When Chase Carey, Rupert Murdoch’s top deputy at News Corp., told broadcasters on Monday about his contingency plan to turn the Fox network into something only available on cable, he knew policymakers would be listening, too. But a few were tied up at the time, meeting with Chet Kanojia, the very man who provoked Carey’s stark warning.
Kanojia had come to Washington to sell lawmakers and reporters on the virtues of his upstart service, Aereo, which scoops up the free signals of local television stations and streams them to the phones and computers of paying subscribers. Because Aereo cuts off the stations from the retransmission fees that they have grown dependent on, they are determined to shut down the service — even, the station owners say, if they have to take their signals off the airwaves to do so.
Carey’s suggestion was dismissed by some as a hollow threat intended to scare the courts — which have ruled twice in favor of Aereo so far — and maybe prod congressional action. But it revealed a lot about the state of broadcasting in an age when wireless companies — instead of TV stations — are snapping up spectrum and using it to deliver Internet services like Aereo.
The networks are not just concerned about Aereo, which has a tiny following, but about copycats. “It’s Aereo today, but it could be something else tomorrow,” said Robin Flynn, a senior analyst at SNL Kagan.
For several decades, companies that were lucky enough to own licenses for local TV stations subsisted on advertising revenue alone, and because there was relatively little competition they enjoyed huge audiences and profit margins to match. As cable and then the Internet introduced new competitors, station owners began to rely on a second revenue source, the so-called retransmission fees that come from the cable and satellite operators that pick up their signals and repackage them for subscribers.
Now that they have had a taste of these fees, the stations are not willing — or, they say, able — to go back to the old model of advertising alone.
SNL Kagan estimates that station owners took in $2.36 billion in fees from subscribers last year. (Some of that money is pocketed by owners, while a portion is paid to the network that it is affiliated with, like Fox or CBS. Each of the networks also owns some stations outright.) The research firm projects the fee revenues to hit $6 billion by 2018.
The trend lines are similar to those in the news and music businesses — subscribers are paying a bigger and bigger piece of the overall cost of content creation.
That is why the stations are doing battle with Aereo, because it does not pay any fees, the same way antenna users do not. News Corp., the Walt Disney Co., Comcast, CBS Corp. and Univision, all of which own stations in New York, sued Aereo shortly after the service was announced last year, accusing it of copyright infringement. But the media giants failed to win a preliminary injunction against the service last summer, and their appeals were rejected in a 2-1 decision in the 2nd U.S. Circuit Court of Appeals in New York last week.
Aereo’s success in court could embolden cable and satellite providers to do their own end-runs around retransmission fees. So now the station owners are plotting their next moves.
“We won’t just sit idle and allow our content to be actively stolen,” Carey said after speaking on stage at the National Association of Broadcasters conference in Las Vegas. “It is clear that the broadcast business needs a dual revenue stream from both ad and subscription to be viable.” If the revenues from retransmission fees start to erode, he said, “one option could be converting the Fox broadcast network to a pay channel, which we would do in collaboration with both our content partners and affiliates.”
“It sounds like an idle threat,” said John Bergmayer, a senior staff lawyer for Public Knowledge, a public interest group in Washington. Bergmayer called Carey’s comments “probably just part of an opening gambit to Congress,” noting that the broadcasters could press for a change to copyright law that would effectively choke Aereo out of existence.