Is DirecTV Testing Antennas To Circumvent Re-Transmission Fees?

by Trefis Team
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DirecTV (NASDAQ:DTV) appears to be testing a new set-top box that incorporates an antenna allowing the customers to access over-the-air broadcast signals. [1] This could potentially allow the company to avoid paying re-transmission consent fees to the broadcasters, which can help it control programming expenses to an extent. This further implies lower cost passed on to the customers in form of price increases.

While DirecTV is busy developing such set-top boxes, what if broadcasters actually decide to take their networks off the air?

See our complete analysis for DirecTV

Re-transmission Consent Again In The Limelight

Re-transmission consent refers to the provision that requires cable and MSOs (multi-service operators) to obtain permission from broadcasters before carrying their programming. Usually these operators would pay cash to the broadcasters for the right to carry their programming. This amount is estimated to top $6 billion by 2018.  [2]

Broadcasters sensed trouble over re-transmission fees when Aereo was launched last year. Aereo is a technology startup that re-transmits over-the-air broadcast signals using tiny antennas to its online subscribers. Aereo doesn’t pay any re-transmission fee and has been engaged in legal battles against various broadcasters since its inception. A U.S. appeals court earlier last month denied an injunction by broadcasters that could have shut down Aereo. [3] This gives a legal edge to such technology and operators can use this to avoid paying carriage fees. However, the legality of Aereo is still uncertain and it is likely that the Supreme Court will intervene at some stage to settle the dispute between Aereo and the broadcasters.

What The Future Looks Like

Unlike Aereo’s controversial transcoding solution, the addition of an antenna into DirecTV set-top boxes will have the advantage of being definitively legal. DirecTV is the largest satellite operator in the U.S. with over 20 million customers. The company intends to test such set-top boxes in certain regions with new connections and later move on to its existing subscriber base. While the company will be able to reduce its carriage costs, there will be a loss in the broadcast quality in some areas.

However, an interesting twist to the story is that Newscorp’s (NASDAQ:NWS) Fox earlier threatened to take the network off the air rather then allowing companies like Aereo to re-transmit it freely. The FCC (Federal Communications Commission) is offering to buy back unused broadcast spectrum from TV companies so that it can sell it to wireless data providers. [4] Although unlikely, one can’t rule out that broadcasters may decide to shut down their over-the-air transmissions and sell their licenses back to the government. They can then distribute their product exclusively to cable and satellite operators. Interestingly, taking Fox off the air wouldn’t impact Newscorp significantly. (See: What’s At Risk In News Corp’s Feud With Aereo?, Trefis, Apr 15, 2013) With the arrival of Aereo, the entire media industry is seeing a fragile environment over re-transmission fees, and it will be interesting to see how things turn out in the future. Even if the Supreme Court were to intervene against Aereo, DirecTV’s antennas are legal, and if successful, there could be a meaningful impact on the broadcasters’ income.

Our price estimate for DirecTV stands at $58, implying a discount of over 5% to the market price.

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Notes:
  1. 41st Annual JP Morgan Global Technology Webcast, Media and Telecom Conference, JP Morgan, May 14, 2013 []
  2. Kagan: Retrans to Top $6 Billion by 2018, Broadcasting and Cable, Nov 5, 2012 []
  3. Second circuit court of appeals upholds district court decision in favor of Aereo, Aereo Press Release, Apr 1, 2013 []
  4. FCC to buy out TV broadcasters to free up mobile spectrum, ARS Technica, Sep 29, 2012 []
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