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Free TV app could disrupt revenue for networks, thanks to an FCC loophole

Ethan Wolff-Mann
Senior Writer

A new non-profit could dramatically upend TV networks’ revenue streams by providing customers with the same free broadcast TV you can get with a rabbit ears antenna, but delivered online.

Two weeks ago, Locast.org discreetly began streaming ABC, CBS, Fox and NBC through Roku players in Denver, Boston, Chicago, Houston, Dallas, and New York. The organization also streams TV via an Android app, and has been available online since January.

Online streaming of broadcast TV has been tried before. In 2012, Barry Diller’s IAC launched Aereo, but it failed spectacularly. After two years of operation, the company was sued into bankruptcy in 2014 by CBS, NBC, ABC, and 21st Century Fox for not paying retransmission fees, which are the fees networks get from distributors to use their content.

FILE – Locast, a non-profit free TV app that found an FCC loophole, could change television and networks. (AP Photo/Patrick Sison, File)

However, Locast has an ace up its sleeve that Aereo did not, a card provided by the U.S. Copyright Act of 1976. Locast is Locast.org, not Locast.com, and its status as a non-profit means it is legally allowed to rebroadcast for free, as it provides a public service of extending signal reach.

In many places with poor signal, community groups and other organizations relay signals as “broadcast translators” or “broadcast relay stations.” Locast styles itself as a modern version — and a “public service.”

“Locast is a non-profit that is performing the exact same service as an over-the-air translator,” wrote Rich Greenfield of BTIG in a recent note. “They are simply acting as a digital translator (with the ’76 Copyright Act silent on what technologies could be used to operate a translator).

Potentially large implications for the industry

Retransmission fees make up a significant amount of revenue for TV networks, especially for CBS. Unlike the other networks, CBS is less diversified than ABC (owned by Disney), NBC (owned by Comcast, so it pays itself in a way since Comcast/Xfinity would essentially be paying NBC for retransmission), and Fox (owned by 21st Century Fox).

At CBS’s investor day in 2016, the company said it expected to rake in $1 billion in retransmission fees by the end of the year, which would be about 8% of revenue. The company referred to these fees as a “pillar of growth” plan.

On a recent second-quarter earnings call, now-CEO Joseph R. Ianniello said, “this year we’ll be over $1.6 billion, well on our way to $2.5 billion,” referring to the retransmission fees CBS will receive. This is likely to be around 11% of revenue in 2018, based on Wall Street estimates.

Locast “is bad for retransmission fee revenue, but [there’s] no clear legal path to attack it,” BTIG’s Greenfield told Yahoo Finance in an email.

For now, Locast told Yahoo Finance that it anticipated legal action when it launched, but as it has expanded and launched on more platforms none has come yet.

CBS declined to comment. Comcast, 21st Century Fox, and Disney did not respond by publication time.

On the one hand, this could help boost viewership, said Greenfield, but since networks depend on retransmission revenue for survival, it’s a big threat, and one that can’t be addressed proactively by the networks launching their own free online network TV services. Retransmission revenue is just too important for growth.

The addition of Roku could throw more fuel on the fire, and help the young service gather momentum.

“More devices make it much more compelling — especially TV connected devices,” said Greenfield.

Back in 2014, when the consortium of broadcasters beat Aereo, CBS stock jumped 5.9%, an indication of the market’s view. According to one media analyst, Aereo was a significant black cloud that hung over the company, while it existed.

CBS considered the threat so great that then-CEO Les Moonves threatened to cut off broadcast signal if Aereo won in the Supreme Court. “If the government wants to give them permission to steal our signal, then we will come up with some other way to get them our content and still get paid for it,” he said at the time.

Locast so far

Locast does need money to survive as serving a potentially massive audience at scale requires a lot of technological investment. According to BTIG, it costs around $40,000 for a million people to be watching for an hour. To help defray the cost, donations are accepted and even solicited after an hour of watching.

So far, the average Locast user — using Roku — is watching about an hour per day.

Currently Locast streams to only a small portion of the population in certain cities, and users are verified as eligible by geolocating and certifying their own locations and identities.

This, of course could mean data, something that Greenfield says could potentially become a revenue source should Locast sell it to networks. For the company to remain a non-profit, the money would have to be invested back into the organization.

Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, retail, personal finance, and more. Follow him on Twitter @ewolffmann.

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