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Fox's threat to go cable-only won't mean much to most viewers

April 09, 2013|By Joe Flint
  • News Corp. Chief Operating Officer Chase Carey may take "The Simpsons" to cable.
News Corp. Chief Operating Officer Chase Carey may take "The Simpsons"… (Chase Carey / Bloomberg;…)

News Corp. Chief Operating Officer Chase Carey made big headlines Monday for suggesting that Fox could go from a broadcast network to cable channel to make ends meet. 

The implication is that consumers would have to pay to watch Bart Simpson or catch some NFL football on Sunday afternoons.

But for all intents and purpose, Fox is already a cable channel and has been for a long time. Yes, about 10% to 15% of the country's TV consumers still get Fox via antennas, but everyone else receives its signals from a pay-TV provider such as Time Warner Cable or DirecTV.

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And they pay for it too. Back in the early 1990s, lawmakers gave broadcasters the right to charge distributors to carry their signal. In the TV industry, this is known as retransmission consent.

Initially, cable and satellite companies were loathe to pay broadcasters to carry their channels. After all, they had been carrying them for free for decades. Furthermore, broadcasters used the public airwaves, which meant anyone with an antenna could get their signals for free anyway. Of course, that didn't stop pay-TV companies from charging their subscribers a fee to get broadcast signals.

The pay-TV guys held their ground and said they wouldn't pay for an over-the-air TV channel. So the broadcasters, in a stroke of genius, decided to launch cable networks and package them with their broadcast properties. News Corp. created the FX channel. NBC launched a channel that would ultimately become MSNBC. Walt Disney Co., parent of ABC and ESPN, developed ESPN2, a sister channel.

This was a solution that worked for the pay-TV side. They rationalized that they were not paying for Fox, but rather for FX. If some of the money they paid News Corp. for FX ended up going to Fox, that was fine.

The system worked for many years. But as programming costs continued to rise and ratings for broadcasters declined because of all the media fragmentation, Fox, ABC, CBS and NBC wanted cold hard cash for their own programming. Cable channels have two revenue streams -- subscriber fees and advertising -- and broadcasters wanted that too.

The pay-TV industry resisted but ultimately agreed to cough up some bucks. Retransmission consent has become a key revenue stream for broadcasters. According to SNL Kagan, Fox, CBS, NBC, ABC, CW and Univision will take in a combined $1.7 billion in fees from pay-TV companies in 2015.

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Every now and then there is an ugly negotiation and a network pulls its signal for a few days or a week but ultimately a deal gets done and our bills all go up a little bit. The pay-TV industry has complained to regulators that broadcasters are abusing retransmission consent and lining their pockets but so far the Federal Communications Commission has not showed a ton of interest in getting involved in this.

So why is Carey suddenly talking about Fox officially becoming a cable-only service?

Because a little start-up company called Aereo is seen as a potential threat to the retransmission consent revenue stream. New York-based Aereo, which only started last year, distributes broadcast signals to consumers via the Internet for about $8 a month. Aereo does this without paying broadcasters retransmission consent fees.

Fox, CBS, NBC, ABC and other broadcasters including Tribune Co. (parent of the Los Angeles Times) have gone to the courts to try to stop Aereo on grounds of copyright theft. So far they've struck out but the battle will continue.

Although Carey said Monday he expects Fox and the other broadcast networks to ultimately win in court, he also made clear that if Aereo isn't defeated, then the Fox broadcast network will take its ball and go home.

"We won't just sit idle and allow our content to be actively stolen," Carey said in a statement. "It is clear that the broadcast business needs a duel revenue stream from both ad and subscription to be viable."

Aereo has very few subscribers and is only just now rolling out to other parts of the country. It may be a long time before it gets to Southern California because a rival service, ironically called "Aereokiller," was stopped in its tracks by a ruling from the 9th Circuit Court in California. Interestingly, one of the backers of Aereo is media mogul Barry Diller, who was the architect of the Fox network when he worked for News Corp.

Carey and other broadcasters fear that if the courts don't stop Aereo it will either catch on with consumers or that a cable company might partner with Aereo to try to get out of paying retransmission consent fees.

That seems unlikely for two reasons: First, from the consumer standpoint, the last thing the pay-TV industry seems interested in is giving their customers more options in what channels they get. Second, from a business standpoint, the big broadcasters also own powerful cable networks and can use that leverage to dissuade anyone from thinking about getting into bed with Aereo.

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