Aereo & Market Disruption

I want to warn you in advance, this could be a long post.  So if you need a beverage or a restroom break now might be a good time to do so.  Go ahead, I'll wait.............. .......Ok, you're back

I attended the CEWeekNY event on Wednesday, June 26.  The primary reason I attended was to listen to the "chat" between Aereo found and CEO Chet Kanojia and the head of the CEA, Gary Shapiro.  In case you are not aware of Aereo the company has developed a cloud-based service that captures the digital TV broadcast signals, the free over-the-air ones, and transmits them to you over the Internet to your iPhone or iPad or computer.  They also provide DVR service starting at $8.00 per month for 20 hours of storage.  $12.00 per month will get you 60 hours of DVR storage.

This service has caused an uproar with broadcast TV providers, ABC, CBS, NBC, FOX, etc., as they view this service as illegal.  So much so that they have all filed suit against Aereo to stop the service.  Thus far, Aereo has won these suits, but I believe they may have lost one filed in LA.  In response, Aereo has filed a declaratory judgment in NY, which would basically extend the NY ruling to the entire country.

What's the fuss, you ask?  Well, the fuss is about economics, business models and money.

The basis for Aereo's success at litigation thus far is a simple concept.  The law allows anyone to receive FREE broadcast TV programming through an antenna.  Its the law.  Aereo has developed a tiny, 2 inch, antenna and erected these in an "antenna farm" within a building that has direct line of site to the broadcast TV transmission location in the cities where they operate.  Each consumer is assigned their own antenna so, instead of erecting a digital TV antenna on the roof of your home or within your home, Aereo is doing this for you, and then sending your signal to you via the internet. Genius!  The law does not say YOUR antenna has to be on YOUR property.  The fee being charged is not to rebroadcast the signal, but for DVR service.

The other basis for Aereo's success at litigation is the Sony Beta-max ruling years ago that allowed a consumer to record a TV broadcast for viewing at a later time, or time shifting, wherever they wished to view the broadcast.  Implicit in this is the fact that it is your media to be consumed where you want to view it.  Also implicit is the concept of Fair Use that did not violate copyright laws.

The broadcasters make globs of money via advertising and, recently, instituted their own mini disruption of the cable market by requiring subscriber fees from the cable MSO (e.g. Time Warner Cable) to broadcast their content, like ESPN and Lifetime do, providing them with two revenue streams - advertising and subscriber.

Beyond the statistics about roll-outs and such, a couple of things Mr. Kanojia said struck me.

First, and I will paraphrase, economics causes disruption.  For those of you who pay your cable provider handsomely each month, has your bill ever gone down?  The basic cost of cable in the USA is about $120/mo.  Add broadband services, HBO, the cost of your cable box, remote, etc. and the cost easily tops $150 per month.  People just can not afford this anymore.  The cable MSO and content providers (ESPN) continue to focus on revenues and profitability over customer experience and ability to pay.  I have said this many times, there is a generation among us that simply can not afford to pay college debt, rent, food and for cable services.  They are seeking another source for entertainment, which is why services like Hulu and Netflix and YouTube Channels are thriving and growing.  Aereo is just another example of this disruption and how the model of content delivery is slowly shifting away from the Cable MSO.

Second, consumers have the right to control their own media selections, and how these selections are consumed.  The paradigm is shifting and it is being driven by technology and economics.  Back in the day consumers watched TV over the air (wireless) and spoke on the phone via land line (wired).  I know, I know, old school.  Advances in technology changed this paradigm, and now most consumers use a wireless telephone and received TV service from a wire via a cable company.  Continued advances in technology, and cheaper consumer solutions, will begin to allow a consumer to select from which source they select and consume their content and other entertainment choices.

The same thing is happening in radio (Pandora, Spotify, iHeartRadio, etc.).  Anyone notice the law suits flying around after Pandora announced it will purchase a radio station in the Dakotas to reduce its royalty costs? The radio market is being disrupted by these online services.  To survive both the performer and the existing distribution paradigm (over the air radio) are filing suits to block the advancement of a new paradigm which offers the consumer more choice and convenience.  Disruption of the market causes those with business models under attack to fight to retain their market position, and their cash cows. 

While cable companies, broadcasters and their management are focused on financial results, Aereo, according to Mr. Kanojia, is focused on technology the customer experience.  Providing a compelling customer experience at an affordable price, giving the consumer the ability to control their own media selections and consumption device, will ultimately lead to higher revenues and profits.  At least Aereo investor Barry Diller of IAC hopes so!

And Aereo is not the only service that allows a consumer to store media away from their home.  Ever heard of Ultraviolet, the platform offered by the Digital Entertainment Content Ecosystem (DECE)?  This industry standard essentially assigns a digital right to a piece of content you buy that permits it to be played on any device you own, anywhere.  Where is that right stored?  Not on your device, but in what they call a "rights locker".  Is this no different than storing your media selections in an off-site location?  Cablevision won a law suit brought against them for a DVR service to be stored in "the cloud" instead of on the DVR in your home.  In fact, my latest cable bill from Cablevision included, in a supplement, an announcement of a Super DVR service that will allow the recording of 10 shows at once and over 75 hours of HD content storage.  Not on the hard disk in my DVR.  Off site, in the cloud, at Cablevision's facilities.  How does this differ from what Aereo is offering, off-site storage of your time shifted content?

Disruption in the market place is a good thing, and is usually driven by consumer desires, preferences and economics.  Aereo is not the only company looking to disrupt this paradigm.  Intel is launching a TV service and Google and Apple are also working on TV services.  Industries and their participants must adapt to these disruptions or suffer the consequences.  Just ask RIM (Blackberry) about this.  

The economics of the current media delivery and consumption paradigm are unsustainable.  Those benefiting from the entrenched paradigm, media companies, broadcasters, cable MSOs, etc., will continue to fight and file law suits to protect a paradigm that has provided them and their shareholders great wealth and profitability.  But ultimately a tech savvy and economically challenged generation of consumers, or generations, will dictate how they select and consume media, and the entrenched industry will have to adapt to survive.