Wednesday, June 25, 2014

GCI, IACI: The Supreme Court rules against Aereo ...

The Supreme Court ruled against Aereo and in favor of ABC this morning.  We expected such a ruling and we also agree with it.  In terms of how some stocks are reacting, GCI, which we have been viewing as a 'buy' and value at approx. $40/sh, is up 4%+.  IACI, one of the biggest investors in Aereo and a stock that we value at only $60/sh, is down approx. 1%.  Other stocks impacted by this ruling include: MEG (+10%), SBGI (+14%), and CBS (+5%). 

The Court's ruling was based on a few things that we have discussed before: 1) Aereo is actually distributing content and not merely storing the content, nor just providing the hardware, as it claimed; 2) based on (1), Aereo is transmitting "a performance ... of the work ... to the public" (as stated in the Copyright Act of 1976; and 3) given (1) and (2) and the fact that it has not attained nor paid for any right to distribute (or "transmit") the content, Aereo is committing copyright infringement.  Simply put: content remains king and any distribution of it must be paid for.  

What does this ruling mean for GCI?

The Supremem Court's decision means GCI will continue to receive retransmission fees from distributors; whether the distribution is in real-time or delayed, or via cable, satellite or OTT.  The retrans fees basically go straight to the bottom-line, and based on some industry studies such as one conducted by SNL Kagan, we think those revenues could grow at a 16% 5-year CAGR through 2019, possibly expanding GCI's Broadcast segment EBITDA margin to 54%+.  

What does this ruling mean for Aereo?

The CEO of Aereo has been quoted saying that the company does not have a "plan B" if the Court rules against it.  After this morning's news, we will see if Aereo, along with the $90MM+ invested in it, will disappear.  The other option may be that Aereo begins paying broadcasters.    

Other news ...

In other news, the latest Q1 GDP figure was released by the BEA which showed real GDP declined at a 2.9% annualized rate compared with a 1.9% decline expected by those expert economists.  Durable goods orders for the month of May also came in below expectations, -1% compared with the 0% consensus.  PMI services for June beat expectations, 61.2 vs 58.0 consensus.  But we note that deceleration in the outstanding business, business expectations, and prices charged (or revenues) sub-indexes, combined with acceleration in employment and input price sub-indexes, do not sound that great.  But who cares, the equity market continues to go up and up; S&P500 is up 0.23% at 1954.  

Lastly, we are a bit relieved as the Supreme Court also ruled that law enforcement officials need warrants to have access to any data on cell-phones.  Then again, as we have seen in the past, no laws are really applicable to the NSA.  But we continue to hope for change.  

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