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Free TV On Internet Blurs Pay-TV Picture

Glenn Britt has seen the future for pay TV. And he’s concerned.

The CEO of Time Warner Cable (TWC) said during a Q4 results conference call earlier this month that his company is starting to see “cord cutting.”

Andy Oliver, 37, is part of the vanguard. Some 18 months ago, the San Diego public relations manager canceled his cable TV subscription and turned to the Internet for news and entertainment.

“Cable TV is one heck of an expense to subscribe to hundreds of channels when I only watch half a dozen on a regular basis,” said Oliver, a vice president at Lewis PR.

There are no solid numbers on how many Olivers are out there, but the industry’s fears are clear: Just as the Internet has disrupted the music and newspaper businesses, TV might well be next. So the industry is scrambling to work with the Internet and help craft the emerging TV landscape.

“The danger here is that, over time, subscription revenue could erode,” said Britt on the Feb. 4 call.

That trend, of course, also would hurt phone and satellite firms that provide pay-TV services, as well as all the content providers that sell their shows to the TV providers and sell TV ads and sponsorships.

“If we don’t have a customer, then the programmers don’t get paid for the customers we don’t have anymore,” Britt said.

Oliver, for one, has given no thought to going back to pay TV. With his broadband connection, Oliver gets the news he wants via CNN and BBC and searches for other video online through OVguide.com, a portal that had 12 million unique visitors in January.

In the past year or so, every TV network has put content online, usually several seasons’ worth of their most popular shows.

The new trend is for sites that aggregate TV content from a variety of sources. Besides OVguide, it includes Hulu, TV.com, Joost, Sling, Veoh, blinkx and Fancast.

The industry giants are major players. Fancast is a unit of Comcast. (CMCSA) CBS (CBS) runs TV.com. Hulu is a venture of General Electric’s (GE) NBC and News Corp.‘s (NWS) Fox.

The Discovery Channel, (DISCA) Viacom’s (VIA) Cartoon Network and MTV, and many others also provide free content on their sites.

While it’s not clear how many people are cutting the pay-TV cord — it seems the numbers are few — people are flocking to online video. U.S. Internet users viewed 14.3 billion videos in December, up 13% from November and 42% from December 2007, says comScore.

Most of the content watched were short, amateur-produced clips on No. 1 video-sharing site YouTube, owned by Google. (GOOG) But clearly more people are viewing longer videos online, including full episodes of TV shows.

Hulu made a big splash this month with a commercial during the Super Bowl, resulting in a 118% surge in page views in the following days.

Hulu won’t discuss revenue or profit, but research firm Screen Digest estimates Hulu revenue this year of $175 million vs. $65 million in 2008. Hulu will likely generate as much or more revenue than YouTube this year, and be much more profitable.

Generally, advertisers are averse to running ads next to user-generated content for various reasons. But they are comfortable running ads with professional content and will pay a much higher rate than average.

“Online video had been more of a novelty, but it’s become an integral part of the overall Internet landscape,” said comScore analyst Andrew Lipsman. “A year ago, Hulu was not even on the radar. Now, it’s the sixth-largest video property.”

Hulu offers full-length episodes of TV shows and a growing number of feature films. blinkx, a video search engine, has cataloged 32 million hours of video on the Web, up 78% from a year ago. “Increasingly, we’re seeing our audience use our site more like a TV,” said blinkx CEO Suranga Chandratillake. It’s a big change.

“You now have all this free content that historically, consumers had to pay for,” said Larry Gerbrandt, a principal at research firm Media Valuation Partners. “The problem with the online model is it delivers a fraction of the advertising revenue that they get by airing the show on broadcast TV.”

The “they” refers to all the players in the TV business.

“The biggest risk sits with the cable and telecom companies,” said Kurt Scherf, an analyst at research firm Parks Associates. “They pay a lot of money to carry that content.”

A Threat, Eventually

The move to online video “poses all kinds of questions about how ad revenue will be shared,” he said. For now, however, it appears that online video’s advance has helped — not hurt — TV viewing. Surveys by Nielsen show that people who watch video online watch more TV than other folks. Online viewing helps consumers stay engaged with TV shows because, for example, they can catch up on anything they missed.

“There’s lots of potential for disruption, but we’re not seeing any of it just yet,” said Howard Schimmel, senior vice president of client insights at Nielsen. “Online viewers are watching more TV. That’s giving the networks a little time to play around with Web sites like Hulu.”

Stephen Burke, president of Comcast Cable, played down the online threat in a recent call with analysts, two weeks after Britt’s warning. “We are not seeing large numbers of people dropping their television service due to either financial hardships or the fact that they can get video increasingly on the Internet,” Burke told analysts during Comcast’s earnings conference call.

Still, Britt’s not the only TV executive who’s worried. Hulu last week pulled its content from TV.com.

Analysts and bloggers speculated that NBC/Fox’s Hulu pulled the plug because TV.com was gaining viewers, possibly at Hulu’s expense. Visits to TV.com have surged since CBS relaunched the site in January, though it still lags far behind Hulu. TV.com changes included adding social networking features and content from PBS, MGM, Sony (SNE) and Showtime.

At the same time, Hulu also blocked its shows from being viewed at Boxee, a startup firm that makes Internet video easy to watch on TV. Hulu said its content providers requested this removal.

People watching shows via the Internet on their big-screen TVs — for free, with limited ads — sends shivers down the television industry.

Cable still has one big advantage: Live sports, which often is not available on the Web. But CBS will let online users watch the NCAA men’s basketball tournament.

So, the battle lines are being drawn. Until now, video content owners had been willing to share. Now, video sites are looking for as many viewers as they can get, in order to boost their ad revenue.

It’s a dilemma familiar to all media in the Internet age. Pay-TV firms might not like the trend toward free online video, but they may have no choice but to jump in.

As Comcast CEO Brian Roberts said in last week’s call: “We don’t want to close any doors off for our relationship with the consumer.”