Aereo, the internet TV start-up that allows New Yorkers to watch live and time shifted content from broadcast networks over the internet, is in the news again as it seeks a declaratory judgment against CBS. Simply put, the Aereo lawsuit asks a federal court in New York to explicitly rule Aereo’s service does not violate broadcasters’ copyrights and that the court’s ruling applies nationwide.
The legal battles between Aereo and broadcasters are likely to continue for years and seem destined for the Supreme Court. (See Figure 1.) While we wait to see what happens in the courts, we think broadcasters and their cable, telco, and satellite distribution partners should do more to undermine Aereo’s value proposition. However, they are hamstrung by broadcasters’ uncertainty about whether to partner with multichannel operators in the age of internet TV or disintermediate them.
Figure 1: U.S. Federal Courts and Aereo Lawsuits
Aereo’s Unique Value Proposition
Much has been made of Aereo’s low $7-12 per month cost. However, price alone is not a killer app. Services like Netflix, Amazon Instant Video, Hulu, and iTunes are low cost options. And, consumers have always been able to use an antenna to get broadcast content without paying any subscription fee. The fact is, relatively few US consumers have adopted these solutions as their primary source of TV. SNL Kagan says 84.7% of U.S. households with a TV have some sort of multichannel service, which is down a modest 2.5% from its peak of 87.3% in 2010.
Figure 2: Multichannel Penetration
Aereo appeals to consumers with a unique combination of low price, broadcast content, and flexibility in where and when consumers watch. (See Figure 3.)
Figure 3: Aereo Relative Value Proposition
Aereo simply promises its customers the ability to watch either live content or anything they’ve recorded on a network DVR, whenever they want to watch it, on any device. Frankly, Aereo’s service compares pretty well with the confusing patchwork of content available through pay TV operators’ video on demand and “TV Everywhere” services. In those cases, a program’s availability is almost impossible to predict:
Figure 4: Which Episodes are Available on TV Everywhere?
For many shows, the episodes available on-line and from VOD are different. This situation is not unique to Comcast. It’s also baffling to consumers.
Broadcasters and multichannel operators will have greater success competing against Aereo if they force consumers to choose between “cheaper” and “better”. Today, Aereo’s offering is both cheaper and better for the growing ranks of internet-centric consumers.
However, broadcast networks could mitigate the risks of a legal Aereo service by allowing operators to distribute the latest episodes of their broadcast content both on-demand and on-line, allowing TV Everywhere and VOD to live up to their promise. Operators have a role too, in that they need to create easy-to-use interfaces and license additional content directly from local broadcast channels, such as local news or sports. A complete TV Everywhere service including broadcast and cable channels, however, would be clearly superior to Aereo.
Other establishment solutions are less compelling. We think speculation by some content executives that they could handicap Aereo by moving their content from broadcast to cable networks is unlikely to come to pass. The contracts networks have with affiliate broadcast stations, the impact it would have on the value of network-owned and operated stations, and very bad press around such a decision makes it a poor solution. We agree this is a possible long-term outcome should Aereo or its business model prove successful, but it is not something we could advise any broadcast network to do anytime soon.
Internet TV is a Wedge Issue
Others have suggested a cable/broadcaster partnered solution to Aereo. But, content owners have been slow in granting full rights to multichannel operators for on-line distribution because Internet TV raises the possibility content owners could disintermediate operators and seize more of the value of their content. For years, broadcasters have conducted direct to consumer experiments: streaming from network websites, creating program-specific streaming sites, and even joining together to create Hulu. This lingering possibility stands in the way of a complete partnership between content owners and operators for internet TV, handicapping their joint products and opening the door to OTT competitors like Aereo. The resulting power struggle will only be resolved when content owners and multichannel operators answer these questions:
- What is the potential value of disintermediating multichannel operators? How much profit could content owners realistically appropriate?
- What is the value to content owners in having direct relationships with consumers?
- How many different on-line TV content providers will mass market consumers be willing to maintain relationships with? One? Two? Seven?
- Are multichannel operators in the best position to maximize economic rents from consumers because they can tier service and upsell more effectively?
- How important is it to consumers to have a consistent user experience (and content) across devices such as the living room TV, laptop, tablet, and smartphone?
- Can content providers develop a compelling user interface across all these devices? Will consumers accept different user interfaces across different content providers? What would it cost to compete on interface quality as well as content quality?
- What is the risk that in trying to disintermediate, content owners trade one distribution oligopoly (multichannel operators) for another that is even more concentrated (broadband providers)?
- How much risk is there that the existing (profitable) business model blows up due to delay in creating a positive user experience for on-line content?
- How much longer will it take to vet broadcaster-centric solutions like Hulu and now Syncbak?
- What is the expected value of subscribers lost to Aereo or Aereo + other OTT services like Netflix?
- How likely and how expensive would it be to recover customers lost to a lower cost product? How much profit would be lost if multichannel operators were forced to promote a lower cost tier?
- Does delaying a positive user experience through multichannel operators become oxygen feeding the fires of alternative content creators like Netflix, Google, Amazon, and independents? What is the risk that this alternate content universe becomes complete enough that many consumers can live without a multichannel subscription?