Aereo and the death of broadcast TV

By Felix Salmon
April 22, 2013

One of the funnier subplots in the media universe these days is the one about Aereo. Aereo is the kind of company which sounds like a thought experiment, but it’s very real: it takes free broadcast signals, uploads them to the cloud, and rents them out — at a fee — to people who want to watch broadcast TV on their computers. It’s a way of showing the broadcast networks how silly it is that they don’t put their programming online, and it’s also an argument for why cable companies shouldn’t have to pay through the nose for the right to retransmit content which has always been free-to-air.

Real-world companies are largely immune to thought experiments, however, and so it was only when Aereo started operating in the real world that the court cases and ultimatums started being thrown around. If Aereo isn’t shut down, say the broadcasters, they might have no choice but to take their networks off the air entirely. This of course would effectively kill Aereo, whose CEO is rather desperately drawing an analogy between the right to receive broadcast TV and the right to vote.

“The real question is a consumer question: Can you rightfully disenfranchise 50 million consumers?” he asked. “Is that what the preferred policy is?”

In the event that the networks did go through with it, he speculated that other programmers would be quick to replace them in the role of public broadcasters. “That spectrum is incredibly valuable. Somebody’s going to take advantage of that,” he said.

The 50 million number, by the way, should not be considered particularly reliable: it’s Aereo’s guess as to the number of people who ever watch free-to-air TV, even if they mainly watch cable or satellite. (Maybe they have a hut somewhere with an old rabbit-ear TV in it.)

But Aereo is absolutely right that America’s broadcast spectrum is incredibly valuable. The problem is that it’s much more valuable to cellphone companies than it is to broadcasters. The government has a plan to start a series of cleverly-designed auctions, whereby broadcast spectrum would end up being bought from broadcasters and consolidated in the hands of wireless-data companies who value it more highly. That plan can’t be put in place too quickly: the fact is that we’re living in a world where TV broadcasts create much less value than wireless companies could realize with a fraction of the bandwidth.

At the same time, broadcasters are realizing that their retransmission revenues are significantly more valuable than the marginal advertising revenues they get from households which are still reliant on rabbit ears. That trend is only going to strengthen going forwards, especially given that most new TV sets can’t even receive broadcast signals in the first place. What’s more, broadcasters can give themselves a little extra leverage if they shut down their free-to-air service (and Aereo). Once that happens, then if they refuse to provide retransmission rights during negotiations over retransmission rights, the cable companies’ customers will be cut off from their content entirely.

None of this is going to happen quickly, or cleanly. But broadcast TV is rapidly becoming an obsolete technology, and the distinction between cable channels and broadcast channels is a distinction which has outlived its usefulness. Aereo’s very existence is testimony to the silliness of the status quo, and the logical end point is for all the current broadcast spectrum to end up in the hands of institutions which can use it much more effectively as digital bandwidth.

The losers in this process will be Aereo, of course, and also the households which still rely on broadcast TV — somewhere between 10% and 15% of the total. I suspect, however, that those households are precisely the ones with the least amount of political clout. Which means that sooner or later, they’re going to lose their access to free-to-air broadcast TV. They won’t like it, but there’s pretty much nothing they can do to prevent it.

*Update: I’m informed that it’s actually illegal to sell a TV which can’t receive over-the-air broadcast signals. That said, it’s legal to sell a “monitor” which only has HDMI inputs, and which is designed to be used mainly as a TV.

Comments
15 comments so far

I can’t argue with anything you say, Felix, but I would like to suggest that rather than transfer the broadcast TV spectrum from one oligopoly to another (wireless service providers, see http://www.newyorker.com/online/blogs/el ements/2013/04/tmobile-verizon-monopoly- oligopoly-business-practices.html), if the broadcasters don’t want to use the spectrum any more, it should be turned into unlicensed spectrum, to allow anyone to operate low power, high speed wi-fi networks.

However, this isn’t going to happen, as no broadcast TV station owner is going to give up their license voluntarily. Also, the networks (especially Fox) will not stop broadcasting over the air until people stop watching over the air broadcasts. It’s a bluff, and it won’t be hard to call it.

Posted by KenG_CA | Report as abusive

I think this is a fascinating subject and your post gets at a lot of interesting issues. However, this:

“What’s more, broadcasters can give themselves a little extra leverage . . . then if they refuse to provide retransmission rights during negotiations over retransmission rights, the cable companies’ customers will be cut off from their content entirely.”

Doesn’t make sense. Broadcasters have two options: must-carry (and no retrans revenue from cable operators) or negotiated retrans (i.e. 100% margin money).

If they “refuse to provide retrans rights” they have a LOT more to lose than the cable companies, ESPECIALLY if they’ve turned off their over the air. They would have literally no way of reaching viewers, which is not a credible threat.

Posted by CasualSophist | Report as abusive

Felix, it’s important the know that the number of 50 million over-the-air watchers did not come from Aereo … it’s from the NAB itself.

https://www.nab.org/documents/newsroom/p ressRelease.asp?id=2761

Posted by CheriFoxxx | Report as abusive

Sorry, I overstated my point: If there is any broadcast tv tuner, it has to support ATSC, the current digital standard for broadcast tv in the US. You could, of course, sell a display with built in speakers and a bundled remote control, that has an HDMI port and no broadcast tuner at all.

As far as I can tell, FCC regulations do not prevent such a device from being marketed as a “television,” although a consumer who buys one might have a case that there’s a reasonable expectation of such devices including a broadcast tuner. If you have a computer monitor with speakers and an HDMI port, it might make for a nice television, and it probably doesn’t have a broadcast tuner.

That said, all the most popular tvs sold by Amazon include ATSC tuners. I didn’t check specifically, but most also support the QAM standard for receiving clear cable tv channels without a cable box.

Posted by guanix | Report as abusive

“The 50 million number .. is the number of people who ever watch free-to-air TV, even if they mainly watch cable or satellite. ”

No! That is the number of people who rely exclusively on over-the-air TV without any cable or satellite.

http://www.tvnewscheck.com/article/60230  /us-otaonly-tv-viewing-hits-178-of-hhs

Also, far from being on the decline, this is actually one of the fastest growing segments of the market. I think it may have something to do with the digital switch and the accompanying radical improvement in visual quality of OTA TV. Exclusive OTA viewer estimates go from 42M in 2010, to 46M in 2011, to 54M in 2012.

The reports of the death of bunny ears have been greatly exaggerated.

But yes, it is true that OTA-only viewers rank low on the amount of political clout. They are disproportionally young adults and minorities.

Posted by Nameless | Report as abusive

While I like your perspective that broadcast TV is an obsolete technology, its death may have other interesting implications. Note that broadcasters did not pay for their licenses; they were issued for free on behalf of the American public in exchange for providing a free and useful service — e.g. local news and educational programming. Returning the spectrum frees them from the burden of being required to provide local news (which, arguably, they failed to provide long ago), at which point networks could set up shop on cable as single, centralized conglomerates — the “NBC” channel, like MTV and USA, rather than hundreds of local affiliates. Affiliates would be out of business almost instantly and viewers would lose not only access to free content, but whatever scrap of newsworthy or educational programming was being produced locally. I’m not saying this is bad (local news is a national embarrassment), but is it for the best? Will something like PBS fill this void, i.e. the BBC model?

I only watch broadcast TV anymore for live events (sports, awards, breaking news). Would these content owners, e.g. MLB and NHL, continue to license their streams to networks if they lack the built-in broadcast potential of millions of free, local viewers? Or will they go subscription-only too? Will the NFL even bother signing a multi-million dollar broadcast license with Fox if Fox is just a middle-man cable/streaming aggregator?

So yes, broadcast is obsolete technology, but that INCLUDES cable TV, which is slowly being replaced with online subscriptions. Aereo gets it, and is pointing out the stupidity, but the networks clearly don’t, if they think taking refuge on cable is any answer.

Posted by fansyn | Report as abusive

The sad part is cable has been slow to go digital and still relies on inferior SD for the most part, offering HD only with limited offerings at additional expense. OTA is superior technology. (Meanwhile many still think converter boxes are necessary for OTA, but this is only for pre 2007 TVs.)

I don’t see Aereo as disruptive as it provides only OTA but can provide it mobilely, but if Intel can provide cable channels sans cable, that could be.

Posted by MyLord | Report as abusive

Here’s one example showing why OTA is growing in popularity.

I’m in Southern California about 30 miles from San Diego. According to antennaweb.org, with a proper antenna, I can receive at least a dozen channels, including CBS, ABC, NBC, FOX, and PBS, in high definition quality.

Our local cable TV market is divided between a few companies into non-overlapping regions, which means that I have a choice of 1 cable provider (Cox). Their cheapest package ($22/month) includes a subset (either 6 or 7) of freely-available OTA high-definition channels, and additional 15 or so analog channels. To get all local OTA channels from Cox, I need a package that costs $36/month for the subscription and additional $8.50/month for equipment rental.

In essence, the $22/month package gives me less what I would get for free over the air (ok, not with bunny ears, but with a real roof mounted antenna – I’m pretty far from the city – but still), and I need to pay $44/month to exceed the OTA service.

It makes sense for the cable provider because they want to upsell me to their high end packages with HBO, etc., but it does not make sense for customers who want to save money and just want basic TV.

Posted by Nameless | Report as abusive

Felix,

Many people choose OTA over cable because the quality is superior and paying $80 once is highly preferable to paying $50-$120 per month indefinitely.

In Seattle we get the original three broadcasters, WB, a FOX affiliate, and PBS (plus about 40 foreign language and/or religious channels). All of them in fully uncompressed high def.

My wife misses E! and I miss Jon Stewart, but we save $1000/yr and I spend a little bit of it on digital content that we get through our Roku box and the rest goes toward better whiskey and vacations.

Posted by JonHocut | Report as abusive

I think Aereo is referring to GfK Media’s report last year, showing that about 53.8 million Americans exclusively used OTA broadcasts. The report also indicated that the number of exclusive-OTA users, was GROWING.

If broadcasters yank their OTA broadcasts, I can visualize at least four scenarios not yet mentioned:

A: The FCC will yank back those wireless spectrum licenses, then auction them off for use with wireless data services, as all mainstream TV viewing shifts to the internet. Online advert prices will shoot up, particularly when online adverts will be better targeted to individual households. Ad-supported / no-subs channels will simply move from OTA to online.

B: Companies like HBO, Showtime, etc. may rush to grab those yanked-back FCC licenses, and use them to OTA broadcast their own, syndicated content, thereby further squeezing out the traditional broadcast channels from both ends.

C: A variant of (B), other companies rush in to license rebroadcast rights, such that you might find 10 ION channels with content that is a week (or more) old. SyFy shows are delayed for months before they show up on free Hulu, so similarly, SyFy could license the same content to ION for the same delayed period.

D: The OTA broadcasters simply drive new content to online / cable, while their OTA networks use week-old content. It’s a reversal of Fox’s current model of delaying new content for 8 days before it is made available online, in order to prop up ad prices for OTA broadcasts.

Posted by GRRR | Report as abusive

I just don’t see Fox or anyone else yanking their OTA broadcasts over the “threat” of Aereo. That would be the ultimate case of cutting off the nose to spite the face. At the present time, Aereo is present in a single market (New York) and it allegedly had fewer than 2,000 subscribers as of last August. Even in the best case scenario, if they expand nationwide, does anyone realistically expect them to get so much market share as to threaten OTA+cable viewership (and therefore advertising revenue) numbers?

Posted by Nameless | Report as abusive

Fox won’t stop broadcasting because Aereo reaches 2000 people… they will stop because if Aereo can stream the content to 2000 people than Cablevision can and will use the same legal loophole to stream the content to 20 million people.

I for one hope they do. As a taxpayer I would much rather have a bidding war for the spectrum than to have it stay in the hands of the legacy broadcasters.

Posted by y2kurtus | Report as abusive

Interesting, but then, logically, it does not make sense for Cablevision to pay Fox for the right to retransmit the same content that Fox broadcasts to OTA users for free.

Also, it’s a tradeoff. Fox makes a certain amount of money every year in advertising revenues. These revenues are proportional to the number of viewers and we can allocate some fraction of these revenues, call it X, to OTA users. On top of that Fox makes some additional money, call it Y, by letting Cablevision transmit its content through its network.

If X > Y, then Fox would rather let Cablevision “pirate” their content than to shut down OTA.
But, of course, if X>0 and Y>0, Fox would start by making loud threats because, ideally, they want to keep both sources of revenue.

Posted by Nameless | Report as abusive

“Fox won’t stop broadcasting because Aereo reaches 2000 people… they will stop because if Aereo can stream the content to 2000 people than Cablevision can and will use the same legal loophole to stream the content to 20 million people.”

And explain to me, again, exactly what the great disaster for Fox here is?

TODAY I can watch Fox OTA. If I am technically minded I can buy a mac mini or similar as an HTPC, equip it with 3 or more USB tuners and an external hard drive, and can build myself a kickass DVR.

With Aereo I can instead pay Aereo (or Cablevision) money to watch the same signal on my computer, with much less of the control that my HTPC DVR gives me.

So
(a) why is this at all compelling for ME, the consumer? Yes, maybe if I live in NYC the OTA signal is crap because of the high rises, AND I’m not in a position to put up a better antenna. This is a ridiculously specialized situation that applies pretty much nowhere else in the country. (Maybe in the very center of Chicago.)

(b) why is this at all frightening for Fox? An Aereo signal is rather LESS amenable to time shifting, ad-skipping, and re-encoding than my customized HTPC DVR. Anyone who seriously cares about these capabilities has them already.

(c) IF Cablevision tries to copy Aereo wholesale
[a] this would require them to deliver the HD signal as broadcast, as opposed to the lowdef crap they are providing today. This is not a free upgrade for them. There is plenty of Coasian scope here for negotiation between them and Fox about how the costs are split.
[b] how does Cablevision technically send out this signal? If they send it as a multicast signal, that provides a very large legal attack front — a multicast signal can be argued as very strong evidence that what is being provided is a PUBLIC performance. But Cablevision does not have the bandwidth to provide every subscribe with the signal they are getting today delivered as an independent IP stream.

The whole thing strikes me as a tempest in a teacup — a series of stupid arguments from the broadcasters (who may have legitimate fears, but are acting every bit as stupidly as print media did when confronted with the internet, blaming the wrong party, trying to solve the wrong problem, imaging they can stop technology) aided and abetted by commenters who believe anything stated by either side in this dispute as gospel rather than dubious claims at best.

Posted by handleym99 | Report as abusive

I want to pick up on something a previous commenter said:
“I only watch broadcast TV anymore for live events (sports, awards, breaking news). Would these content owners, e.g. MLB and NHL, continue to license their streams to networks if they lack the built-in broadcast potential of millions of free, local viewers? Or will they go subscription-only too?”

Live content is the last thing that broadcasters have that the internet doesn’t – but even that’s changing. Just look at the fact that the US Open tennis was all live streamed, for example. As soon as I can get live sport and local news online instead of on my television, I don’t need broadcasters anymore, and the valuable spectrum they’re using can be freed up for other uses (i.e. mobile internet, cell phones).

Our company (www.telestream.com.au) does live streaming, and we’re getting a LOT of interest from sporting bodies – my prediction would be that in 15 years, there won’t be any more broadcast TV (I suspect radio will be slower to die, particularly because of its use in emergencies, but it too will go the way of the telegraph).

Posted by TelestreamAV | Report as abusive
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