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4/04/2009 2:00 AM Eastern

Like a team of indecisive carpenters, cable operators and programmers know they want to build a wall, but they don’t have any specific plans, they can’t agree on how it should look and no one knows what will happen after it goes up.

The issues, in evidence last week at The Cable Show ’09 here, are the streaming of cable shows over the Web for a growing number of Internet-savvy consumers, who should be allowed to watch those streams and for how much money. In an effort to stave off piracy, cable operators and programmers are currently in talks about ways to “authenticate” paying subscribers to allow them to view shows online.

But many technological and business questions remain. What concerns operators most is whether free online content from networks like MTV, TNT and FX will eventually cause consumer “cord-cutting” — dropping cable services in lieu of free online content.

At the moment, there’s no clear consensus on the business model. Comcast chairman and CEO Brian Roberts called online TV a “friend, not a foe.” Scripps Networks Interactive CEO John Lansing called streaming video “the elephant in the room” that could crush the current cable-network revenue model. Meanwhile, some programmers say that they should be compensated for allowing online viewing.

The one thing that everyone does agree on is that issue cannot be ignored. “I don’t think we should put our heads in the sand,” Roberts said at the show’s opening session. He added that the industry cannot ignore the fact that some viewers, especially young ones, are increasingly watching programming online.

It’s clear viewers are moving to the Web to view video: a recent Leichtman Research Group report stated that more than one-third of adult viewers are watching some form of video content on the Web. About 8% watch streamed TV shows weekly on the Internet — but that was up from 6% last year.

Much of that viewing is of broadcast-network programming: LRG president Bruce Leichtman said that cable networks, for the most part, have been more “disciplined” in offering their video product wholesale online, compared to the broadcast networks.

Still, most of cable’s streamed content is offered for free, which raises a flag for cable-operator executives such as Scripps’s Lansing, who’s concerned that the proliferation of cable content — despite the advertising fees it generates — will undermine the industry’s dual advertiser/affiliate-fee revenue stream.

Rainbow Media CEO Josh Sapan, a passionate critic of putting shows online for free, argued the $25 billion in license fees a year that networks generate from cable operators could be in jeopardy if those affiliates believe that the core linear cable product is compromised by the availability of the same programming on the Web.

“It is a practice that doesn’t provide an economic reward and compromises the model that creates great TV,” Sapan said. “If we jeopardize [revenues], it’s a pretty high price to compete on a daily basis for share.”

But while there’s risk to the revenue base necessary to produce top shows like TNT’s The Closer and USA Network’s Burn Notice, several industry executives believe the risk of not reaching a growing population engaged in the Web is just as great.

“You want to make sure you’re moving with the times — you have to embrace change, or you’ll be left behind,” said NBC Universal Cable Entertainment and Cable Studio president Bonnie Hammer, who added that the Web is “additive” to a consumer’s overall television experience and does not disrupt or compromise ratings and viewership on linear cable networks.

Indeed, overall television watching is up, despite the growth in online viewing. Nielsen Media Research reported last month that the average U.S. viewer watched a record 151 hours of traditional television during the fourth quarter of 2008.

For some networks, the DVR, which allows consumers to warehouse shows and fast-forward through commercials, is a bigger threat to network revenues than the Web.

“Frankly, having them catch up online where they can’t fast-forward the ads is better for us then having them catch up on a DVR where [consumers] fast-forward the ads … generating less and less value for us,” said NBCU president of digital distribution Jean-Briac Perrette. “At least online, we’re getting increasingly more and more value — not nearly as much as linear, but it’s a better value for us if they watch it online than on a DVR.”

Comcast’s Roberts said he believes that cable programming online could be a boon for distributors who are smart enough to figure out how to monetize it.

“I think it’s a friend, not a foe,” said Roberts of online cable programming. “It is powering our broadband business, one of the fastest growing parts of Comcast. For programmers, it’s a new opportunity to try to monetize in this horrific advertising environment.”

But how do you monetize it? Sapan believes that the operator efforts to develop some form of authorization strategy that would allow only cable subscribers to access cable-based, long-form programming provides the industry the ability to better control which consumers access its content.

MSO such as Comcast, Time Warner Cable and Cox Communications are already attempting to secure distribution agreements from programmers to provide an expanded collection of video content online, whether through a free authentication format or a potential pay tier of broadband-based video content.

While such a move may block the roughly 10 million people who today don’t subscribe to cable, satellite or telco services, Sapan said any long-term delays in implementing such “walled gardens” could cause that figure to exponentially increase, as consumers begin cutting the cord to take advantage of free Internet viewing.

Time Warner Cable is working with two major programming partners on its “TV Everywhere” initiative to make sure the Internet-video service is easy to use and scalable, said executive vice president and chief strategy officer Peter Stern. Speaking on a Cable Show panel, he said the MSO is already working closely with two programmers, including Turner Broadcasting System, on a plan that will involve authenticating consumers “in a very straightforward way so they can get access to content.”

“To be honest, we’re still working it out in terms of the user experience,” Stern said.

The concept, which is also being tested by Comcast and Cox Communications, is to reinforce the cable-TV subscription model by providing that programming to paying customers over their Internet devices. Stern pointed out that 90% of Time Warner Cable’s broadband customers are already paying for multichannel video.

“Those people are already entitled to watch this programming,” he said at the show. “The big risk we have is, if we don’t offer this programming to them the way they want it, they’ll turn to piracy.” Alternatively, if that programming is provided to them for free over the Internet, the risk is they’ll cancel their subscription service — with such “cord-cutters” obtaining their media online.

But The Walt Disney Co. CEO Bob Iger has reservations about such authorization plans. While he says authentication efforts would be an “interesting and potentially compelling feature for consumers,” and that Disney would be open to “exploring that possibility,” he told Cable Show attendees that he’s concerned about anything that would retard consumers’ ability to access such fare.

“Preventing people from watching any shows online, unless they subscribe to some multichannel service, could be viewed as both anti-consumer, and anti-technology, and would be something we would find difficult to embrace,” Iger said.

Scripps’ Lansing said programmers would also be listening for the “value proposition” from cable operators regarding an authorization process. “If we don’t build a system for our own ecosystem, then someday we’ll look back years from now and regret it just like the music industry,” he said.

When asked if programmers should charge operators more for online content, again Lansing said, “If they charge the customer more, that’s something we should share.”

Ultimately, Suddenlink Communications CEO Jerry Kent said that online video, especially bandwidth intensive high-definition video, could be good for operators who sell high-speed Internet connections.

Kent noted that the music industry has struggled because it ignored the Internet, while the newspaper industry has wavered because it embraced the Internet too much — basically by giving away its content. Cable operators and programmers need to find a middle ground, he said.

“We need to find something in between, maybe something where a paying customer can get video anytime, anywhere on any device,” Kent said.

WHAT’S WATCHED ONLINE
The most-watched scripted series on ad-supported cable networks in 2008:

Series Network Total Viewers Average Full-length Episodes Online*
*As of April 2, 2009
SOURCE: Disney/ABC Television Group analysis of Nielsen Media Research data.
The Closer TNT 8.4 million 6 (tnt.tv)
Burn Notice USA 5.8 million 3 (usanetwork.com)
Monk USA 5.7 million 6 (usanetwork.com)
In Plain Sight USA 5.3 million 6 (usanetwork.com)
Psych USA 5.2 million 7 (usanetwork.com)
Law & Order: CI USA 4.9 million 0 (usanetwork.com)
Saving Grace TNT 4.7 million 4 (tnt.tv)
Army Wives Lifetime 4.3 million 0 (mylifetime.com)
Secret Life of the American Teenager ABC Family 3.9 million 24 (abcfamily.com)
Nip/Tuck FX 3.5 million 1 (fxnetworks.com)

Mike Farrell and Todd Spangler contributed to this report.

 

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