The big news in television is that the Supreme Court is reviewing the Aereo case. Aereo is a maverick, a firm offering TV viewers an opportunity to watch and record over-the-air television broadcasts through Internet technology. In the business world, mavericks are often a blessing. They innovate; they seek ways around antiquated rules or customs; and, they bring consumers new products and services, often at a lower price. As a new entrant, Aereo threatens the status quo in television distribution and may provide distributors and consumers more competitive choices and lower priced options. Of course, that’s not how established broadcasters see it.
For a fee of around $8 per month, Aereo offers a customer the same digital programming available from a home antenna. However, the customer avoids the need to purchase and install an antenna and also gets the convenience of saving a program at the Aereo source and viewing it at a later time. The broadcasting industry believes Aereo’s actions violate copyright law and wants to enjoin further operations. The broadcasters would allow Aereo to continue its service, but only if they are paid a copyright licensing fee, similar to the fees pay TV distributors remit to programmers. The lower courts have ruled in favor of Aereo, and it is this ruling that will be reviewed by the Supreme Court.
The Court will have to grapple with technical language in the Copyright Act. The legality of Aereo’s conduct turns on whether the retransmission of broadcasts constitutes a “public performance.” The resolution of this issue could have a substantial impact on future television distribution in the United States.
Television programming is now transmitted to viewers in three ways: (1) through over-the-air broadcasts, (2) through pay TV distributed by traditional cable, telephone company fiber optic cable, or satellite, and (3) through the Internet. Over-the-air broadcasting remains the delivery option for roughly 57 million Americans. Programmers still receive a substantial revenue flow from this type of broadcasting: the more viewers, the more advertisers pay to have their ads featured.
From a programmer’s point of view, the most lucrative delivery mechanism is pay TV. The FCC estimated that as of 2010, pay TV programmers received 55 % of their revenues from subscription fees (assessed based on the number of viewers subscribing to the distributor’s service) and 42 % from advertising. Understandably, broadcasters would like to move viewers to the dual-revenue source pay TV system, which currently serves about 100 million US households.
Aereo relies on a combination of over the air broadcast signals and Internet delivery, neither of which allow the broadcaster to collect subscription fees. To the extent that the Aereo system maintains or increases the popularity of over-the-air broadcasting, it is anathema to TV programmers and distributors as well. Some programmers have even threatened to abandon over-the-air broadcasting should Aereo prevail in the litigation. Whether the programmers would carry out this threat is uncertain. Doing so would require giving up the advertising revenues that flow from the over 57 million Americans who still get their television through the digital airwaves. The broadcasting spectrum that a television broadcaster abandons might end up in the hands of rival programmers who were willing to provide programming funded by advertising revenues.
If the programmers prevail in the Aereo litigation, they could prolong the life of the current system of pay TV or even temporarily boost subscription revenues. That system, however, is inefficient and highly anticompetitive. Programmer imposed bundling and tiering restrictions require distributors and consumers to purchase large and unwieldy bundles of channels, depriving distributors of the freedom to offer consumers more choices and lower cost options for purchasing programming. Although distributors are on the same side as programmers in the Aereo dispute, there is no doubt that distributors want an end to the bundling restrictions. In the words of a Direct TV representative, “the current all-or-nothing system dictated by programmers is completely broken. . . . [F]or programmers to force this system on all pay TV customers, just so they can line their pockets with extra profits, is shameful.”
Here are some of the problems underlying the bundling and tiering restrictions.
• The forced bundling increases returns on copyrighted programming, but simultaneously stifles independents in the creation and marketing of innovative programming, suppresses consumer choice, inflates consumer prices, and deters some potential viewers from subscribing.
• The average consumer pay TV bill is more than $90/month today and is expected to rise to $120/month in the next few years.
• The GAO has found that pay TV bills are increasing at more than twice the rate of inflation.
• The average pay TV bill in Canada, where viewers are given more choice, is roughly $30 a month less than in the United States.
• Sports television now accounts for roughly half of subscription fees, with that percentage expected to rise in the next few years, yet well less than half of Americans regularly watch sports on television.
• The bundling system is under attack in Congress (Senator John McCain has introduced a bill to require a la carte distribution).
• The bundling system is under attack in continuing antitrust litigation.
• Increasing numbers of subscribers are choosing to cut the cord on their pay TV subscriptions.
• Many young Americans are never-corders, choosing to get programming from the Internet or other sources.
Given these realities, an executive for a TV programmer would be well-advised to prepare for a world in which forced bundling ends and consumers get meaningful choices. That will mean a considerable loss of revenue for powerful programmers, but the losses can be mitigated if distributors offer attractive, customized bundles preferred by viewers. Programmers will raise prices on popular individual channels to offset some of the loss. And overall viewership would increase with more options for price-conscious consumers, allowing a partially offsetting increase in advertising revenue.
A victory for the TV programmers in the Aereo litigation will not save the doomed system of forced bundling, but it could prolong the life of this unpopular and anticompetitive delivery system. A victory for Aereo will not end forced bundling, but it will increase pressure on distributors to push for freedom of choice, a welcome result for consumers and for a well-functioning competitive system.
–Warren Grimes is a professor at Southwestern Law School in Los Angeles, where he teaches and writes about antitrust and television distribution issues.
