July 17 - Fitch Ratings believes if online TV providers are not required by
law to pay re-transmission consent fees to the stations they are streaming,
cable operators will likely gain material negotiating leverage with
Last week, a Federal judge in New York rejected a request for a preliminary
injunction filed by major U.S. broadcasters against start-up on-line television
provider Aereo, Inc. The broadcasters are claiming that Aereo's service violates
copyright law by reformatting and retransmitting broadcaster TV signals without
consent or compensation. The injunction aimed to stop Aereo from rebroadcasting
or streaming the broadcaster's over-the-air TV signals on the internet. Aereo's
service, which is only available in the New York City market (although backer
Barry Diller has stated plans to enter every major American city by year-end
2013) streams local on-the-air TV stations over the internet for a $12 dollar
The judge's decision appears to be based on the precedent set in the 2008
Cablevision case in which Cablevision's remote-storage DVR boxes were not
considered public performances and were found not to violate copyright laws.
However, we believe in this case a key difference is that Cablevision was paying
licensing fees to content owners in order to broadcast the signals and offer the
remote DVRs while Aereo is not.
The Aereo case calls into question the whole retransmission consent model. 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 favor, we believe 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. Mitigants to this
scenario include any legal resolution likely being several years away and
uncertainty around the economic benefits outside of larger cities.
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. 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.
We acknowledge that the migration of viewers from pay TV to online and mobile
platforms could pressure advertising revenue in the near term, as these viewers
are not currently included in Nielsen ratings. However, upon obtaining Nielsen
measurement, this dynamic could drive a sustainable advertising model. We
believes this could increase the likelihood of one or more broadcast networks
revisiting the prospect of transitioning to a cable network, which had been
previously quelled by the introduction of retransmission payments.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article, which may include hyperlinks to companies
and current ratings, can be accessed at www.fitchratings.com. All opinions
expressed are those of Fitch Ratings.