Market Insight

Victory for broadcasters as US Supreme Court rules against Aereo

June 25, 2014

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The Supreme Court reached a verdict in favour of the broadcasters in the legal battle between broadcast streaming service Aereo and major US network broadcasters. The Supreme Court’s 6-3 ruling settled conflicting verdicts in the lower district courts across the nation. Aereo won legal court battles in New York and Boston, but recently lost in Utah.

Aereo was found to be more than an equipment provider and more equivalent to a cable company according to the Supreme Court. As a result the Supreme Court sided with the broadcasters that the live broadcast streaming service breached copyright laws as it did not pay any retransmission fees to the broadcasters. The 1976 Copyright Act was essential to the Supreme Court's decision to determine that Aereo’s use of tiny antennas violated broadcaster’s copyright content and is indeed public performance.

The ruling will likely seal Aereo's fate as its CEO Chet Kanojia publicly stated that there is currently no plan B if Aereo were to lose the case. Unless Aereo reconsiders its business model and negotiates carriage fees with the broadcasters, Aereo will likely cease service in 11 cities and halt its expansion to 16 more cities. The Supreme Court stated that its decision should not curb other emerging technologies.

Our take

In a world of feast or famine, it looks like the fates have decided famine for Aereo and its investors. Of course the proposition was not without risk, Kanojia acknowledged early that there would be a total victory or total defeat. The merits of the ruling, while being painful for Aereo's investors, can be argued from several perspectives.

First, from Aereo's point of view, the ruling is likely seen as incorrect, but the six to three ruling is still the law of the land. Unfortunately for the company, the majority of Justices disagreed that the one-to-one relationship of antenna to customer did not constitute a private performance. Rather the public performance by Aereo is seen as detrimental to the operational viability of broadcasters. Ultimately, IHS believes that without making a judgment about private or public performance, that if Aereo were allowed to continue to operate that the company would have impacted current business models dramatically.

However, there is a silver lining; if the company can negotiate with broadcasters to pay a licence fee, its expansion may proceed more quickly than previously possible. Any licence fee would allow the company to use one master antenna or the actual network feed instead of antenna farms. And given that the company has already mastered the retransmission of signals through the internet, the change would offer little to no technological challenge.

Aereo's rejection by the Supreme Court is a significant victory for broadcasters, and the current pay TV business model. At risk was the entire broadcast TV business in the US. Had the decision gone differently, it is conceivable that smaller broadcast networks and local stations would have ceased operations. Similarly, given an opposite ruling, it is conceivable that Fox would have followed through on its threat to transition to a pure cable network and that pay TV operators may have emulated Aereo like antenna farms as means to circumventing skyrocketing carriage fees for local stations.

For years IHS has questioned the current rate at which licence fees are growing, on both the cable and broadcast sides of the business. As average pay TV ARPU passes $81 in 2014, the question remains, how long are American pay TV households willing to bear the burden of  content cost increases being passed from pay TV operators down to their subscribers?

Especially telling is the fact that many newly-forming households are not taking a subscription to pay TV - rather that they consume on-demand content via internet-based services like Netflix. Would Aereo have rescued the pay TV business? Certainly not. But a positive ruling would have given pay TV operators another weapon with which to fight back at local broadcast station carriage fee growth.

The decision by the Court seemed largely inevitable as stakes were so high. However, IHS believes that there is likely to be a renewed effort by pay TV operators to seek relief for growing content costs which are outpacing inflation by several orders of magnitude.


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