Cable operators and media companies are cautiously dabbling in on-demand online video, but this is one case where caution could be as dangerous as recklessness.
Recently, the nation's two largest cable operators have been talking about offering their cable lineup to subscribers online so they can view their favorite shows on their computers. And now, YouTube, the site Viacom sued for more than a $1 billion in 2007 and threatened to have shut down, is signing deals with big studios like Sony Pictures and Lionsgate, as well as TV network CBS. (CNET News is published by CBS Interactive, a unit of CBS.)
All this recent activity seems to suggest that cable companies and big media companies finally understand that the Web is their future. People want to watch what they want when they want. And the Internet provides an ideal way to connect people to their favorite content.
While these efforts are a step forward, the cable operators and the media companies are still trying to maintain control and strike a balance between the old and the new. Their biggest fear (and a reasonable one) is disrupting an extremely lucrative business model that has served them well for the past 30 years. But experts caution that if they move too slowly, they could risk losing everything to digital piracy.
In short, do you give up some of your existing revenue and hope you can make that money back through advertising? Or do you stick with your current model and fight what could be a losing battle to protect your copyrights?
"There is no way to put the genie back in the bottle now," said Avner Ronen, CEO of Boxee, a company that acts as a sort of browser for the TV to help people find and play online video on their big screen TVs. "But if users can't easily get the content legally and reasonably priced in a reasonable amount of time, they will go out and get it some other place. That has been proven with music, and video is no different."
Appetite for online video grows
There is little doubt the online media age is upon us. Movie studios and network TV companies have been serving up popular shows online for at least the past couple of years. And now the nation's two largest cable operators, Comcast and Time Warner Cable, are testing services that allow their cable TV viewers to watch their regular cable lineup over the Net on their computers.
Time Warner Cable, the second-largest cable operator in the country, is already testing its online video-on-demand service in Milwaukee. The service allows Time Warner customers who subscribe to HBO, for example, to watch episodes of "Entourage" or "Flight of the Conchords" online through the Web site. Subscribers who don't pay for HBO, don't get access to those shows. Comcast isn't in tests yet, but the company plans to offer a similar service available through its Fancast Web site later this year.
Unlike video Web sites such as Hulu.com, which is owned by NBC and News Corp., and CBS' TV.com, the cable online video services are not free. And it doesn't sound like the cable operators have any intention of offering them for free.
"We believe we can add more value to the entertainment that people are already paying for," said Sam Swartz, executive vice president for Comcast Interactive Media. "We recognize that consumers have different ways to consume content. Some will want to view it on a PC. Others will want to see it on a TV. Our job is--for the same subscription fee--to offer it to consumers on whatever platform they want."
One thing has become very clear to be successful in offering online video: Content is king. And sites that don't have it die. Just look at Joost, which was founded in 2007 by Janus Friis and Niklas Zennstrom, the same pair who founded Skype and Kazaa. But the company had trouble landing top TV shows and films and two years later, it's on the auction block.
Meanwhile, NBC and News Corp.'s Hulu.com has flourished providing online access not only to NBC's and News Corp.'s own content, but also TV content from others, as well as some movies. CBS has also gotten into the game by offering some of its TV shows online through its Web site TV.com. And now movie studios are courting the once loathed and feared YouTube. The site owned by Google recently signed distribution deals with Sony Pictures, CBS, Metro-Goldwyn-Mayer, Lionsgate, Starz, Discovery Communications, and National Geographic.
Show me the money
Media companies plan to make money from these services through advertising, a model that has worked well in the broadcast world for more than 50 years. But making money in advertising on the Web has so far proven harder than in the broadcast market.
The problem is that media companies make more money from airing a show on broadcast than they do online, even though a lot of people who record their television shows with a DVR fast-forward through the broadcast commercials. And viewers of Hulu can't forward through the commercials offered during their shows. The other problem is that advertising firms get paid bigger budgets to develop advertising for TV spots than they do for Web spots, providing an incentive to push clients toward TV advertising rather than online advertising.
Another major problem with the current business model is that cable companies spend tens of billions of dollars each year to license content from media companies. They then turn around and sell subscriptions to their service to consumers, who view the content. Popular content, such as the sports channel ESPN or the all-news channel CNN, are very expensive. And if consumers can get the same content from those sites for free on the Web, why would they pay $100 or more a month to subscribe to cable?
Understandably, cable operators have pushed hard to keep media companies from offering too much of their content for free online.
"Media companies are getting pressure from the cable companies to not put as much content online," Ronen said. "Cable is saying, 'Why should we be helping people cut the cable cord when we're paying $20 billion a year for content.'"
Still, online distribution represents a new opportunity for media companies providing them the chance to monetize older content that sits unused in their archives as well as bringing in additional revenue from new products associated with popular shows.
As media companies try to figure out how to make more money from the Web while not biting the hand that feeds them, i.e. the cable companies, they are experimenting with which content to distribute online and how much of that content they make available for free to online viewers. For example, NBC offers full episodes of all three seasons of the show "Friday Night Lights" on Hulu.com. But the super-popular comedy "30 Rock" only offers full episodes of some of the most recent episodes.
Content owners have also restricted the use of services, like Hulu, overseas, since there are special content license deals with foreign broadcasters for TV shows and movies produced for the U.S. market.
But there have also been occasions where media companies have actually taken content off the Web. Earlier this year, Hulu.com upset fans of the FX show "It's Always Sunny in Philadelphia" when it yanked almost the entire three seasons of the show. Distraught users sent angry messages on Twitter and Hulu was forced to post a response in a blog saying that it was FX's decision to pull the show and not Hulu's.
The situation demonstrated that it is the media companies, and not video-playing Web sites, such as Hulu, that have control of the content.
Media companies, likely nudged by the cable companies, have also tried to keep the online video viewing on the PC. For much of this year, Hulu has been blocking Boxee, a software application that provides an easy way to discover and view online video on the TV.
While the media and cable companies may be merely trying to protect their copyrighted content and existing business models, they may find their attempts to control the distribution of their content fruitless. Boxee CEO Ronen said that these companies are risking losing complete control of their content through piracy.
"Piracy will become an even bigger concern for them if they don't give viewers what they want," he said. "It's already happening, especially overseas where you can't get access to most of this content legally."
But Comcast's Swartz said that the online video market is still young. And experimentation is necessary at this stage.
"We are in the bottom of the second inning when it comes to putting content online," he said. "Content owners are realizing that they put some content out there and they aren't making money. Now they are at the point where they are trying to figure out which business models will work."
Of course, the big question is whether they will figure it out in time. The game may only be in the bottom of the second inning, but it could be over a lot quicker than Swartz or any of the other cable and big media execs realize.