February 25, 2018

USA World Cup Team Survives, Aereo Doesn’t

On Thursday, June 26, the USA men’s football team moved on to the knock-out round of 16 in the World Cup, but the day before, startup Aereo lost its battle for survival in the Supreme Court.

What does USA FIFA football team advancing have to do with Aereo losing? ESPN and sports on television.

The Supreme Court case was titled American Broadcasting, Co. (ABC) vs. Aereo. ABC and ESPN are owned by the Walt Disney Co., which was joined in the case by CBS, NBC Universal (owned by cable TV giant Comcast), FOX and all the large cable TV companies and cable networks. The broadcast networks and their owned TV stations all claimed that it wasn’t fair for Aereo to retransmit their programming without paying them.

The details of copyright law are too complicated for me to fathom, so I can’t comment on that aspect of the case. Many bloggers and other news sources commented intelligently by focusing on the legal issues in the case, as Jerry Markon, Robert Barnes and Cecilia Kang did in the Washington Post. Some, like Farhad Manjoo in the NY Times Bits blog, commented on the technology issues involved, especially the implications that the Court’s decision might have on cloud storage companies.

But I think it’s interesting to see how the Supreme Court members divided in the 6-3 split. The Court’s three most conservative members (Alito, Scalia and Thomas) were on the dissenting team. Did they not understand the technology involved or interpret the copyright laws differently than the majority (Breyer, Ginsburg, Kagan, Kennedy, Roberts and Sotomayor)?

Could it be the conservatives were voting in favor of a free-market solution and the majority was voting for a more liberal-oriented regulatory solution? Or could it be that the conservatives were sick and tired of their cable TV bills ballooning and wanted to cut the cord, or maybe they just weren’t interested in World Cup football? Free, over-the-air NFL, yes; cable-and-ESPN-delivered FIFA, no.

Or could it be that the conservative trio were looking ahead to 2018, when Fox and Telemundo will be carrying the World Cup, for which they paid $1.2 billion for the two-year package, outbidding ESPN and Univision, which paid $425 for the current FIFA package. Maybe they thought it was a fair, free-market solution for Aereo or other retransmission delivery systems not to pay anything to sports rights holders such as ESPN and FOX.

If you were a Supreme Court justice and liked the World Cup, loved ESPN and other cable network programming (MTV, CNN, MSNBC, FOX News, CNBC, Bloomberg News, etc.) and couldn’t bear the thought of cutting the cord, you would vote in favor of the broadcasters and cable networks and believe it was not fair for Aereo to pay nothing to broadcast networks for programming, especially not to pay for expensive sports programming.

The majority might have seen the chaos that would have ensued if they voted for Aereo. FOX and Telemundo would more than likely demand that FIFA re-negotiate the $1.2 billion deal. FOX, CBS, NBC and ESPN would more than likely demand that the NFL re-negotiate the multi-billion rights deals.  FOX and ESPN would want to re-do their deals with Major League Baseball. All too much to contemplate — too much money involved.

Thus, the decision against Aereo was the easiest way out – give the money to the broadcast and cable networks, the TV stations and the sports leagues, not to upstart Aereo and its backer, Barry Diller. The decision also put off the eventual demise of broadcast and cable TV a little longer, just like the USA World Cup football team’s advancement put off its eventual defeat a little longer.

Don’t Tred On My Profits, Aereo

Broadcast TV networks and stations are really pissed at everyone’s favorite boss, Barry Diller, and Aereo, the TV-signal-grabbing startup Diller is backing.

The TV networks and stations are furious at Aereo because the company uses small, dime-sized antennas to pick up over-the-air TV signals and route them over the Internet to people who pay Aereo a monthly fee of $12 so they can watch broadcast TV on devices such as PCs, smartphones, iPads and other devices connected to a screen and the Internet. Currently the Aereo service is only available in New York City, but the company has raised money to expand to 22 cities in the near future.

Aereo doesn’t pay TV broadcasters for access to their signals and programming, which caused the broadcasters to sue Aereo. But the courts have sided with Aereo (so far), which pissed off the networks so much that News Corp. COO, Chase Carey, speaking for Fox TV, and Haim Saban, speaking for Univision, threatened to move their networks’ programming to cable.

Nice going, guys. That’s like the captain of the Titanic ordering the crew to blow gaping holes in the sides of the sinking ship to let more water in.

The TV networks and their owned stations are probably bluffing, as Jeff Bercovici writes in Forbes:

Skeptics say Fox and Univision must be bluffing, for a variety of reasons: the antenna-using share of their audiences is still significant (about 10% for Fox, maybe 20% for Univision); they’re hemmed in by affiliate agreements and sports rights deals that require them to broadcast; the government might step in as voters freaked out about the disappearance of free television.

While these things are all true, none of them are obstacles so much as speed bumps. “The reality is there’s a very real potential that broadcasters could convert to cable networks,” says BTIG analyst Rich Greenfield, who has been following the networks’ legal tussle with Aereo. “The challenge is over what timeframe.”

So, who are the TV networks and stations threatening? Why are they bluffing?

All you have to do to understand what’s going on is to look at a picture of Chase Carey, COO of News Corp (Fox Television Network and Fox Television Stations).

Chase Carey

Chase Carey

He looks like Colonel Blimp from the Victorian age, and that’s just about the era the TV networks and stations are living in – a privileged, completely out-of-touch, Downton-Abbey-like aristocracy.

In the 1950s through the 1990s, it was virtually impossible lose money with a television station. The TV networks covered a TV station’s overhead with affiliate compensation fees, so all the revenue from local news programming and syndicated programming was profit. Not rocket science.

And TV stations, like greedy Wall Streeters, weren’t satisfied with outsized profits; they wanted what all money grabbers want – more. Therefore, in the 1990s when cable surpassed terrestrial TV in total viewership and the Internet started stealing advertising dollars, how did TV stations in general react? Did they increase their commitment to serving the “public interest, convenience, and necessity,” for which they were given free licenses to use the public’s airwaves?

Of course not. TV stations stopped editorializing, stopped hiring community affairs directors, and reduced public affairs programming in an attempt to keep profit margins up. TV station owners thought they were entitled to their overblown profits as a birthright. They bought into the notion that the purpose of a business was to maximize shareholder value, a mantra that was developed by leading MBA programs, such as those at the Harvard Business School.

While TV station owners were comfortably asleep at the wheel (as fast asleep as owners of newspapers were) and maximizing revenue and profits, Internet entrepreneurs started businesses whose primary purpose was to delight customers, or to organize the world’s information, or to connect people socially – profits didn’t come first.

Can you imagine a TV station corporate owner such as Fox or Univision or CBS pronouncing that their primary purpose was to delight their communities or create shared value for the cities and towns they serve?

No. Corporately owned TV stations cared about maximizing profits, not about serving their communities or delighting their customers. So, should we feel sorry for Fox, ABC, CBS, or NBC that Aereo is grabbing their signals from the airwaves that the public owns? Aren’t the stations getting and ironic dose of their own profit-seeking medicine?

The TV station profit ship is sinking, and Barry Diller is helping. Even though he started the Fox TV network in 1986 and owned a string of TV stations in 1997 (Silver King Broadcasting), Diller was prescient and saw the Internet juggernaut coming in 1993. He is now head of IAC, a leading Internet company, and is worth about $1.8 billion.

But he probably feels $1.8 billion isn’t enough. My guess is that Diller is investing in Aereo not to stick it to cable, though some media pundits believe he is going after cable bundling because he wants a la carte pricing, but because something else is going on. My guess is that he hopes that the major TV station owners will see that Aereo could disintermediate them and will buy Aereo at an outrageous multiple in order to put off the inevitable for another ten years.

What could foil Diller’s plan, if selling to TV stations is his plan, is that the government will take away the valuable electronic spectrum space from TV stations and auction it off under pressure from lobbies more powerful than the National Association of Broadcasters (NAB), such as the telecommunication lobby (ATT and Verizon, et al), the Internet and wireless lobby (Google, Facebook, Microsoft, et al), and the video entertainment lobby (Netflix, Hulu, YouTube, Amazon et al).

The pressure to take away TV spectrum and auction it off to wireless carriers will come from the public, too, because people, especially young people, are abandoning local TV for watching video on their tablets and smartphones, and they don’t see local TV stations doing a lot to make their communities better.

By emphasizing profits over public service, TV stations have not endeared themselves to the people who live in the communities the stations are supposed to serve. Therefore, TV stations’ licenses to use the spectrum are vulnerable, and station owners are terrified. You’d think they might try to turn the situation around by increasing their public service and serving their communities better. However, does Chase Carey look like a guy who puts the common good first, who wants to serve his community, who wants to give Downton Abbey to the servants?

I think he looks like a man who’s saying, “Don’t tred on my profits, Aereo … even if I don’t deserve them.”