DISH’s AutoHop move could smash an $11bn hole in the US TV business model

In the 1970s, English soccer enforcer Norman Hunter gained an iconic status for extolling the virtues of “getting your retaliation in first.” And so it was that yesterday pay TV operator DISH and three of the major US TV networks (FOX, CBS and NBC) all rushed to court to be the first to make a case against the other.

The networks have been livid since DISH launched its ‘Hopper whole-home HD DVR’ device. The DVR has what it calls a ‘PrimeTime Anytime’ feature that creates an eight-day archive of all prime time programs aired by the networks. This alone is contentious, as it potentially impacts on usage of the networks’ own catch-up services. What has got TV executives really pulling their hair out, however, is the ‘AutoHop’ feature, which allows users the choice of not recording any of the adverts within these programs – so threatening the billions of dollars of advertising revenue central to their ‘free-to-air’ business model.

In the suits filed against DISH, the networks say these features are “violating copyrights” and are “unlawful”. DISH’s claim against the networks is that the “AutoHop feature does not infringe any copyrights” and the company “remains in compliance with its agreements with the networks”.

The outcome of these legal proceedings will have significant consequences. There are few among us who actively enjoy having their TV viewing interrupted by adverts, so the promise of an ad-free experience will be attractive to many. Indeed one reason that DVR recorders have grown so popular over the past decade is because they allow users to fast-forward through the adverts. So what’s the difference here?

The problem for the networks – and their advertisers – is that the device is specifically designed to excise adverts completely. When adverts are fast-forwarded, this is seen as a by-product of a legitimate device functionality – which still leaves the potential for an element of advert visibility and brand recognition. AutoHop removes the adverts like they never existed in the first place. Up until now advertisers have been willing to live with the ‘fast-forward scenario’ and continue to spend billions of dollars promoting their products and services on TV. If AutoHop-type technology became widespread there would be a serious reassessment amongst advertisers as to the level of spend they were willing to commit.

Nielsen reported that US DVR usage has increased from 1.6 per cent of viewing time in 2006 to eight per cent in 2011. Assuming a similar level of growth over the next five years, DVR’s could well account for 15 per cent of viewing time by 2016. Informa’s TV advertising forecasts show that net US TV advertising will be worth more than $70bn by 2016, meaning some $11bn could be in jeopardy.

With such big issues at stake, why has DISH made this contentious and potentially disruptive move? Unlike its rival DirecTV, which targets more affluent demographics, the lower-cost DISH service has struggled to find subscriber growth in these difficult economic times. Its subscriber base declined in 2011 and so it is keen to find ‘an edge’ to return it to subscriber growth. AutoHop could well represent that ‘edge’, albeit as a short-term fix.

DISH’s move may also have been driven by a desire to renegotiate (downwards) the retransmission fees that it pays the major networks. It resents having to pay such fees for content that is broadcast free-to-air.

Whatever its motivation, it has created a storm. Norman Hunter was known for “biting legs”. DISH may well have been ill-advised to bite the hand that feeds it.

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