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Aereo Says Networks Bluffing on Threat of Switch to Cable

Aereo Inc. Chief Executive Officer Chet Kanojia challenged CBS Corp. (CBS) and News Corp. (NWSA)’s Fox broadcast network to follow through on threats to go off the air and switch to cable to prevent the Internet startup from retransmitting their shows without permission.

Lower advertising revenue from cable and pressure from lawmakers will make it difficult to put the switch into practice, Kanojia said in an interview yesterday.

CBS and News Corp. have both threatened to take their broadcast signals off the air if Aereo, backed by billionaire Barry Diller, is allowed to continue reselling network programming over the Internet without paying a retransmission fee. The two networks would be sacrificing billions of dollars in ad revenue by making the switch, Kanojia said.

“The reality is, they want to get paid twice, and Aereo is just an excuse to articulate that business strategy,” Kanojia said. “Good luck to them.”

Broadcast and cable networks have two main sources of revenue: advertising sales and fees from pay-TV such as DirecTV (DTV) and Time Warner Cable Inc. (TWC) that carry their programming.

While broadcast advertising trumps cable advertising because the audiences are much bigger, CBS and Fox say they must be compensated for their programming. CBS could go off the air if courts don’t stop Aereo, Leslie Moonves, the New York-based network’s CEO, said this week.

Affiliate Stations

His comments follow those of News Corp. Chief Operating Officer Chase Carey, who said last month that Fox and its affiliate stations would stop broadcasting and serve only pay-TV customers to protect the billions of dollars spent annually on programs.

CBS generated $4.17 billion in advertising revenue last year, about four times more than popular cable networks such as Time Warner Inc. (TWX)’s TNT or Comcast Corp. (CMCSA)’s USA, according to estimates from research firm SNL Kagan. Fox had about $2.58 billion in advertising sales.

Fox and CBS could earn much more in cable affiliate revenue than they do in retransmission fees under the current broadcast set-up. ESPN generates about $5.54 per cable subscriber per month, more than the $1 or $2 per subscriber that the networks earn, according to Kagan.

‘85 Percent’

CBS rejects Kanojia’s assertion that the networks would lose billions in ad revenue if they were to leave the airwaves, said Chris Ender, a spokesman for the network.

“More than 85 percent of our viewers already receive their signal” from a pay-TV service, Ender said yesterday in an e-mailed response to Kanojia’s remarks. “CBS could serve the remaining 15 percent in a variety of legitimate ways. We don’t believe it’s going to come to that in any event.”

Scott Grogin, a spokesman for Fox Networks, declined to comment.

The networks would also have to give up their valuable broadcast spectrum if they moved to a cable model, Kanojia said. If they moved their most popular programming to cable and kept the spectrum for their other content, they may face resistance from the U.S. Congress and regulators, he said.

“I have a hard time believing lawmakers are going to be OK with them taking away all the valuable programming,” Kanojia said. “You’re telling millions of people they’re not going to have access to sports?”

Aereo won a court ruling last month that its technology, which receives television signals using tiny antennas and then resells the programming to customers, doesn’t infringe network copyrights. Aereo charges $8 to $12 a month for its service, which includes the four networks and Bloomberg Television.

Aereo, based in New York, is planning a national expansion throughout this year. The company announced it was expanding beyond New York City to Boston on April 23.

Shares of CBS climbed 2.1 percent to $47.35 at the close in New York yesterday, taking their gain this year to 24 percent, compared with a 12 percent rise in the Standard & Poor’s 500 Index. New York-based News Corp., up 2.4 percent to $31.88, has advanced 25 percent this year.

To contact the reporter on this story: Alex Sherman in New York at asherman6@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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