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05/26/2009

Another Look at Cord-Cutting: No Such Thing as a Free Lunch

By: Paul Rodriquez, Cable Tech Talk

Online viewing of video is on the rise. This is a fact.

But if you take the news coverage and blog posts about the “cord-cutting” phenomenon at face value, you would have the impression that this is a widespread phenomenon involving millions of consumers canceling their multichannel video subscriptions in favor of online distribution. I certainly think the issue of online video is worthy of examination, but these articles on cord-cutting seem predicated on two arguments:

  • You can easily replace your multichannel video subscription by going online.
  • Significant numbers of people are choosing to “cut the cord.”

I thought it would be useful to address this issue again, but this time to split the topic in to two parts. Today, I’ll look at the content portion of cord-cutting.

I also think, before I go any further, I ought to link to our previous posts on this topic:

Is Everything Online?

In online circles, there is the impression that almost anything can be found through the Internet. The Library of Congress is “the largest library in the world, with millions of books, recordings, photographs, maps and manuscripts in its collections.” Only a fraction of that material can be found online. The same is true for TV content.

I love online video. I catch up on episodes I miss, do time-shifting while traveling, check out shows that friends recommend. But, there’s an important distinction to be made here: If you’re talking about TV shows streamed free online, that category largely consists of over-the-air broadcast programming from networks like ABC, CBS, NBC, and FOX. (For some reason, The Big Bang Theory is MIA. What up?) Some cable networks do offer some shows online. But not nearly as much as broadcasters do, as noted in this recent Washington Post article on cord-cutting:

Thanks to dozens of videocasting Web sites, such as Hulu, TV.com, Joost and Fancast, full-length episodes of more than 90 percent of the shows carried by the major broadcast networks are legally accessible within a day of being broadcast, according to Forrester Research (only about 20 percent of what’s on cable is similarly available). [emphasis added]

Let’s say I want to watch news. On my way to work, I’ll watch the previous evening’s Countdown and The Rachel Maddow Show on my iPod. But suppose there’s a breaking news story? You can’t watch live streaming cable news. I don’t care about sports, so it doesn’t matter to me that you can’t watch sports programming online. And while some cable programming can be found online, much cannot.

So, the perception is that tons of television content is available for free online, but the reality is that this is not completely true for cable programming. The extra irony is that since the 2001/2002 TV season, the ratings for cable networks have topped those of all national broadcast networks collectively. For the ‘07/’08 season, U.S. homes spent an average of 38.6 hours per week – on a total day basis – tuned in to ad-supported cable networks compared to 26.7 hours per week for all commercial broadcast sources combined.

So, the programming available through broadcast television, with viewership that has been steadily declining over the last 15 years, is freely available online. The programming of cable television, whose viewership has been on the rise for that same period? Not so much.

Why Isn’t All TV Online?

Once you’ve addressed the question “Is all video online?,” you then have to ask, “Why isn’t it all online?” You might take a look at this Online Media Daily article or my recent post on the issue: A Lively Debate About Online Video. But the short answer is that there’s currently a specific business model for cable programming. Most cable networks have a dual revenue stream from advertising and from subscriptions. Right now, although companies are experimenting, moving all their video online for free doesn’t seem to make economic sense.

James Ledbetter accurately addressed the central problem in a recent column: Call It Free, But It Will Cost You:

The problem is that — outside of a handful of examples, almost all of which are Internet- or digital-based — giving things away does not work in any significant way. Here’s why: Just about any activity that merits the title “business” has a cost of producing its goods or services… Businesses need to recover labor and capital costs, and giving things away for free doesn’t meet that need.

Ledbetter talks about how this applies to the business of law or oil, but the television industry absolutely needs to recoup productions costs.

It seems to me that a key factor in cable’s success has long been our original programming. SpongeBob SquarePants,Iron Chef AmericaHannah MontanaSportsCenterThe Closer, or Burn Notice - people love cable shows. Those shows cost money to produce; if the revenue for those shows decreases, then their existence may be threatened.

There’s a lot of original video available online and some it is quite good. But where are the online shows that have the quality of these cable shows? It’s not because of talent; it’s a question of how you pay for such programs. To quote again from the Post article:

…there are significant financial questions about whether “free” online video can ever become a viable business. One problem: TV shows that migrate online carry fewer commercials — often no more than two minutes of ads per half-hour program, compared with eight minutes on conventional TV. While the research company eMarketer.com predicts that online video sponsorship will grow 44 percent to $850 million this year, that’s still a tiny fraction of the $70 billion spent on cable and broadcast TV ads in 2008.

And a recent Daisy Whitney column discussed how digital studios that produce online video are struggling with the economic reality that “There’s just not enough money to go around on the Web.”

Some people seem to prefer to see cable operators as hostile to over-the-top online video. NCTA’s President & CEO Kyle McSlarrow recently addressed this point on this very blog:

…it is somewhat tiresome to have Free Press repeatedly assert that every effort by network providers to examine any new approach or idea in our or related industries is somehow designed to protect against the supposed “threat” of “Internet video.” This is so stale, and so at odds with the facts, that it really should not be necessary to point out the obvious:

  • Over the last few years, the use of broadband connections to view Internet video has grown at a faster rate than any other application. According to one estimate, traffic generated by YouTube video in 2008 alone was more than the sum of traffic crossing the Internet backbone in 2000.
  • Far from fearing online video, our industry is courting and exploring partnerships to bring Internet video to the television screen;
  • Our industry has worked – and continues to work – cooperatively with consumer electronics manufacturers to ensure TVs can receive Internet video by building in the necessary ports;
  • Our industry is the largest provider of broadband in America, and we view the health and growth of the Internet ecosystem as fundamental to our success, which means the applications and services on the Internet must thrive too;
  • Our industry is aggressively deploying next generation broadband across America in order to enable, not restrict, new applications.

This analysis, of course, refers to current business models. Even now, the cable industry is experimenting with methods of offering cable programming online to subscribers, and things may change even further in the future. In my next post, I’ll examine whether people are really cutting the cord in significant numbers.

Source: http://www.cabletechtalk.com/broadband/2009/05/26/another-look-at-cord-cutting-no-such-thing-as-a-free-lunch/


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