Recent reports suggest cable operators are considering building their own version of Aereo--or potentially partnering with Aereo itself. The thinking, expressed by cable industry veteran and investor Leo Hindery, goes something like this: If Aereo can carry local TV stations without paying for the privilege, can't cable operators do it too?
The answer is, well, sure. But not without spending a significant amount of cash and maybe even more good will with the industry's programming suppliers. For cable operators to make the most of Aereo's technology and eliminate the fees it pays to broadcasters entirely, they would have to spend money in a few key areas.
First, they would have to build a system of antennas and DVRs--one for every household--to enjoy the same legal standing Aereo has argued it is entitled to under copyright law. Aereo has had the luxury of starting small and strategically planning its expansion, yet the cost of building and operating that kind of system is already proving expensive.
Aereo hasn't revealed how many subscribers it has. But this week the Wall Street Journal estimated Aereo has between 95,000 and 135,000 subscribers in New York alone. And it reportedly draws enough electricity there to yield a roughly $2 million annual electricity bill. That means it's paying roughly $15 a year to the power company for every subscriber.
Building and operating an Aereo-like service at the scale of the total domestic pay-TV industry--an industry that serves an estimated 94.6 million households according to Leichtman Research Group--would be much more expensive. Electricity is cheaper outside of New York, but even at, say, 20 percent lower energy costs, the pay-TV industry would spend at least $1.1 billion per year in power costs alone to run that kind of system.
Additionally, Aereo has some patents in this area and may be owed royalties if its model of a micro-antenna-based cloud-DVR catches on more widely.
In subscribers' homes, cable operators will run into another series of costs. Not all the equipment currently leased to cable subscribers is capable of accessing a remote DVR service like the one Aereo is building. Before a cable operator could realize the programming cost savings from offering an antenna-based remote DVR system, all its subscribers would have to be able to access such a system. Making sure they can would be another potentially large and time-consuming expense.
There are also the harder-to-quantify costs associated with going up against the broadcasters. The companies which own the major broadcast networks and TV stations in the largest markets also own the bulk of the most popular cable networks like ESPN, Showtime and FX. Furthermore, by rolling out an Aereo-like cloud DVR service, the distributors would effectively increase DVR penetration in pay-TV households to 100 percent.
It's hard to imagine the networks would just sit by while distributors cut out a growing portion of their revenue and simultaneously encourage viewers to skip more ads. Distributors could find themselves in ugly public battles with their most important program suppliers, potentially driving subscribers away.
Somewhere within the finance departments of the cable operators, there is probably a spreadsheet tallying these costs. Next to that tally is probably a projection for the operator's annual retransmission consent spending. If the first number is smaller than the second, the case for moving forward with an Aereo-like model would be financially strong.
And that second number will be big. SNL Kagan estimated last year that pay-TV operators would pay $4.2 billion in retransmission consent fees in 2015 and that those fees would climb steadily through 2018.
Maybe that's why Aereo has split the cable industry into two camps. In one, operators like Time Warner Cable (NYSE: TWC) and American Cable Association members track Aereo's legal battles with a kind of giddy bemusement that grows with each of Aereo's legal victories over the broadcasters. In the other, operators such as Comcast (Nasdaq: CMCSA), whose TV stations rely on retransmission consent revenue, remain publicly adamant that Aereo is illegal.