OTA’s Silver Lining Also Has A Looming Cloud

One of the great things about broadcasting is broadcasting — the over-the-air technology that lets anyone, anywhere tune in for free (assuming the proper antenna).

OTA gives broadcasters an edge over all cable channels, which are restricted to the subset of TV homes that choose to subscribe to cable or satellite. Because broadcasters reach virtually every TV home, they continue to draw the biggest TV audiences.  They remain the favorites of the mass marketers as the returns from the upfront ad dealing will prove once again in the coming weeks.

OTA also makes broadcasters the go-to source for news and information when disasters strike and cable lines and cell networks are apt to fail. See Moore, Okla.

But OTA is not the unqualified blessing that it once was.

Over the past several years, broadcasters have begun receiving fees from cable and satellite operators that retransmit their signals. They are, in effect, cable programmers and partners of the operators.

And retransmission consent revenue is vital. Broadcasters’ digital media have been a disappointment and, as Nexstar Broadcasting CEO Perry Sook acknowledged in a speech at the MFM conference this week, spot revenue is increasing at a rate of only 2% or 3%  a year. “Admittedly, it’s not the kind of growth that investors or owners want to see.”

By contrast, retrans has real upside. According to SNL Kagan, broadcasters reaped $2.4 billion from retrans last year and, if nothing untoward happens, should see the take increase to more than $6 billion by 2018.

So, here’s the rub. Retrans is based on the number of subscribers. Every time a viewer cuts the cord on cable or satellite and turns to OTA, it’s not just the operators who suffer. The broadcasters takes a small hit, too.

And cord-cutting is no longer a series of anecdotes. It’s a fact. The major operators recorded a net loss of 80,000 video subscribers over the past four quarters, the Leichtman Research Group calculates.

“First-time ever annual industry-wide losses reflect a combination of a saturated market, an increased focus from providers on acquiring higher-value subscribers, and some consumers opting for a lower-cost mixture of over-the-air TV, Netflix and other over-the-top viewing options,” explained Bruce Leichtman, president of the firm.

Aereo, the Barry Diller-backed service that is causing broadcasters so much angst, is using OTA against broadcasters. By claiming that it is providing a one-to-one antenna service, it is taking the OTA signals and packaging and reselling them to subscribers via the Internet without paying copyright holders or broadcasters.

At bottom, it’s a retrans-avoidance technology. If the courts don’t shut it down, Aereo could license the technology to cable and satellite operators, which would then be able to offer broadcast signals in a separate IP package to subscribers without paying retrans.

DirecTV is not waiting for the courts to rule on Aereo. Speaking at a J.P. Morgan conference in Boston last week, according to a report in Broadcast Engineering, CFO Patrick Doyle said that the satellite TV firm is working on a set-top box that would seamlessly integrate OTA signals with the rest of the cable offerings so that DirecTV would no longer have to pay retrans fees.

Given the rising cost of retrans, “it’s starting to make sense,” he said. “We’ll spend more time on it. We’ll probably test in some markets an over-the-air integrated tuner set-up and make sure the customer experience is there.”

This is another example of media jujitsu — turning broadcasters’ OTA strength into a weakness.

The problem with Doyle’s scheme is that it will require subscribers to hook up an antenna to the set-top box. In some cases, simple rabbit ears will do. In many others, however, it will take an outdoor antenna, perhaps a big array on the chimney.  So, I think the impact on broadcasters and their retrans revenue would be minimal. One of the reasons people sign up for cable and satellite is so they can get rid of their antennas.

Which leads me to ATSC 3.0. Many broadcasters have been lining up in support of developing and implementing a next-generation broadcast standard over the next several years. Its OTA signal would be far more rugged than that of today. You will be able to receive it inside homes or on mobile devices with small, inconspicuous antennas.

I have been a champion of such a standard, seeing it as a way for broadcasting to maintain its ubiquity in a world where viewing of primetime is as likely to take place on a 10-inch screen resting on one’s belly as on a 60-inch screen hanging on one’s living room wall.

But there is the downside. If OTA signals can be received easily on any device, including set-top-boxes with little whip antennas, why would cable and satellite operators or anybody else pay for them?

As broadcasters plot strategy for the next 10 years — and I hope they are taking time between the quarterly sales report to do so — they need to consider the role that OTA — especially in the advanced, more potent form contemplated by ATSC 3.0 — will play.

In the meantime, they need to find the sweet spot. They need to encourage some cord-cutting so as to maintain a high percentage of OTA-only homes and their advantage over cable channels. At the same time, they don’t want the percentage to go so high that it starts really irritating cable and satellite operators and cutting significantly into the retrans loot.

I don’t know what the sweet spot is. In fact, I’m not sure of the percentage of OTA-only homes today. Estimates range from 9% (Nielsen) to 18% (GfK Media). But my hunch is that it should be higher than it is. More millions of homes relying on broadcasting for TV would not only help in ratings and ad sales, but also in the battle to hang on to spectrum in Washington. Twenty-five percent seems like a nice target.

But as broadcasters mull the optimum OTA-to-non-OTA ratio, they should know this: As Aereo has demonstrated and DirecTV has now threatened, OTA can and will be used against them.

Harry A. Jessell is editor of TVNewsCheck. He can be contacted at 973-701-1067 or [email protected]. You can read earlier columns here.