Aereo Could Have Worked

by | Sep 22, 2014 | Insights | 0 comments

by Field Garthwaite, CEO, IRIS.TV

Barry Diller makes a great case in WSJ Opinion when he talks about how spectrum is available and therefore can be redistributed. In one respect, it sounds like a very good idea to democratize spectrum and enable new business models to emerge. There’s a big problem, however, when you re-distribute network television, an entire business that is based on measuring and selling audiences to advertisers.

The companies most impacted by Aereo’s attempt to create a new subscription service were the major Network TV providers—CBS, NBC, ABC and FOX— and other local TV stations. Those companies, which are available to anyone with an antenna, are reliant upon advertising revenue and measuring the size of their audience.

When a company like Aereo moves in, charges $9 a month for access to a remote antenna (as opposed to the free signal on your TV which Nielsen and other ratings companies have developed methodologies to measure total viewership) and then doesn’t report ratings or consumption patterns back to the networks, it is highly disruptive to their business model.

The big lesson here is that Aereo’s business could have worked if Barry Diller, CEO Chet Kanojia, and the rest of the Aereo board played by the rules of measurement, or more importantly, the law. Instead, they wanted to completely ‘disrupt’ the model of television, as we know it. In an industry as large as network television, with a history rooted in politics, and tightly controlled distribution, it is no surprise that the government will side in the favor of major media companies. However, it does not mean that there is no place for a company like Aereo. Aereo could have worked, and it is likely that another startup that plays by the rules or at least breaks them in a way that compels networks to the bargaining table, will accomplish Aereo’s original goal of unbundling cable TV.

Networks spend tens to hundreds of millions of dollars a year on production, and tens of millions more on research, ad sales and programming to decide what show will play at each hour of the day, what demographic they’ll hit, and what those ratings will be as required by their contracts with advertisers.

In 2013, Nielsen brought in $5.7 billion in revenue, the majority of which was generated in the United States. We live in the largest market in the world for buying and selling media, and it is an industry that takes measurement very seriously (despite any cracks one might point out in the system…save that criticism for another day).

It seems like Barry Diller and the team at Aereo had a great idea and had consumers’ best interests in mind. What’s easy to overlook is the difference between network and cable TV, and the downstream consequences that occur when you remove the Networks ability to monetize their own content. Cable networks are paid subscriber fees in addition to the advertising revenue they generate from commercial breaks. Although networks receive revenue from advertising they also receive retransmission fees from Multiple-system Operators (MSOs). These fees are estimated to be around $4 billion this year and projected to be more than $7 billion in 2018.

The argument can be made that Aereo was not capturing potential subscribers from broadcast and cable but rather opening a new market and growing the pie of monetizable viewers like cable TV in the 80s.

While retransmission consent was a key provision of the 1992 United States Cable Television Consumer Protection and Competition Act, if Aereo had at least operated under pre-1992 advertising-only model and reported Nielsen data, it would likely still be operating and helping networks innovate towards the future of TV today.

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