Analyst Report: As TV Comes Online, Can Content Providers Sell ‘Premium’?

Analysis

2009 is not shaping up to be a golden year for media. But with business models in flux, the timing may just be right for unconventional thinking about the future of entertainment distribution. As providers’ business interests and consumers’ consumption interests come into alignment over the next year, I think we’re headed toward a resurgence for paid video on the Internet.

First of all, while online television viewing is a preferable and more convenient experience for many of us, advertising revenue on the web isn’t yet pulling its weight. U.S. TV networks made $1.63 billion on web advertising last year, or 2.4 percent of the $67.6 million in U.S. broadcast and cable TV advertising revenue, according to Convergence Consulting. Web distributors like Hulu have established expectations that online TV comes with fewer ads, and while they have good ideas about making those ads more relevant and addressable (and therefore valuable), they’re not taking those ideas to the bank just yet.

Meanwhile, paid television providers like Comcast and Time Warner have realized that network web sites and aggregators like Hulu could actually offer an alternative to monthly TV subscriptions. While they may publicly pooh-pooh the existence of “cord-cutters” (i.e. former subscribers who now get their TV online), cable companies clearly feel threatened, because they have announced plans to match and improve upon services like Hulu. With the yet-to-be-launched services, viewers who can prove they are paying TV subscribers will have access to large libraries of content online. Comcast calls it “On Demand Online” and Time Warner calls it “TV Everywhere.” Viacom’s Phillipe Dauman has also talked up paid access to shows online, and News Corp.’s Rupert Murdoch has reportedly set up a special ops team tasked with figuring out how to charge for online content.

We have our concerns that these efforts will be a total debacle, but they’re shaping up to be the next big thing in media distribution. And you never know, authentication machinations may just result in desirable and convenient deals for consumer. Many people doubted Hulu when it was first announced, assuming media companies and the digital age were incongruous. But the site has clearly resonated with viewers, who made it one of the top two or three U.S. video sites by number of streams just a year after its launch.

What’s interesting about the timing of these initiatives is that consumers may actually be open to paying for some of the programming they consume online. Until now, web content has pretty much been synonymous with free content. Paid video initiatives have been slow to take off. iTunes, the market pioneer in paid television downloads, had only $180 million in U.S. revenue from TV episodes in 2008, up 20 percent from 2007, according to Convergence Consulting. But improved content availability, delivery speeds, video quality, and mainstream familiarity with online video and e-commerce are factors that shouldn’t be underestimated.

Furthermore (and this is something cable networks really don’t want to hear) with the rise of social media, celebrity culture and other modern tools for fandom, people identify more with shows and stars than with networks. That means opportunities to pay for only what we want to watch have more appeal than ever before.

The new commonly held logic, trumpeted at multiple conferences I’ve attended, is as follows: “The music industry didn’t adapt to the digital age and tried to keep charging for everything, while newspapers gave it all away for free. And look where they both are.” As far as television shows go, consumers are willing to pay for some content — especially content they already pay for.  That aura of “premium” is still associated with shows from networks like HBO, all-you-can-eat sports packages and new-release movies. Premium can also apply to high-quality content delivery. IDC expects $1.6 billion in payments for high-definition content in 2012, compared to just $600 million for advertising-supported HD content.

The tricky thing is that the programs for which people would be most willing to pay are also key revenue generators for existing business models. When Disney recently agreed to put full-length content on Hulu (and take a stake in the company), it may have handed over some of its highest-rated primetime shows, but it certainly didn’t offer up full-length ESPN programs. At last check, Disney charged cable and satellite providers $3.65 per subscriber per month just to carry the channel. That’s not the kind of setup you want to renegotiate.

Where iTunes’ a la carte micropayment strategy has yet to transform the TV market, other paid business models are showing promise. Studies have shown that viewers prefer streaming video to downloads. Netflix has a very nice subscription streaming business, one that’s energizing its company as one of the only positive growth stories in this terrible economy. MLB has developed a very appealing (when it works) online system for livestreaming games and watching them on demand. The full version, which costs $110 per season, signed up 400,000 paid subscribers in the first three weeks of this season, up 46 percent over the prior year.

The one problem paid content initiatives will never defeat? The appeal of free content. If Hulu were able to offer the world’s content on any demand from any device for free, there’s no question it would beat “TV Everywhere.” But right at this very moment, the timing could be exactly right for digital paid content.

Liz Gannes is the Co-Editor and Founder of NewTeeVee.

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