According to Fitch Ratings, if online TV providers are not required by law to pay re-transmission consent fees to the stations they are streaming, cable operators likely will gain material negotiating leverage with broadcasters.

Last week, a federal judge in New York rejected a request for a preliminary injunction filed by major U.S. broadcasters against start-up online television provider Aereo Inc. (click here for more information). The broadcasters are claiming that Aereo’s service violates copyright law by reformatting and retransmitting broadcaster TV signals without consent or compensation. The injunction aimed to stop Aereo from rebroadcasting or streaming the broadcaster’s over-the-air TV signals on the Internet. Aereo’s service, only available in the New York City market (although backer Barry Diller has stated plans to enter every major American city by year-end 2013) streams local on-the-air TV stations over the Internet for a $12 monthly fee.

The judge’s decision appears to be based on the precedent set in the 2008 Cablevision case in which Cablevision’s remote-storage DVR boxes were not considered public performances and were found not to violate copyright laws. However, we believe, in this case, a key difference is that Cablevision was paying licensing fees to content owners in order to broadcast the signals and offer the remote DVRs while Aereo is not.

The Aereo case calls into question the whole retransmission consent model. Pay-TV providers (cable companies, satellite companies, and telephone companies) currently pay the broadcasters retransmission consent fees to include local broadcast content in their respective video services. We believe retransmission consent is arguably among the fastest-growing operating expense for pay-TV providers. On the other hand, it has been a material boon to the broadcast networks, as the fast-growing, high-margin revenue has provided an offset to stagnating advertising revenue growth.

If the case ultimately is ruled in Aereo’s favor, we believe other pay-TV providers could leverage the threat of offering a similar service to significantly lower their retransmission payments. A worst-case scenario for the broadcast networks would be cessation of retransmission payments altogether, with pay-TV providers establishing models similar to Aereo. Mitigants to this scenario include any legal resolution likely being several years away and uncertainty around the economic benefits outside of larger cities.

Should Aereo ultimately prevail, we believe this could accelerate cord-cutting as a subset of the market will find an Aereo account and streaming video-on-demand (SVOD) services (Netflix, Hulu) a viable substitute for a full cable suite. However, we continue to believe that a significant portion of the population will continue to ascribe substantial value to a full roster of cable channels and the wide array of new content available in one spot. Free-to-air broadcast television always has been available, and pay-TV penetration still is approximately 90 percent of TV households.

We acknowledge that the migration of viewers from pay-TV to online and mobile platforms could pressure advertising revenue in the near term, as these viewers are not currently included in Nielsen ratings. However, upon obtaining Nielsen measurement, this dynamic could drive a sustainable advertising model. We believes this could increase the likelihood of one or more broadcast networks revisiting the prospect of transitioning to a cable network, which had been previously quelled by the introduction of retransmission payments.

— Fitch Ratings

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