Why Internet Video Threatens Cable Television

Force of habit is a powerful thing. How else can I explain why I spend $200 per month for a package of Internet, TV, and telephone—most of which I don't really need? My wife and I make most calls on our cell phones; pretty much the only people who call our landline are telemarketers. An even bigger waste of money is TV, which accounts for $125 of the $200 package. We don't watch much, and nearly everything we want we could get online. So why not just pay for the Internet and forget the rest?

My answers are totally lame: I'm 49 years old; this is how I've always done things; change is hard. Also, I still find it easier to watch some things on TV, like news and sports. I'm not a big sports junkie, but I'll watch an occasional football game, and this winter we'll follow the Olympics in Vancouver, because I like ski racing and my wife likes figure skating. But are those events worth the $1,500 we'll spend on TV this year? No way. And yet we dither and dawdle and keep on paying.

That's true for most people. Nielsen recently reported that although online video viewing has risen 35 percent in the past year, 99 percent of TV viewing is still done on a traditional TV. But that's not the case for younger people, like my pal Dan Frommer. He's 27 years old and works as a writer for a technology Web site. Frommer pulled the plug on cable TV in May 2008 and instead gets shows from the Internet via a Macintosh computer hooked to his LCD television. He can't get everything he'd like to see, but he's saved $1,500 on cable-TV fees. "I'm not going to let myself get ripped off for a bunch of garbage that I don't watch anyway," he says. Many of his 20-something friends have also pulled the plug. The next generation—today's teenagers—will likely never sign up for cable TV at all.

This is dreadful news for cable companies. For decades they've had a glorious business model, running the tollbooth that stood between you and the shows. Now the Internet provides a way to get around that tollbooth, and cable companies are faced with a dilemma: do they embrace the Internet and try to make money online, or do they fight the Internet and try to hold off the destruction? The answer is to do both—holding off the rising tide with one hand while racing to devise workable Internet business models with the other.

This is the context for the recent $15 billion deal between Comcast and GE, whereby Comcast, the leading U.S. cable company, acquired 51 percent of NBC Universal. There are many reasons Comcast made the deal, but one is to prepare for a world in which people stop paying for cable TV and instead get everything over the Internet. It's the same reason telephone companies like Verizon and AT&T went into the mobile-phone business.

Until recently it was easy for Comcast to hang on to cable-TV subscribers, because watching TV over the Internet was pretty painful. But that's changing, fast. The best example is Hulu, an ad-supported Web site whose owners include NBC, ABC, and Fox. Hulu is TV the way TV should be. There's great content: The Office, 30 Rock, The Daily Show, Saturday Night Live. You watch whatever you want to watch, whenever you want. You can watch highlight clips. You can search archives. You can even hook your computer to a big-screen TV. Launched two years ago, Hulu now delivers nearly 1 billion video streams each month.

Supposedly Hulu is meant only to complement regular TV, not replace it. Still, it's a threat. Now, by owning part of NBC, Comcast will exert some control over the site. Whether Comcast will hobble Hulu or ruin it, either accidentally or on purpose, remains to be seen. (The company says it has no plans to change it.) Comcast operates an ad-supported site called Fancast that is similar to Hulu, and soon it will launch a site on which people who subscribe to premium channels like HBO will be able to watch those channels online. "Online video is our friend, not our enemy," Comcast CEO Brian Roberts likes to say.

Cynically translated, I think that means Comcast doesn't care what road the video travels down, so long as Comcast can operate the tollbooth. Owning a big content company gives Comcast some leverage in that struggle. Problem is, even if the tollbooth stays up, it probably won't rake in as much money as it used to. The rule is that when the Internet hits an industry, wherever you used to make dollars, you now make dimes. Or pennies. So for cable companies, the good old days may soon be over. For the rest of us, however, they may be just around the corner.