Bloomberg News

TV Drama Season in D.C. Has Broadcasters Awaiting Rulings

June 18, 2014

Aereo Inc. Chief Executive Officer Chet Kanojia

Aereo Inc. Chief Executive Officer Chet Kanojia, center, leaves the U.S. Supreme Court following oral arguments by Aereo Inc. and American Broadcasting Companies Inc. in Washington, D.C., on Tuesday, April 22. The U.S. Supreme Court is set to decide as early as tomorrow whether Aereo Inc. can use coin-sized antennas to capture TV signals and sell them over the Internet -- without paying broadcasters such as Burdick’s closely held Schurz Communications Inc. Photographer: Andrew Harrer/Bloomberg

Television executive Marci Burdick is gripped by a drama that isn’t appearing on her company’s CBS affiliate in South Bend, Indiana: She’s watching battles in Washington that figure to reshape the broadcast industry.

The U.S. Supreme Court is set to decide as early as tomorrow whether Aereo Inc. can use coin-sized antennas to capture TV signals and sell them over the Internet -- without paying broadcasters such as Burdick’s closely held Schurz Communications Inc. A decision for Aereo might lead cable and satellite companies to stop paying $4 billion a year to station owners, too.

If Aereo wins, “local broadcasters and their networks would have to have serious conversations about the business model,” Burdick, senior vice president at Schurz, said in an interview.

That’s not the only thing worrying broadcasters. The Federal Communications Commission has proposed eliminating a 39-year-old rule that bars pay-TV companies such as Comcast Corp. (CMCSA:US) and Dish Network Inc. from showing National Football League games that get blacked out on local broadcast stations whenever the stadiums aren’t sold out.

Without that rule, the NFL may abandon over-the-air TV for pay-TV, rather than lose control of its telecasts, according to the broadcasters who spend billions for game rights.

The challenges for broadcasters probably will continue next year, when the FCC wants stations to decide whether to give up airwaves for cash. The agency will auction surrendered frequencies for use by wireless providers such as AT&T Inc. and Verizon Communications Inc., which have said they need more airwaves to meet soaring demand for mobile communications.

Antenna-Fed TV

The decisions in Washington have the potential to reshape the TV business. Competition little imagined even a generation ago -- when antenna-fed sets dominated living rooms -- has left fewer than one in 10 homes relying exclusively on TV as cable, satellite and online services expand.

FCC ChairmanTom Wheeler, a Democrat and former head of trade groups for wireless and cable industries, led the agency to adopt tougher limits on TV-station ownership. On the same day in March, the agency asked whether to eliminate rules that give broadcasters exclusive rights to serve a city or town, a privilege that gives stations added leverage in fee negotiations because disputes can result in programming blackouts on cable or satellite systems.

Pulling Threads

“All of that pulls at the fabric that supports free and local” TV, Gordon Smith, president of the National Association of Broadcasters, a Washington-based trade group, said in an interview. Smith is a former senator from Oregon.

Executives in the Internet and wireless spheres say broadcasters are trying to stifle innovation by attempting to guard longstanding rules that date to a time when broadcasters were omnipresent, cable was nascent and consumer satellite services didn’t exist.

“The world has shifted to watching video content on portable devices, on smartphones and tablets -- and they have not gone along with that shift,” Gary Shapiro, president of the Consumer Electronics Association, an Arlington, Virginia-based trade lobby that represents gadget makers, said in an interview.

In response, members of the National Association of Broadcasters -- which include CBS Corp. (CBS:US), 21st Century Fox Inc., Comcast Corp.’s NBC and Walt Disney Co.’s ABC -- have said pay-TV providers are asking the government to interfere with free-market negotiations.

The fights have brought big names to Washington from both sides, from CBS Chief Executive Officer Les Moonves to Dish Chairman Charlie Ergen.

Aereo Test

TV’s first test comes in the Supreme Court’s decision this week or next on whether to stop Aereo.

“Aereo is theft,” Moonves told investors in May.

Aereo says consumers have the right to access local over-the-air TV with an individual antenna, which the company provides. Backed by billionaire media mogul Barry Diller, Aereo threatens the fees that cable and satellite distributors pay to broadcasters for the rights to carry local stations. Those payments may grow to $7 billion by 2018, according to data compiled by Bloomberg.

Meeting with the FCC in December, Ergen and other Dish executives argued the fees to broadcasters are part of an “outdated system, leading to ever-increasing consumer bills and a historic level of blackouts.”

The Fox network has said it will go off the air and become a cable channel if courts don’t stop Aereo -- a change that if followed by other networks would mark an end to TV as it’s been known since the 1950s.

‘Trust Gap’

Pay-TV companies want government help to cut the rates they pay for broadcasters’ most popular programs, the NAB told the FCC in March. Those programs attract 37 percent of viewers with sets in use during prime evening hours, according to TV-ratings company Nielsen.

Broadcasters have a “trust gap” with the FCC’s Wheeler that “continues to widen,” Smith said.

Wheeler declined to comment, said Kim Hart, a spokeswoman for the agency.

Some broadcasters are conflicted. Philadelphia-based Comcast, the largest U.S. cable operator, has a foot in both camps via its ownership of NBC. It hasn’t taken a position at the FCC on rules for fee disputes or sports blackouts. Disney owns ESPN, the sports cable network, as well as eight ABC broadcast stations.

Football Politics

A month after taking office, Wheeler won a preliminary vote to loosen local TV stations’ grip on NFL games by killing the sports blackout rule. The agency hasn’t taken a final vote.

The rule unfairly harms consumers by punishing fans in cities with large stadiums and declining populations, Senators Richard Blumenthal, a Connecticut Democrat, and John McCain, an Arizona Republican, said in a June 2 letter to the FCC. The lawmakers want a decision before the NFL season begins.

The FCC regulation, dating to 1975, helps pack stadiums, the NFL said in a filing. Without the rule, cable and satellite providers may air games from other markets and sports leagues might switch from free, over-the air TV, NAB said in a filing.

The league in 2011 signed deals with CBS, NBC and Fox to keep games on broadcast TV through 2022. Under the agreements, the NFL will collect $6 billion per year, including payments from ESPN and DirecTV, according to data compiled by Bloomberg.

Station Blackouts

For broadcasters, station blackouts have paid dividends. Last year New York-based CBS went through a one-month fee dispute with Time Warner Cable that left more than 3 million cable subscribers without CBS programming. Moonves told investors the face-off brought “dramatic gains” in the fees the cable provider paid CBS.

Time Warner lost customers, according to to its executives. The New York-based company, now the object of a takeover bid by largest cable company Comcast, told the FCC the dispute shows the need to “stem the mounting harm” caused by fee disputes including “constant threats of blackouts.”

Many stations are adapting to technological changes. Most now offer shows online, and more than 150 offer over-the-air signals that can be viewed on mobile devices, said Anne Schelle, managing director of Pearl, a partnership of broadcast companies such as Gannett Co. and Media General Inc. working on innovative ways to deliver TV.

“They’re streaming it, they’ve got apps,” Schelle said.

Free Airwaves

Broadcasters’ next big decisions come in 2015, when the U.S. government is due to mount its largest single U.S. action planned to fulfill President Barack Obama’s 2010 directive for more airwaves to feed the smartphone boom.

Broadcasters can offer all their airwaves for sale and leave the business, sell part of their frequency swath and stay in business on the other part, or not participate at all. Because it’s not clear how many stations will take part, the FCC isn’t saying how much it will disburse to broadcasters.

The FCC’s actions are damping enthusiasm, said Smith, the head of the broadcasters’ association.

“Broadcaster interest has dramatically declined because, at so many levels, actions have been taken that undermine the financial viability of free and local television,” he said.

Cashing Out

Others say some broadcasters may see the auction as an opportunity to cash out rather than chance a risky regulatory environment.

Changes being considered by the FCC are “creating uncertainty about the future of over-the-air broadcasting” Fred Campbell, who was wireless bureau chief at the agency under Republican leadership, said in an interview.

“If you’re sending the signal their future is not going to be bright, they have to say to themselves, maybe I’m better off in the auction,” Campbell said.

Schurz, owner of 10 TV stations, isn’t interested in participating, Burdick said. The Mishawaka, Indiana-based company is worried about what follows -- including expenses such as new transmitters if the FCC requires a move to different frequencies. She says the family-owned business intends to stay in broadcasting for decades to come.

“I don’t see a lot of broadcasters queuing up to go out of business,” Burdick said.

To contact the reporter on this story: Todd Shields in Washington at tshields3@bloomberg.net

To contact the editors responsible for this story: Romaine Bostick at rbostick@bloomberg.net Elizabeth Wasserman, Justin Blum, Jeffrey D. Grocott


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