The Aereo Decision

The Supreme Court ruled today that Aereo, using its unique cloud-based architecture, violated copyright laws when retransmitting over-the-air broadcast signals to customers with Web-enabled devices (TVs, tablets, smartphones).  Broadcasters claim that this was a “win” for consumers.  Was it?

The 1992 Cable Act detailed the rules covering retransmission consent.  But, it wasn’t until the early 2000s that TV stations began demanding retransmission fees from MVPDs for the rights to carry their signals.  Today, those fees can be as much as $1 or more per subscriber.  Moreover, TV stations now earn about 15% of their revenues from these fees and have the expectation that the percentage will go up as these fees increase significantly in the coming years.   No doubt the TV stations and broadcasters won big today. 

So did the MVPDs.  While consumers can still get over-the-air broadcast signals for free by having an antenna on their property, less than 10% of households rely on this method exclusively.  For everyone else, the broadcast channels are bundled in with the video packages purchased from an MVPD provider. If the Aereo business model was allowed by the courts, some of them might have been tempted to cut the cord.  For firms, like Comcast, there is an additional benefit as the threat of losing retransmission fees paid to its NBC network affiliates has gone away.

The appeal of Aereo was that it brought with it the possibility for lower MVPD bills for consumers and more choices in how to receive and pay for desired programs.  Today’s decision removes that possibility for now, but hopefully it does not discourage other firms from trying to develop technological solutions that respect copyright laws while providing consumers with lower priced video options.     

Bundles

If you are a cable MVPD, how do you compete with direct competition from LECs and DBS providers and indirect competition from broadband that is provided by your LEC competitors and from another business segment within your own firm?  The answer is: you bundle.  You make the substitute product a complement and you discount the “add-on” products so that the value of the package is appealing enough for the customer not to cut the cord.  This strategy has worked well up to this point.  Will it continue to do so or are customers getting tired of the “deal”?  

	MVPD	Broadband	Telecom - Landline	Telecom - Wireless	Marketing
Cable	X	X	X		Double & Triple Play
Telco	X	X	X	X	Double & Triple Play
DBS	X				Partnerships
# competitors/market	4	2	2

Has anything changed?

Over the past 12 years has much changed in the video delivery market?  Yes!

• DBS (DirecTV and DBS) more than doubled their number of subscribers, aided by passage of Satellite Home Viewer Improvement Act in 1999.
• Significant consolidation among top cable firms.
• Entry of LECs in 1999.  Now hold an 11% share of MVPD market at the end of 2013.
• Today, approximately 35% of HHs have access to at least 4 MVPDs competitors (2 DBS, 1 cable, 1 LEC).  In 2001, the maximum number of competitors/market was three (2 DBS and 1 cable).
• Cable and Telco MVPDs bundle broadband and telephony with video offerings to form double and triple plays.  DBS firms partner with telcos to offer similar video/telephony/internet bundles.
• Broadband is becoming a more viable product substitute to MVPD as firms like Netflix and Amazon Prime create and deliver content for the internet.  Some subscribers are cord-cutting (or cord-shaving).

Over the past 12 years has much changed in the video delivery market?  No!

• Many of the top cable MVPDs are vertically integrated with content providers.  Comcast, with its ownership of NBC/Universal, has the largest number of program affiliations.
• ESPN and live sports programming dictate perceived value and prices.
• Cable programming is bundled into pricing tiers.

	EOY 2013		2Q2001
Comcast	21,690,000	22.9%	8,415,950	9.5%	purchased AT&T Broadband in 2003 and added approx. 2M subs from Adelphia in 2006
DirecTV	20,253,000	21.4%	9,996,700	11.3%	proposed merger with Dish in 2001 was blocked by regulators
Dish	14,057,000	14.9%	6,066,902	6.9%
Time Warner	11,393,000	12.0%	12,672,496	14.4%	purchased 2/3rds of Adelphia's subscribers in 2006
AT&T	5,460,000	5.8%	14,518,176	16.4%	AT&T Broadband thru 2003; AT&T U-Verse began in 2006
Verizon	5,262,000	5.6%	-	0.0%
Cox	4,800,000	5.1%	6,164,043	7.0%
Charter	4,342,000	4.6%	6,490,790	7.4%
Cablevision	2,813,000	3.0%	3,002,543	3.4%
Adelphia	-	0.0%	5,748,986	6.5%
All Other	4,536,294	4.8%	15,233,488	17.3%
	94,606,294	100.0%	88,310,074
CR4	67,393,000	71.2%	45,603,322	51.6%
Top 5 Cable	45,038,000	47.6%	48,261,455	54.7%
AT&T & Verizon	10,722,000	11.3%	0	-
DirecTV & Dish	34,310,000	36.3%	16,063,602	18.2%

The Great Disruptor -- Aereo?

Two years ago, a new product came onto the market in NYC that just might have a significant impact on the distribution of video programming.  Aereo uses small antennas, individually assigned to subscribers, to receive public broadcast signals locally and then retransmits those signals to subscribers over the internet.  The small bundle of broadcast television stations (e.g. ABC, CBS, NBC) are streamed to any device at any time. 

Today, about 10% of households use an on-premise antenna to receive television broadcast signals for free.  What Aereo does is moves those antennas (and DVRs) from the customers’ homes to their own facility.  That move to the cloud allows for greater flexibility on where and when subscribers can view “their shows”. Aereo offers the service to households for just $8 a month.  Some MVPD customers may choose to pair Aereo’s service with broadband and drop their cable subscriptions.  Televisions stations would see a drop in retransmission fees paid by MVPDs, because under the Copyright Act, if a television broadcast is considered a public performance than Aereo, the internet redistributor, does not need a license or have to pay television stations retransmission fees.  If the Supreme Court rules in Aereo’s favor, how will competitors respond?  Will more content move from broadcast channels to premium cable channels or the internet?  How disruptive will this technology change be?     

Are we beginning to see the end of channel bundles?

Tying exists when two or more products are packaged together for sale.  In general terms, tying arrangements are often pro-competitive business arrangements because of the cost savings derived from economies of scope.  The courts, however, are concerned with the business practice of tying if they believe that a firm can extend its dominance in the tying product market to gain dominance or rents in the tied product market.  In 1962, The Supreme Court in United States v. Loew’s, Inc. found that the practice of licensing or selling desired films to television stations on the condition that they purchase a block of films that included unwanted or inferior films was a violation of Section 1 of the Sherman Act.  The Court ordered that the defendants price the films individually and prohibited differences in prices when films were sold individually or part of a package, unless there were legitimate cost differences. 

Fast forward to 2013.  Cablevision filed an antitrust lawsuit against Viacom alleging the content provider forced it to carry and pay for fourteen lesser-watched channels in order to have the right to carry its more popular channels, specifically Nickelodeon, Comedy Central, and MTV.  What’s behind the sudden shake-up in the relationship between content owner and distributor? 

For decades, in an expanding MVPD market, the channel bundles allowed new programming to be introduced at lower risk and costs.  MVPDs and programmers, together, espoused the benefits of the channel bundles sold to consumers and defended the absence of a la carte pricing.  More recently, however, the accelerated rivalry from broadband and wireless networks delivering new and unbundled content anytime and anywhere, has led to an increasing number of MVPD subscribers cord-cutting or cord-shaving.  Consequently, MVPDs will find it increasingly difficult to pass along higher programming costs to consumers without some push back.  The crack in the business model may have come in the recent move by 60 rural cable companies to drop Viacom programming completely from their channel line-ups.  Will the courts play a disruptive role too by declaring these programming bundles illegal?  If they do, the impact will be far-reaching and long-lasting.  

Gotta Love T-Mobile!

What does a wireless telecom firm have to do to attract new customers and build brand loyalty?  Give away free iPhones on a 7-day trial basis?  Waive data fees for streaming music from services such as Pandora, Rhapsody, iTunes Radio, Slacker Radio, and iHeartRadio?  Do away with contracts and international roaming fees?  

As the fourth largest wireless telecom provider in the United States, with about 40% of the number of subscribers as the two largest firms in the industry, but with spare capacity on an upgraded network, T-Mobile, the uncarrier, is disrupting the industry in a big way.  Will AT&T and Verizon respond?  If Sprint and T-Mobile decide to merge will regulators be more likely to think that the disruption ends or gets stronger?    

Can you blame them?

In a June 18, 2014 Wall Street Journal article, it was reported that 60 small cable firms elected to discontinue the relationship with Viacom because they believed that the price Viacom wanted for the right to carry its channels was too high.  [The cost increase was quoted as being 100% over five-years.] What was the risk of dropping these channels?  The risk was that many customers who enjoyed watching Viacom programming consisting of Nickelodeon, Comedy Central, and MTV would switch to a competitor (DirecTV or DISH) in the area.  Their only other choice was to pass through the higher programming costs onto consumers.  What was the risk of that alternative?  The risk was that some customers would “cut” the cable cord and seek out cheaper video distribution options.  It was a classic no-win situation for the cable provider.  Or, was it?

As it turns out, fewer than 2% of customers abandoned their cable service.  Why?  For one, if they have broadband service too the only option is to get it from the cable firm in the area--- part of the double or triple play.  To de-couple the services and get them from multiple providers (e.g. broadband from the cable firm and Pay-TV from one of the DBS firms) can be time-consuming and difficult to do.  Moreover, the programming on the Viacom channels is not “time-sensitive” viewing like live broadcasts of sporting events.    So, customers can watch their favorite shows the next day over the Internet with little downside.  Of course, this assumes that the content provider, Viacom in this case, continues to offer its programming online in the disputed areas.

Might the success in pushing-back on rising programming cost become a greater possibility?  In classic economic terms, it depends.  No doubt, in the vertical relationships between content providers and distributors, there is a mutual dependency and the likelihood that one or both parties will try to engage in opportunistic behavior when negotiating transactions.  When the programming is highly-valued, like ESPN, the content provider can withhold its content until it gets the terms and prices it wants.  Other times, the distributor may have the upper-hand in negotiations.   The bottom line is that when there are viable and acceptable choices in how, where, and when content is viewed, bargaining power will shift and maybe, just maybe, consumers will begin paying more reasonable prices to watch their “favorite” television shows.

Possible Dancing Partners as Media and Telecom Converge

One of the factors that regulators might consider when examining the merits of the Comcast-Time Warner Cable and AT&T-DirecTV mergers, is it likely that other firms may consider it to be in their best interest to find acquisitions partners.   Here are some possibilities:

Firm	Possible Partner(s)	Reasoning	Concerns
Charter	Cox, Cablevision	Expand national footprint in MVPD and broadband to match the scale of a Comcast-TWC
Verizon	Charter, Cox, Cablevision	Expand national footprint in MVPD and broadband to match the scale of a Comcast-TWC, and expand product bundling to more consumers.  Bundles could include wireline and wireless telephony, video, and broadband	The number of MVPD and broadband competitors in some local markets declines by one, increasing both local and national concentration
Verizon	Dish	Greater size to negotiate more favorable programming deals.  Greater opportunity to bundle telephony, video, and data services	The number of MVPD competitors in some local markets declines by one, increasing both local and national concentration
Sprint or T-Mobile	MVPD (Charter, Cox, Cablevision)	Scope economies from product bundles of wireless with Pay-TV and broadband
Sprint or T-Mobile	Dish	Scope economies from product bundles of wireless with Pay-TV and broadband
Verizon	ABC or CBS or other content providers	Content is king	Foreclosure or discrimination of competitive, non-affiliated content providers.
Dish	ABC or CBS or other content providers	Content is king	Foreclosure or discrimination of competitive, non-affiliated content providers.
Content provider (ABC, CBS, Netflix, etc.)	Broadband provider (small or large)	Content is king.   Broadband (distribution) is queen.	Foreclosure or discrimination of competitive, non-affiliated content providers.

Who benefits from bundles?

One of the major benefits of the proposed mergers between Comcast and Time Warner Cable and AT&T and DirecTV, is that the program distributors will be able to leverage their greater size in negotiating better programming deals with content providers.  Theoretically, they will be able to then provide that content across multiple platforms (smartphones, PCs, tablets, TVs); all bundled into a triple or quadruple package of products sold to us. 

We get bundles on top of bundles.  For our wireless service, we are offered tiered packages of voice and data minutes.  For our Pay-TV service, we have tiered programming choices that bundle channels we want to watch with a whole slew of ones we have no interest in watching.  The firms lure us in by then bundling the multiple services into “plays” and maybe we “save” $10 per month for a year.  Each month, we get one bill that combines all of these services for us.  That’s the good news.   The bad news is that the bill amounts to several hundred dollars.  So, we get aggravated [again]!  We think about changing services [again].  We make the call to the 1-800 number [again].  We get frustrated when talking to the customer service rep who tries to convince us that any downgrade to our service would be unwise.  We let it go for another month or two. 

Increasingly though, consumers are not letting it go.  Increasingly, consumers are cord-cutting or at least cord-shaving.  Increasingly, they are recognizing that the “bundle” benefits the firm much more than them.  The scale and scope economies that firms realize when selling a customer multiple products can be significant.  As a result, the value of each customer increases as more of these incremental [high-margin) products are purchased.  Then, the trick is to make customers think that the one-stop shop is in their best interest.  Brilliant!  But, it’s not.  It’s only in our best interest if it maximizes our utility.  We are starting to realize that, but, it requires us to learn what the options are in a very complex web of choices.  It may require paying more than one bill per month.  In the end, it may be worth it!