Ryvicker: We’re not so worried about Aereo


AereoMarci Ryvicker, Wells Fargo Securities Senior Analyst, thinks Barry Diller’s embattled local broadcast TV streaming service doesn’t really pose that much of a threat to the television ecosystem after all. We have to wonder as well—just go out and buy a battery-powered TV if you want to see live broadcast TV so badly  out of the home—its completely free, where Aereo charges for it. It should be that simple, but digital TV reception stinks and consumers will not carry these things around. Nonetheless, says Ryvicker:

“We’re not so worried about Aereo. This note is not meant to provide a legal opinion on the merits of Aereo, nor is it meant to provide this start-up with even more airtime than it has already received (we probably fail here). Rather, we simply did some digging in order to provide the answers to some Frequently Asked Questions that continue to pop up among the investment community, especially given growing interest in the pure-play television stocks, which are up 151% YTD versus the S&P 500 +11%. BOTTOM LINE: We are A LOT LESS concerned about the risk Aereo poses to the overall ecosystem.

What is Aereo? Aereo is a “start-up” company offering access to live viewing of all broadcast networks and 20-40 hours of DVR storage for $8-12 per month in certain markets (only NYC and Boston now) via a broadband connected device (currently computers, iPads, and Roku boxes). Aereo was founded by Chaitanya “Chet” Kanojia (founder and CEO of Navic Networks) in 2011 as “Bamboom Labs” and introduced as Aereo by Barry Diller (Chairman of IACI) in February 2012.

Why are the broadcast networks suing Aereo? In March 2012, separate lawsuits were filed against Aereo in the U.S. District Court of Southern New York by two groups of broadcasters claiming copyright infringement and asking for an injunction to stop Aereo’s service, with one group also claiming unfair competition. Aereo counterclaimed that consumers are entitled to free over-the-air TV using an antenna, as well as individual DVR recordings stored at Aereo’s own remote location (using CVC’s RS-DVR as precedence).

What is the status of the various lawsuits? The broadcast networks have lost 2 rounds of the injunction case in the NY courts and are waiting for a review of their case en banc (we have heard this is unlikely), while the copyright case is still awaiting trial. There is a similar case on the West Coast, where the broadcast nets have sued Aereo copycat FilmON for copyright infringement and have also requested an injunction–here, the broadcast networks won the injunction case, to which FilmON has since appealed. Should the two courts come to different conclusions, these cases will likely be combined and head to the Supreme Court.

What is the BEST case scenario? Both FilmON and Aereo are deemed to breach copyright law and subsequently forced to shut down, which would be considered a positive catalyst for all media/broadcast stocks (in our view).

What is the WORST case scenario? The broadcast nets lose on appeal in both the 9th (FilmON) and 2nd (Aereo) Circuit courts. While likely a negative catalyst for media stocks, at least initially, we still question the true impact this technology would have on retrans given i) many of the providers of broadcast content also provide cable content; and ii) it is extremely costly and technologically difficult for incumbent MVPDs to pursue an Aereo-type model, thus negotiating leverage might not tip as much in MVPD favor as investors fear.

What is the most LIKELY scenario? According to our contacts, the broadcast nets are most likely to prevail in the 9th Circuit; while a win in the 2nd Circuit is not as clear. At this point, we think the litigation is likely to take some time, which means that Aereo and FilmON will continue to launch market-by-market until they are stopped. We looked at TV station (O&O and pure plays) and MVPD exposure to Aereo’s 23 target markets, noting that JRN, GTN, NXST, and SBGI are in the BEST position from a station group perspective; while CVC, VZ (J. Fritzsche), CMCSA, and T (J. Fritzsche) are in the BEST position from a pay-tv perspective.”