Why Today's CBS Earnings Call Makes Me Root For Aereo

CBS Chief Executive Leslie Moonves is a smart guy. The network has a solid programming lineup and he and his fellow network executives have done a great job of wringing out every bit of possible value out of their content. That is certainly part of the reason CBS had a great third quarter, with overall ad sales up 13% and syndication sales for "NCIS: Los Angeles" and "The Good Wife" also boosting the bottom line.

But as the conference call with investors and the press progressed Wednesday afternoon, he also touched on a subject that should be near and dear to the hearts of all pay TV customers. The fast rise in retransmission fees paid by cable and satellite TV companies to the network and its affiliates for the rights to rebroadcast the CBS signal.

Moonves touted the fact that 50% of the company's revenues now come from advertising. That's compared to several years ago, when advertising comprised nearly 75% of the CBS revenue stream. He talked about the increase in retransmission fees (along with higher program licensing fees) as helping the company become less reliant of advertising, which is more volatile.

Volatile is executive speak for "revenue more dependent on ratings," and that's one of the problems inherent with the current industry rush towards increasing retransmission fees. Unlike advertising revenue, retransmission fees are paid no matter how well your fall schedule fares with audiences. Unlike advertising revenue, it's not dependent on the whims of major retailers, who are more concerned with mushy metrics like demographics or ad effectiveness. Retransmission fees are baked into the current media ecosystem and there aren't any natural constraints on their growth.

And those retransmission fees are going to grow very quickly. The federal law covering retransmission fees was passed in 1992, but it was nearly a decade later before local stations and broadcast networks even considered asking for them. Until a few years ago, the fees were negligible, but industry research firm SNL Kagan estimates they topped $2.36 billion in 2012. And that's expected to explode to more than $6 billion industry-wide by 2018.

When it comes specifically to CBS, Moonves bragged on Wednesday's call that the network's take from retransmission fees are up about 50% already this year and "you'll see even bigger increases in the years to come."

The problem with increased retransmission fees is that they ultimately come out of the pockets of viewers. Advertising money is paid out of the coffers of businesses and while you could argue that a series of bad or ineffectual ad campaigns might bump up the costs of your box of Wheaties, businesses also have the ability to cut their losses and the size of their ad budgets. There is no practical constraint on retransmission costs, since networks know that in the end cable and satellite companies can't afford to not have access to all the major network local signals. And those costs inevitably are shifted down the pipeline to customers, who complain about rising cable and satellite TV costs without realizing the reasons behind part of the increase.

In the past, Moonves has argued CBS should be "properly compensated" for its content, and I agree with that sentiment. What I disagree about is what qualifies as "proper compensation." Any business where you have the ability to charge your customers more each year without them realizing it is indeed a sweet revenue model and that's the deal CBS and its rival broadcast networks have managed to build in the past several years. They aren't going to change that revenue paradigm short of being forced to by the business equivalent of the short end of a gun.

And that's where Aereo comes in.

Aereo provides its customers with local TV signals that it grabs on small individual antennas. It sends the signals off to its customers and provides the equivalent of DVR-like recording functionality. The troubling aspect for the networks and local TV affiliates is that it is exploiting a loophole in current law that seems to allow it to legally sidestep paying the local stations a retransmission fee.

That's why the networks, local stations and other interested parties have been filing lawsuits against Aereo in every jurisdiction possible. They realize that if Aereo prevails with this idea, it will impact their ability to keep raising retransmission fees in the future. Sure, DirecTV might not launch a Aereo-like service in its next battle with CBS, but having the ability to do so gives it a lot more leverage than it has now. Competition will keep costs down and open up new ideas that might offer more competition to the existing industry multiple revenue streams.

That's why I'm rooting for Aereo even more after listening to Les Moonves talk today. I'm all in favor of CBS making all the money it can off its programming. What I don't like is that growing belief in the industry that increasing retransmission costs is a more predictable revenue stream than advertising. CBS wouldn't think of coming to its viewers directly and asking for a buck a month to access its broadcasts. But they (and in fairness, all of their sister broadcast networks) don't have a problem asking for that fee indirectly through fees if it means their fingerprints aren't on the bill sent to customers.

I don't wish CBS or Les Moonves ill will. But I wouldn't mind seeing Aereo win a few more rounds in the courts in 2014.