What’s At Risk In News Corp’s Feud With Aereo?

Chase Carey, COO of News Corp (NASDAQ:NWS), recently said that Fox Network will go off the air and become a cable channel available only for pay-TV customers if U.S. courts don’t stop Aereo from retransmitting Fox’s programs. A U.S. appeals court earlier this month declined an injunction that would have shut down Aereo Inc. We believe that Fox going off the air will have a limited financial impact on News Corp as close to 90% of the U.S. households are already subscribed to pay-TV services, and the broadcasting business constitutes just about 10% to News Corp’s value.

Fox Broadcasting Network offers a wide variety of programs, reaching out to a large audience. It is one of the four biggest broadcasting networks in the U.S. along with NBC, CBS and ABC.

See our complete analysis for News Corp

What’s Aereo’s Business & News Corp’s Disagreement?

Aereo is a technology company that streams live as well as time shifted over-the-air television to its subscribers. It captures over-the-air TV signals, using thousands of tiny antennas, and then transmits the playbacks individually to each of its customers for a subscription fee. Aereo offers recording of programs and easy access to television content on PC, tablet or smartphone for $8 a month. Households that do not subscribe to expensive pay-TV or DVR services can subscribe to Aereo at a much cheaper price.

Soon after its launch in New York in early 2012, Aereo was sued by broadcasters such as News Corp’s Fox, Disney’s ABC, NBCUniversal and CBS for copyright infringement. Earlier this month, a U.S. appeals court rejected the broadcasters’ plea and declined to issue an injunction that would have shut down Aereo.

News Corp says that Aereo is stealing its broadcasting content and retransmitting it to its subscribers. However, Aereo claims that it is using the freely available signals so there is no copyright infringement, and the airing itself is not a ‘public performance’ but limited to its private subscribers. Another reason that News Corp and other broadcasters are worried about is that Aereo’s service can allow viewers to skip commercials, which is an important source of revenue for broadcasters.

What’s News Corp’s Downside If Fox Network Goes Off The Air?

Close to 90% of the U.S. households subscribe to pay-TV services. Does that mean that if Fox goes off the air, its viewership will decline by 10%? We believe that the decline would be higher since the households that don’t have pay-TV services will have disproportionately high contribution to the viewership of broadcasting networks. On the other hand, pay-TV subscribers have access to a host of cable networks, and rely on broadcasting networks for their entertainment needs to a much lesser degree.

If we assume that Fox Network’s viewership declines by 20%, its advertising revenues could suffer by similar percentage. We estimate that News Corp’s broadcasting business constitutes about 10% to its value, and a 20% decline in revenues would lead to a downside of just about 2%.

In addition to this, content partners such as the NFL have also backed Fox. A spokesman at NFL commented that NFL is committed to its partnership with Fox. It is unlikely that going off the air would cost Fox losing any of its key programming partners. Overall, it appears that there isn’t a lot of risk for News Corp. and this move could in fact support the value of its cable business.

What Could Happen Next?

Given the recent verdict by appeals court, Aereo could expand its operations nationwide, and it plans to launch its service in 22 cities this year. Once Aereo reaches other districts it is likely that other broadcasters in those areas will also plea for injunction on Aereo and support the stand of News Corp, Disney, NBCUniversal and CBS.

It is likely that an appeal to the U.S. Supreme Court could be made, and it might lead to a high court review if broadcasters are able to succeed in affirming a recent injunction on AereoKiller, which provided similar services as Aereo in the West Coast.

Our price estimate for News Corp stands at $30, roughly in line with the market price.

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