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Analyst: Auto Hop Flap Much Ado About Nothing

Dish Net’s ad-zapping service likely to have little impact
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A week after the broadcast networks warned that they would not tolerate Dish Network’s commercial-blasting technology, Fox, NBC and CBS today separately filed suit to block the service. And while the math suggests that TV’s reaction may be a bit overblown, a successful legal campaign could set a precedent preventing any other operator from issuing its own ad-erasing feature.

In a note to investors, Janney Capital Markets analyst Tony Wible said that while the networks have gone nuclear in their assault on Dish Net, only “1 percent of advertising revenues is at risk, given the viewing patterns and low penetration of the [Auto Hop] technology.”

One reason Wible believes that Auto Hop is all hat and no cattle has to do with viewer consumption patterns. Per Nielsen C3 data, 82 percent of broadcast viewing is done during the same day a show originally airs, whether live or in time-shifted mode. On cable, same-day viewing is even more prevalent (90 percent).

Because Auto Hop does not allow viewers to zap the ads until 1 a.m. the following day, the vast majority of time-shifted content will be seen with the commercials intact. Of course, viewers can simply fast-forward through the spots in their recorded shows, but the Dish service is far more disruptive. When Auto Hop is deployed, the screen goes totally black during the commercial break; after an interval of a few seconds, the program resumes.

From there, it’s all just a numbers game. “The reality is that Dish's 14.1 million subscribers only account for 12 percent of the broadcast homes,” Wible said. “Only 53 percent of Dish subs have DVRs which implies only 6 percent of homes are at risk.”

Of the 115 million TV households in the U.S., only 7.46 million are DVR-owning Dish Network subs. As such, Wible believes the actual exposure to the Big Four “would likely be less than $162 million, or 1.1 percent of broadcast’s total advertising revenues [$14.1 billion].”

Wible suggests that Dish may simply be leveraging the disruptive power of Auto Hop in order to negotiate against rising carriage fees. “While broadcasters will look to increase fees, Dish could now threaten be more aggressive with its ad skipping window by allowing consumers to shift through ads closer to their debut,” he said.

Now that Dish has filed its own lawsuit against the Big Four, petitioning a federal judge to declare that Auto Hop does not violate copyright law, ABC is expected to follow the other three broadcasters’ lead. In a statement released tonight, CBS said that DISH has no authority to monkey around with the ads that run in the network’s content.

“This service takes existing network content and modifies it in a manner that is unauthorized and illegal,” CBS said. “We believe this is a clear violation of copyright law and we intend to stop it.”

The legal wrangling was presaged by comments made by network executives during last week’s upfront presentations. “They can’t just take our signal and change it and put on a black spot where our commercials were,” said CBS Corp. CEO Les Moonves on May 16. “How does [Dish Net chief] Charlie Ergen expect me to produce CSI without ads?”

While the Auto Hop scuffle is reminiscent of broadcast’s assault on ReplayTV, that 1999 lawsuit was effectively settled by the bankruptcy of the DVR-maker’s parent company, Sonicblue. As such, while the ReplayTV problem went away, no judicial precedent was ever established re technology-facilitated copyright infringement.

A more recent legal battle, which pitted Cablevision and its network-DVR service against the broadcasters, had more to do with the cable operator’s use of its licensing agreements. Cablevision won the case, a victory that Ergen’s lawyers are likely to point to as precedent in this particular row.

“Consumers should be able to fairly choose for themselves what they do and do not want to watch,” said Dish svp of programming David Shull. “Viewers have been skipping commercials since the advent of the remote control; we are giving them a feature they want and that gives them more control.” 

All this wrangling comes as the networks prepare to sell as much as 80 percent of their prime time inventory for the 2012-13 season. Including the CW, broadcast nets are likely to book around $9.3 billion in advance commitments. 

Buyers and sellers say they expect the upfront deals will be slow in coming, as budgets are late in arriving.