Aereo’s Web TV Service May Be Cable Companies’ Ace in the Hole

Photograph by Andrew Harrer/Bloomberg

Barry Diller’s Aereo is perceived as a challenger to cable companies, but it may end up helping their bottom line.

If you’re thinking about canceling cable in favor of something cheaper, Aereo is a pretty attractive alternative at $8 to $12 a month. The online service, which is currently available in New York, plans to expand to 22 other U.S. cities this year and add cable channels to its full roster of high-definition broadcast networks.

Aereo, backed by media mogul Barry Diller, manages to undercut the cable companies’ prices so severely in part because it doesn’t pay retransmission fees. Comcast, DirecTV, Time Warner Cable and other pay-TV providers compensate broadcasters, such as ABC, CBS, Fox and NBC, and their local affiliate stations for their content. (Bloomberg LP, which owns, is an Aereo partner and offers its cable channel on the service.)

Pay-TV companies could look at Aereo’s budget-television offering as a threat. But the shrewd ones could use it as leverage.

The next time, say, Dish tries to renegotiate its contracts, the company can threaten broadcasters with the prospect of paying them nothing by partnering with Aereo. Dish has held talks with Aereo, according to the Wall Street Journal. Dish will need its own Internet service to make this happen, something that may not be far off. Many pay-TV operators are likely to roll out such services over the next few years, Rich Greenfield, an analyst at research firm BTIG, said in a note to clients.

Dish Chairman Charlie Ergen isn’t afraid to stick it to the broadcasters. (His company is already being targeted in court for the commercial-skipping AutoHop feature and for the integration with Sling Media in new set-top boxes.) But Comcast is a slightly different animal now that it owns NBC Universal, which is on the receiving end of the lucrative retrans checks.

Retransmission fees, which were almost nonexistent during the 1990s, have grown astronomically in recent years. According to data from research firm SNL Kagan, broadcasters collected $2.36 billion in retrans fees in 2012, and that revenue could double to more than $6 billion by 2018. People who install antennas in their homes to tune into over-the-air TV do not pay the fees.

Aereo has avoided this expense by claiming it’s not illegally retransmitting because its customers are actually renting their own tiny antennas. We found out yesterday that the courts, so far, agree. Broadcasters say Aereo has found a loophole, and the result will devalue programming.

If Aereo ultimately prevails in the courts, expect the major pay-TV providers to use it as leverage to lower retransmission fees industry-wide — perhaps dramatically — or threaten to partner with Aereo and pay nothing.

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