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The Aereo Case: Video Content Licensing Revenues in a Digital Age

The Supreme Court, in its ruling in ABC vs. Aereo, opted for the status quo over disruption. The Justices in the majority opinion determined that Aereo, to continue operations, needs to license the right to perform publicly. This outcome was a decisive blow againstAereo, which suspended its operations following the loss.

 Aereo has said they have no “Plan B,” which is likely just a PR statement, but the details remain to be seen. The company is working with the Court of Appeals for the Second Circuit on how to proceed. Aereo’s microantenna model is not necessarily illegal, but if Aereocontinues to transmit under license, customers will not be paying $8.00 per month for service. Networks will treat Aereo as a cable retransmitter, and Aereo will be required to negotiate and pay carriage fees the same as any other pay-TV provider.

Another option Aereo may exploit is to lobby for policy change. Current copyright law interprets Aereo’s model as a public performance by “any device or process.” Changing policy to exclude retransmitters from public performance could make Aereo’s model non-infringing. A retransmitter exception could also affect cable and IPTV companies, as this would be a major overhaul to the retransmission consent policy set forth in the 1992 Cable Television Consumer Protection and Competition Act. Broadcast networks would offer stiff resistance to any proposed changes to this policy, and it could set up an ugly legal battle between broadcasters and pay-TV providers.

In rendering this decision, the Supreme Court tried to keep its ruling narrow, almost as if they were ruling only against Aereo, even though the results could extend the risk of copyright infringement to Internet retransmission of content.  The Justices intentionally neglected to address the Cartoon Network, LP v. CSC Holdings, Inc. case (from the United States Court of Appeals for the Second Circuit) in its majority opinion.

That case involved Cablevision’s hosted/remote storage DVR service, and the lower-court decision determined that cloud DVR services are in line with the legal framework of U.S. copyright law. The storage and playback of content by a pay-TV provider do not infringe on the content owner’s rights.  The Supreme Court, in ruling again Aereo, stated, “And we have not considered whether the public performance right is infringed when the user of a service pays primarily for something other than the transmission of copyrighted works, such as the remote storage of content.” In this, the Court omitted comment on the Second Circuit decision. In doing so, they tied the negotiated right to transmit with the right to remotely store content.

Despite these efforts to “thread the needle,” the issue of Aereo’s cloud DVR service puts the decision in Cartoon Network v. Cablevision in jeopardy. Already Fox is citing the Aereo decision as precedent in its ongoing complaint against the DISH Hopper DVR. At the center of these arguments lie content rights, and how the rights licensing process must evolve in the digital age.

This case has forced the content industry to examine how technology has changed their market and will impact their business models. U.S. broadband households watch roughly 30 hours of video per week, with the majority (almost 19 hours) spent on the television. Consumers identify broadcast television networks as the most important source of video consumption, but they are embracing online video and its new capabilities:

**By Q1 2014, two-thirds (64 percent) of U.S. broadband households were streaming video through a streaming media device, smart TV, gaming console, or smart Blu-ray player.

**The amount of online video viewed on a TV is steadily increasing, rising from 2.3 hours per week in 1Q 2013 to almost 3 hours per week in 1Q 2014.

**U.S. broadband households watch an average of 2.9 hours of video per week on a smartphone or tablet.

This rapid adoption of online video habits contrasts with the slow emergence of TV Everywhere, which pay-TV providers developed in response to the initial (perceived) threat of OTT (over-the-top) video. Awareness of TV Everywhere services has been slow to develop—only 25 percent of U.S. consumers are aware they have a TV Everywhere service from their provider—but it is picking up as more and larger brands develop their own platforms and educate consumers on its abilities.

The emergence of multiscreen viewing is adding new layers of complexity to the issue of content rights. Consumers can search for, access, and watch video on a variety of platforms, and this flexibility creates both risks and opportunities for content rights holders. Extending video content to smartphones, tablets, and computers opens new avenues for monetization but could also drain revenues, beyond the threat of piracy, by undercutting high-value media such as VOD, theatrical releases, and disc sales.

Similarly, the popularity of online content, much of which is available for free, creates a revenue dilemma for traditional pay-TV and broadcast television services. The threat of cord cutting has not materialized as first feared – pay-TV adoption rates have held steady, but the percentage of households likely to cancel their pay-TV service is now at 7 percent. Given that the main motivation to cancel pay-TV services is financial, it indicates consumers are sensitive to the cost of their TV services and could react negatively if the price goes up dramatically.

All players have a variety of new avenues to expand revenues. OTT providers are developing original content. Pay-TV providers can leverage big data in carriage agreements. However, given the price sensitivity viewers exhibited toward pay-TV services, all players will have to experiment with new business models and content licensing agreements. As a result, Parks Associates predicts only modest increases in revenues for licensed content to TV providers, with a five-year CAGR of 4.3 percent.

Glenn Hower is a research analyst at Parks Associates.