Cable Channels in the Internet Monetization Gap

mind-the-gap-w240.jpgThere was more buzz about whether (and how) cable companies should make their content available over broadband at the annual Cable Show confab in Washington D.C. this past week.

According to the report in Variety, Comcast is developing “On-Demand Online,” an initiative similar to Time Warner’s plans for “TV Anywhere,” which would provide subscribers with access to their cable TV content over broadband.

As I argued in a previous post, it makes sense for cable companies to allow subscribers to access premium content through authenticated online access. If I subscribe to HBO, I should be able to watch HBO programming from wherever I am, including from my laptop while traveling. This type of ubiquitous access is already available for much of the traditional “free” (that is, advertising-sponsored) broadcast programming. Services like NBC Universal and News Corp.’s Hulu and TV network web sites like ABC.com already provide on-demand online access to standard TV programming.

The monetization schemes behind both of these — premium content and “free” television — easily map into the online world. My subscription fee for HBO should include access to the same content over any transmission channel. And, even though Hulu’s ad revenue doesn’t yet match that of traditional broadcast television, over time it should. (Although I won’t digress into the details here, online advertising offers a number of benefits over traditional broadcast advertising that should help it eventually to create more value.)

There’s a dark cloud floating over this sunny scenario, however: How to handle channels from the middle, “basic plus” tier of cable content. Many of these channels generate revenue in two ways: advertising and fees paid by cable companies to carry the channel. As a BusinessWeek article recently noted, the cable carriers who pay those fees would not be pleased if this content were also available for free online:

[T]he cable companies … are trying to prevent cable networks from putting their shows online. In recent months, Big Cable has reminded USA, Bravo, TNT, and hundreds of other channels that the cable companies provide about half their revenues, in the form of fees to carry their shows. The implicit warning: put your content online and forfeit nearly $30 billion. “If I don’t have a customer,” says Time Warner Cable [CEO Glenn] Britt, “the programmers aren’t going to have a customer.”

Although these cable channels have long benefited from having two monetization streams, these two approaches to revenue are now in conflict. These channels are straddling a gap between premium subscription content and free, ad-sponsored content, both of which have (or will soon have) an Internet monetization model. If these channels are to move onto the Internet — which they resist doing at their own peril — they will need to decide which path they intend to follow online.

Given the weak revenue stream currently provided by online advertising for video — and the not-so-veiled threats from the cable companies — I suspect they’ll gravitate toward the “premium content” option. It is unclear, however, whether users will tolerate ads in authenticated, subscription-based content, which leaves these channels in a precarious position.

4 thoughts on “Cable Channels in the Internet Monetization Gap

  1. It will be interesting to see where this goes. I applaud television for taking a path quite different from that of the RIAA, who have made claims that it is illegal for me to rip an album to an MP3 player that I legally purchased in CD format… not to mention the stories everyone has heard about grandmothers being sued, and MediaSentry’s epic problems.
    Television seems to be taking the alternate route, and the gap is starting to close. I find it interesting you mention the “Basic Plus” channels; I would consider FX one of them, and I just noticed yesterday that the entire series Rescue Me is currently available on Hulu. That said, due to last year’s writer’s strike, there was no Rescue Me at all (aside from 7, 5-minute “minisodes”). I’m guessing by providing it on Hulu, they’re trying to get the buzz around the show going again, with the Season 5 premiere happening this week. It seems an interesting strategy to try to remind fans the show is still around.

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  2. Tim:
    Broadly speaking, I would also include FX in this middle tier of “basic plus” channels. FX is, of course, part of News Corp.’s Fox Entertainment Group, which is one of the co-owners of Hulu (along with NBC Universal). So it’s not surprising to see FX content there. Still, I wonder to what extent they are on thin ice with the cable carriers because they are making their content available for free over the Internet.
    I suspect, however, that there is a significant diversity among these “basic plus” channels in terms of how they generate revenue.
    For example, I would assume that TCM (perhaps my favorite “basic plus” channel) gets essentially all its revenue from cable carrier fees, since it carries no advertising.
    It may be that FX is at the other end of the spectrum, and makes enough from advertising that it doesn’t need to rely on carrier fees.
    It would be interesting to know the breakdown of carrier fees versus advertising revenue for each of the “basic plus” channels, but I suspect this information isn’t readily available to the public.

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  3. Kendall, your jpg grabbed my attention and this is an interesting read. I agree that if I pay for something, whether it’s a premium cable channel, or a DVD, I want to be able to watch it where ever is most convenient to me, even if that means ripping it to my ipod.
    This topic also leads me to think about ratings. I read an article in Rolling Stone which said that the CW, which is admittedly not a cable channel, is keeping shows like Gossip Girl alive although the ratings are very low. The CW execs realize that the ratings system has become antiquated because it doesn’t take into account all the other ways we watch these shows – downloading them from iTunes or Amazon, watching them on sites like Hulu, etc. Perhaps if those mediums were more popular or available a few years ago, shows like Freaks and Geeks and Veronica Mars could have lasted a few more seasons.

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  4. Erin:
    Thanks for the note. It’s interesting (to me at least) that it was the graphic that caused you to stop to read the article.
    Regarding the issue you raise about the antiquated nature of the ratings system and, in particular, the focus on the broadcast TV numbers over other forms of viewership, you might be interested in reading a more recent post of mine on this topic. A recent tweet from @drhorrible stressed that in order to be renewed for a second season, “Dollhouse” needed more viewers watching the show live. For my discussion of this, see “Old Habits Die Hard: What Matters in Media Metrics.”
    The implication is that, from the perspective of Fox Broadcasting, the audience for the TV broadcast is more valuable than viewers who watch the show through alternative venues like their DVR or Hulu.com.
    To add more fuel to this fire, at the Paley Center Festival in Los Angeles yesterday, Whedon seemed to confirm that DVR viewership for “Dollhouse” is stronger than its conventional television audience when he stated that the numbers for Dollhouse have been “solid” and then went on to say that “the DVR ratings have been great.”
    It’s unfortunate that the industry is focused on measuring how media was consumed in the past more than where it is headed in the future.

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