Broadcasters Fear the Music in Aereo Fight

NEW YORK ( TheStreet) -- Walt Disney ( DIS) Chief Executive Robert Iger and CBS ( CBS) Chief Executive Leslie Moonves have been getting red in the face lately about Aereo, the audacious startup that's trying to make a business out of re-transmitting broadcasters' free over-the-air signal to its online subscribers.

Iger and Moonves have already unleashed their lawyers to no avail to try to put a stop to Aereo. But if recent history is a suitable guide, Big Media ought to make sure to avoid the same mistakes the music industry made 12 years ago when it went after Napster.

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Rather than the pay-TV bundle, it was the CD. Consumers were turning to new technologies to avoid paying for products they didn't want. Napster and other file-sharing platforms were daring to use the Internet to exchange recorded music. Its instant popularity was borne of consumer frustration with having to pay $15 or more for a CD when all they wanted was one or two tracks.

Aereo, which is backed by Barry Diller's IAC/InterActive ( IAC), has already won two court decisions to defend its business of retransmitting over-the-air broadcast television for its Internet-based pay-subscription business.

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Like Napster, it's using new technologies to give consumers what they've been looking for: an alternative to the $50-plus pay-TV bundle. The $8 to $12 per month service began this year in New York and recently expanded to Boston and Atlanta as part of a 22-city expansion to be completed in the fall.

Aereo customers are paying a fraction of their pay-TV bill to access the most popular channels on the dial: Comcast's ( CMCSA) NBC, Disney's ABC, CBS and News Corp.'s Fox Network, along with other channels including The CW Network, owned by CBS and Time Warner Corp. ( TWX).

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Benjamin Lennett, a policy analyst at the New America Foundation in Washington, reminds the big media companies that consumers are willing to pay for content provided it's the content they really want.

"Ideally, media companies would learn from the music industry that when you make content more easily accessible and available through different avenues, people will try to access it in the legally accessible way," Lennett said in a phone interview. "The content industry needs to recognize that it's about volume now, not about exclusivity."

Aereo is still very much in its early phase, and Iger and Moonves surely realize that the vast majority of American consumers haven't heard of Aereo, and of those who have, most haven't signed-up for their service. Nonetheless, consumer choice is ever the rage, and politicians are listening.

Sen. John McCain (R-Ariz) introduced legislation earlier this month that would force pay-TV providers to allow customers to pay for channels a la carte, rather than in a bundle. His Television Consumer Freedom Act of 2013 would also revoke the license of any broadcaster that moved solely to pay-TV, a potential boost for Aereo. Moonves has hinted that he may limit CBS's better shows to pay-TV if Aereo becomes a serious option.

Michael McGuire, a media analyst at Gartner, cautions the media companies about turning to the courts or the Federal Communications Commission for decisions that could forever shape the industry. Doing so may invite troubles out of their control.

"The challenge is where do they come down in the heavily bundled-world and the a la carte world," McGuire said in a phone interview from Redwood City, Calif. "If they push too hard, they'll do exactly what the music industry did 12 years ago which was try to use the courts and contracts to block consumers from acquiring the content they eventually expect to get. And we saw what happened there."

But all is hardly lost for Big Media. Aereo may be a sign of the future rather than a genuine disruptor, says Carl Salas, a media analyst at Moody's Investors Service. The big broadcasters may soon offer a similar service to Aereo at an even lower price point, and the most popular channels - ESPN, HBO - will still be available only through a pay-TV service. A la carte may actually end up costing consumers more than the current bundle but at least consumers will have the satisfaction of paying for exactly what they want.

The same might be said for Apple's iTunes.

"Aereo is appealing to people who are already looking at cord shaving or cord cutting," Salas said in a phone interview in New York. "It's more likely that Aereo is just another example of fragmentation, a headwind, rather than a death knell to the big media companies."

In other words, it may be just another Napster.

Written by Leon Lazaroff in New York

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