Moody’s Analyst: Aereo Win Unlikely, but Not Impossible

CASE A CONFLUENCE OF COPYRIGHT LAW, ECONOMICS, TECHNOLOGY EVOLUTION
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With the U.S. Supreme Court expected next month to issue a decision regarding the legality of alleged broadcast usurper Aereo, Moody’s Investor Service Corporate Finance group senior vice president Neil Begley recently issued a report on the possible impact a favorable or unfavorable ruling for the service could have on the cable and broadcast industries. Begley then spoke with Multichannel News senior finance editor Mike Farrell. An edited transcript follows.

MCN: Like a lot of analysts, you don’t believe that Aereo will pass muster with the Supreme Court.

Neil Begley: But you never know. It’s so nuanced. I can hear the argument on one side: “I’m just renting out an antenna that’s hooked up to the Internet; we already have precedence for recording some of these shows that they pick up, and this is just a piece of technology.” The other argument, as well, is they’re making money on copyrighted material. Unfortunately, when you take those nuanced arguments and lay them over outdated copyright laws that don’t adequately account for evolving technologies, it could result in a losing outcome for the broadcasters. There is some possibility of that.

MCN: Even if the broadcasters win, do you believe there is a danger that the court could, in its ruling, lay out a blueprint for another modified version of Aereo’s technology?

NB: That’s always possible. Ultimately, there needs to be a full-blown effort to update copyright laws. There’s been a lot of talk and pressure on international markets and piracy, but we’ve got some problems at home as well. If you’re going to protect intellectual property adequately, you’ve got to consider evolving technology, innovators and such. The hardest part for the government to step in is, you obviously don’t want to stall innovation and investment.

MCN: Do you think that economics is going to play a big role in this? That any ruling is going to have to consider how it will disrupt the overall TV business?

NB: I think so. Before retrans became more material, people started to use the word “secular” when they referred to broadcast television. They stopped doing that because of retrans. Any threat to retrans or any threat to stall the growth of retrans fees, there is that risk that over time their impact becomes more and more diminished by essentially all the new outlets — over-the-top, SVOD, the proliferation of new sites where you can get video.

I think there has got to be some pressure politically; the fact that, as a regulated industry, there are benefits the government has which result from that oversight — from the Emergency Alert System, the control of censorship over decency, things like the amount of children’s content, public-service announcements and political-ad sales. All these things come into play.

MCN: Is there a danger that a ruling against Aereo could affect other technologies like the network DVR or even the cloud?

NB: I think that’s the question now. Immediately when this all came about, Cablevision jumped up and said, “This is different, this is different,” because I think they felt exposed. I think this has broader consequences, particularly surrounding cloud services and things like that. It’s not necessarily a bad thing. Sometimes it just means they will have to negotiate with the intellectual property owners. It doesn’t mean necessarily that the technology gets stifled; it means that they [IP owners] may get a piece of the action, they may get some say over how it’s managed and who’s profi ting and how much. It has extensive ramifi cations to the ultimate owners of the intellectual property — sports leagues and such are very aware of this.

MCN: As an analyst in a credit-rating agency, do you take a different approach in the way you look at companies than an equity analyst?

NB: There’s a fair amount of overlap. Fundamentally, growth, investment and return on capital; we follow that, but we’re looking more at risk, and they’re looking more at opportunity.

MCN: People look at credit-rating agencies as focusing on the ability to serve debt, which is a factor but not the only thing.

NB: We look at retained cash flow, free cash flow, growth from a fundamental perspective. [We look at] the fundamentals of business: Are they diversified? Are they growing? Are they facing a secular decline? Are they cyclical? Is it an inherently versatile business like the studios, or is it fairly stable and predictable like the cable operators? [In] all of these things, there is a fair amount of overlap. When a company is going down the tubes, all of a sudden we get a bunch of calls from equity analysts. Suddenly they have to pay attention to things they generally never pay attention to, like the debt capital structure.

MCN: On almost every earnings call, you hear companies say their investment-grade level is sacrosanct.

NB: There was a very significant scared-straight set of events that occurred during the financial crisis where the people who were often laughed at for saying we have to manage our balance sheet more conservatively and be careful about maturities and debt, suddenly these guys were running the show. The more we distance ourselves from that period of time, the more comfortable these companies become about taking on more risk and more debt. The most common issuer rating we’re seeing is a B2, which is a pretty darn low rating. It’s very tempting to buy back stock on the back of more debt or make an acquisition on the back of more debt. That’s why I think the Comcast-Time Warner Cable deal was somewhat unusual in this climate, that they did an all-equity deal. That says a lot about Brian Roberts and the management team. He wants to be able to sleep at night. They’ll be one of the largest non-financial corporate debt issuers in the world. Taking on a lot of additional risk is not where he wants the company to be. It’s the one thing that can bring down an otherwise healthy company, having too much debt or not being able to meet maturities because the markets freeze up.

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