies pay the traditional free over-the-air broadcasters for permission to retransmit network content to cable subscribers.  NFL football is probably the most important item, since lots of people watch.  They watch it live, too–commercials included.  For a long time, the networks regarded the fees they got as “found” money.  All they really cared about was ad revenue.

Not any more.  Over the past few years, as ad revenues have begun to wane, networks have become increasingly aggressive in pushing retransmission payments up.  In the aggregate, the ota networks will collect about $3 billion in retransmission fees in 2013.  That could balloon to $12 billion five years from now.

CBS vs. TWC

According to SNL Kagan:

–CBS had been charging  TWC $.65 – $.75 per subscriber per month for retransmission consent.  It was aiming to raise that to $2/sub/month by 2018

–the reason the previously doggy local affiliate stations are being scooped up in large numbers by predators is their share of the retransmission loot.  SNL estimates that local stations’ share of retransmission revenues has risen by 50% since 2011 and now accounts for a third of EBITDA for many of them.  The way things are going, retransmission will be the dominant source of income for them before the decade is out

TWC was ok with $2 a subscriber/month.  Digital rights were the main sticking point.  “Digital rights” is a broad concept.  It covers on-demand rights and online rights–everything from on-demand over the internet, to ads in on-demand, to fast-forward disabling of broadcast content.  During the years when it wasn’t paying much attention, CBS had apparently granted TWC wide latitude in this area for free.  Now it wants those rights back–presumably so it can charge extra for them in later contracts with cable operators.

no one’s leaking settlement details

That suggests that one party made the lion’s share of the concessions.  My money would be on CBS having come away from the table as the big winner, if I had to make a bet.

a tipping point for cable?

As monthly cable/broadcast satellite/telco video bills approach $100 a month, subscribership is beginning to decline, albeit slowly.  Although an extra $1.50 a month doesn’t sound like much–$6 a month when multiplied to account for all the major ota networks–passing along these new costs may trigger a disproportionately large loss of subscribers.

Cable’s response?

The nuclear option, to put little ota antennas in cable boxes, is probably too expensive.  Partnership with Aereo would be iffy, given the unclear legal status of the service (a Federal court in New York has ruled in favor, one in California has ruled against).

Maybe the retransmission issue forces a rethink of cable’s whole current pricing philosophy.

 

 

 

 

 

 

Aereo’s courtroom win–what it means

Aereo?

It’s a company in the Barry Diller stable.   Aereo has assembled a ton of tiny little over-the-air television antennas deep in the bowels of Brooklyn, each tagged with the name of the individual customer Aereo rents it to.  The antennas capture the signals of the traditional broadcasters that use public airwaves.  Aereo repackages these signals, adds pause, rewind and record features–and then streams them to each renter’s computer, tablet, smartphone, Apple TV or Roku box.

(For what it’s worth, in addition to all the over-the-air channels, Aereo tosses in Bloomberg TV.)

The service is currently available in New York City, Long Island, plus seven NY counties in/around the Hudson Valley. Thirteen counties in New Jersey qualify as well, as do Fairfield County in Connecticut and Pike County in Pennsylvania.

how much does it cost?

You can “try” Aereo for an hour a day, with (so far) no limitations, for free.  No DVR, though.

You can buy a Day Pass for $1.  That gets you 24 continuous hours of viewing and three hours of recording (lasts ten days).

You can subscribe for $8 a month and get unlimited viewing + 20 hours of DVR space.  $12 a month gets you 40 hours of DVRing.  You can also plunk down $80 for a year’s worth of watching–plus three free months.

the lawsuit

All the big TV networks have sued Aereo, maintaining that the firm is making an unauthorized public transmission of their content (translation: Aereo isn’t paying retransmission fees the way cable/satellite companies do).  Aereo says its service is no different from a guy putting an old-fashioned TV antenna on his roof–except that in this case it’s super-tiny and lives in the lower intestinal tract of Kings County.

On Monday, an appeals court reaffirmed a lower court ruling that Aereo is right and that the networks are unlikely to win in a trial.  So the court isn’t going to shut the service down, like the networks wanted.

The networks say they’re going to bring the case to trial anyway.  Even if they do, and eventually prevail, that will be years–and lots of potential damage–down the road.

my take

1.  After its court wins, Aereo is going to expand its service to 22 new cities (the list is on the Aereo blog).  To me, this means that Aereo is soon going to be more than a minor annoyance.  (Note, however, that there are no plans to set foot in California–perhaps because a court there has already shut down an Aereo-like service, according to the New York Times.)

Aereo has already spawned imitators, so the phenomenon could spread much faster than anyone now suspects.

There’s also nothing to prevent unaffiliated content providers from selling their offerings to Aereo, either (but don’t hold your breath for network-controlled programmers like ESPN).  So Aereo-like services could turn out to be bigger than anyone now thinks.

2.  All the cord-cutters in my family have line-of-sight access to digital broadcast sources–something that’s not common in New York.  So $8 a month is a lot more expensive for us than buying the $35 digital antennas we hook up to our TVs.  But we’re unusually lucky.

Of course, an hour a day of live TV may be enough for many folks, supplemented by the occasional $1 to view, say, important sports events.

And Aereo is an awful lot cheaper than getting the lowest-level cable service.

So Aereo may have a surprisingly large impact on the cord-cutting decision.

3.  If I were a cable company paying retransmission fees to the networks, I’d certainly want to negotiate them down.  After all, I could always try to cut a deal with Aereo if I didn’t get a favorable response.

4.  Original content, à la Netflix, on Aereo?  …shouldn’t be too hard for Diller, who ran Paramount and built Fox Broadcasting.

investment significance

If I didn’t have my trusty digital antenna, I’d be an Aereo customer today.

If I could invest in Aereo today on reasonable terms, I’m pretty sure I’d do it.

Buy into an Aereo IPO?  –harder to say, since if the service gets rolling, the offering price might be crazy-high–even Zynga- or Groupon-high (convulsive trembling!).

At the very least, Aereo may well be the stone that starts the avalanche–and which forces the network broadcasters and cable/satellite companies to scramble to avoid/minimize damage, if they can.

I think it’s an important phenomenon to monitor.