One of the highlights of the SXSWi conference in Austin was the session “Pay TV vs. Internet – The Battle For Your TV,” featuring a no-holds-barred debate between Mark Cuban, Chairman and President of the programming service HDNet, and Avner Ronen, CEO & co-founder of Boxee. The two have sparred before on the topic whether “the Internet” is going to replace today’s existing television models and this clash was just as lively, punctuated early on by a fire alarm that emptied the room for a time.

Staci Kramer at PaidContent neatly sums up their positions:

…Cuban believes in subscription TV and sees Ronen… as representing free-only; Ronen believes TV over the internet is the present—and the future but a la carte. He’s not anti-pay per se—Boxee is working on a pay offering—but anti-establishment TV. Cuban doesn’t see an internet TV business model that works yet.

“How will content be paid for?” is a key question, and the Current Events blog notes that Cuban made strong points in this area:

Cuban pushed hard, arguing that other than a few big players, like Apple, you simply can’t get people to pay on a scale to make a solid business case for internet delivery of media. Ronen fired back with the question “What you are saying is that because you have lack of choice, you are going to win?” Cuban kept going back to the fact that Boxee can’t monetize their business, while Cuban won’t broadcast anything he can’t make a dollar on, and he has a point. Everyone wants to be able to pick and choose what they want to watch, but with the internet giving so much of it away for free, few are willing to pay.

At several points, Cuban argued that the Internet isn’t really set up for efficient delivery of video, but that cable’s infrastructure is. The Gearlog blog highlighted this point:

“But people are willing to pay for Internet video right now,” Ronan responded.  “They are paying for Netflix, they are paying for MLB, they are paying for a lot of things,” he said. “It isn’t about free or not free. It is about whether the Internet can deliver video and it can.”

How much video and how reliably it can be delivered is a different question. And that is where Cuban made his strongest points.  Having a few million users download programming a few times a week is one thing, but what about when it is tens of millions? The Internet simply wasn’t built to support that kind of delivery.

Ronen kept arguing that the old models are dying, that distribution via the Internet is the future, and that it is therefore foolish for content owners for Cuban to not make content available online. Cuban countered that no one is making significant money online and made it clear that he wasn’t going to give his content away for free. For example, Cuban joked, perhaps the producers of the show The Office should just give their program away for free and then tour the production as a play around the country.

Two colorful Cuban quotes:

• “The a la carte model is for morons.”
• “If you think that the Internet going to replace cable, you’re crazy.”

His larger point is that in an a la carte universe, content players have to include significant promotional expenses, because in a world of unlimited choices, you have to find a way to stand out. To an audience member who complained about “ paying $100 a month to watch three shows,” Cuban responded, “In an a la carte world, you’re one of zillions. Marketing is expensive.”

But I think the key point of the whole discussion slipped by most of the audience, and I haven’t seen it reflected in the news coverage. An audience member asked how an Internet-based subscription service – one where the consumer contracts with a company, that then delivers video over the Internet for a fee – would differ from what we have now. Cuban said this was a good question. It is, because the answer is that it wouldn’t look different at all.

I went up afterwards to discuss this with Cuban and confirmed what I was thinking. Consumers don’t care how programming comes to their house, whether it’s over fiber or coax, by satellite or by IP transport. They turn on their TV and watch stuff. So, as long as the economics of producing content remain the same, and there’s no reason to think they won’t, then the technical means of getting programming into the home are immaterial.

Cuban said to an audience member after the session that many of the elements of Internet-based  content look just like digital cable: streaming content on demand, storage costs, capacity issues. As cable becomes increasingly digital, those similarities increase. And if those two worlds – Pay TV and the Internet – are alike in many ways, then it becomes even more important to look at the ways they are different.

Cuban thinks that cable’s subscription model works better for him financially. He also thinks that cable does a better job of delivering video, especially as hi-def becomes more prevalent.  Consumers aren’t going to care about the nuts-and-bolts of how it all works. As Cuban put it, “The future of television is… television.”

[NOTE: Photo above used by kind permission of Staci Kramer.]

With lots of activity happening in the media and entertainment sectors in 2010, we’ve recently seen several stories about the carriage of programming services by cable and other video providers. This coverage has been partly driven by negotiations between programmers and operators about carriage fees, partly by retransmission consent disputes, partly by the growing prevalence of online video.

Many of the news stories and blog coverage have attacked the business model of multichannel video providers (which includes cable, DirecTV & DISH, AT&T’s U-verse & Verizon’s FiOS). Such arguments invariably lead reporters and bloggers to one of two conclusions: We need à la carte or all video should be available online to all consumers.

Over at AllThingsD, Peter Kafka revealed a rate card from an unknown cable operator that reveals what said operator pays each programmer for the right to carry their signals. Kafka thinks that the hidden cost of programming is the problem.

As I’ve said before, I think that many cable viewers are probably okay with most of the bundle–or at least unwilling to foot the bill for real a la carte pricing. But maybe if you waved this list in front of them, they might rethink that.

Of course, there are a few problems with this. First, there’s no way of knowing what these prices really mean. Could this be the same rate that all companies pay? After all, Wal-Mart doesn’t pay the same price for product as another retailer might. In addition, the “wholesale” price that a video distributor pays (or any business for that matter) isn’t the same price that a consumer pays, especially if you purchased channels on an individual basis versus the savings of a bundle.

At the Atlantic, Derek Thompson points out more problems:

Monthly cable bills are about $50, [Kafka] says. An American’s average monthly TV time is 150 hours (via Nielsen). So today we pay about 30 cents per hour of TV, right? Not exactly. Monthly cable bills are by household. Monthly TV hours are by individual. I live with two roommates. I pay $17 for cable and consume 150 hours of television. My TV experience costs more like 11 cents per hour.

Thompson also points out how a la carte would affect advertising and notes that this analysis doesn’t reflect how people watch TV in the real world.

…a great deal of TV time is spent “surfing” for nothing in particular, or watching shows to which we ascribe no real monetary value but we watch anyway because we’ve already paid the monthly access bill.

Eduardo Porter, in the New York Times, also argues that Americans might be more likely to pay for content if they knew what they were paying for, even suggesting that a coin slot attached to the TV or PayPal account would enable purchase of individual shows, regardless of which network they are on.  But all Porter has to do is look at the cost of pay-per-view to realize this is a much more expensive way to watch your favorite shows.

We’ve covered the topic of a la carte several times before, but the point is that cable networks will lose the broad carriage they have now and be forced to spend considerable money to market and sell the channel to individual consumers. Revenue goes down, operating costs go up. Programming will be impacted.

There’s usually a conclusion to all these “analyses,” even if they don’t say it flat-out: “If you would only move to à la carte or some kind of metered plan – then consumers would pay less.”

Except, perhaps, they wouldn’t.

One of the big stories in tech reporting over the past year or so has been the move by some consumers to “cut the cord” from their subscription TV service and begin relying on the Internet for the delivery of video content.  I catch up on a lot of shows myself by watching them online and this is definitely a convenient service.

While cord-cutting is definitely a trend that the entire media industry is watching, many of the articles and blog posts covering this say something like: “Tired of paying so much for cable? Cancel your subscription and turn to the Internet to serve your needs!” The direct implication of this is that you can get all the stuff you currently watch on cable television – or via DBS (DirecTV & DISH) or from the phone companies (AT&T’s U-verse & Verizon’s FiOS) – just by going online.

But all this coverage ignores the fact that you can’t do this. You can get some cable programming online, but not most of it.

Let’s focus in on a couple key elements.

From an October 29 article in the Washington Post:

[Cord-cutting] was a somewhat easy thing for us to do. We don’t watch that much TV in the first place, and most of what we do view is on the [over-the-air broadcast] networks anyway…

If you look at this post I wrote in November of last year, you’ll note the same thing: A lot of cord-cutting proponents don’t watch much television and what they do watch is from broadcast television (generally easy to find online).

From the New York Times on December 9:

…Boxee easily allows access to the Netflix streaming service, which offers up thousands of movies and television shows (just not always the most popular options).

Anyone who’s actually used Netflix’s “Watch Instantly” feature, as I have, knows that you can see older movies and some TV shows but not any of the current cable shows generating water-cooler discussion. And you don’t get any access to new hit movies.

This HuffPo post, while also proclaiming the wonders of cord-cutting, charges that major cable operators “have been pressuring TV programming networks to keep their shows off the Internet,” implying that they should be provided for free.  Perhaps the writer may be unaware that cable programmers have a dual revenue stream: They get some money from advertisers (which is based on the number of homes they’re carried in) and some money from cable operators and other multichannel video providers (called carriage fees).

Online advertising revenue has not been as lucrative yet as television has been. And multichannel video providers would undoubtedly not want to pay as much for a product that is being given away for free online.

And is this really such a good deal for consumers? The Times notes:

If you watch premium-cable television shows, you can pay more than $40 for the season of a single show. But even that is less than one month of cable.

Wait.  $40 for a season of a single show?

I’m paying Comcast about 100 bucks a month for video service, but it’s a very robust package that includes hundreds of viewing options, including multiple premium services. SNL Kagan reports that the average price for digital cable (which 67% of cable subscribers now take) is about $60 a month. I probably watch about three hours daily, for about 90 hours a month. The latest “Three Screens” report from Nielsen reports that Americans are watching an average of 31 hours and 19 minutes of live television per week or 125+ hours a month.

So, one cable show via iTunes for $40; two shows are $80. I happen to watch a lot more than two cable shows.

All this gives me a cost-cutting idea!

Anybody who knows me knows I don’t care about sports. Not professional, collegiate or amateur athletics. Given that situation, I guess I should cancel my subscription to Sports Illustrated, huh?

Yeah, I’m kidding, because I don’t have such a subscription. But it illustrates a good rule for some people: If you’re not interested in watching cable programming, you probably shouldn’t subscribe to cable television.

Online video viewing is small, but growing. The statistics are dwarfed by the amount of television delivered via traditional methods, and the number of video subscribers continues to grow. In all likelihood, those figures will shift over time. But it’s not there yet.

It’s ironic, because lots of people like cable TV precisely because of the programming. Back in the early Seventies, when I was a kid, we had cable for clear reception. By the Eighties, we had it for all the great new channels: Nickelodeon, MTV, A&E, CNN. If this service is of no value to you, then it’s wise to not subscribe. But you’re not going to duplicate the experience through your computer – not yet, anyway.

UPDATE: For more on the economics of buying programming “à la carte,” such as from iTunes or Amazon, see here and here. Bottom line: Buying individuals programs is a great cost savings, provided you watch very little TV.

The latest “Three Screens” report from Nielsen today shows that despite repeated claims of rampant “cord cutting” from the media, the overwhelming majority of video is still consumed on good old fashioned televisions, and without time shifting from DVRS.  Live TV is still the number one choice for viewing.

• Americans watch an average of 31 hours and 19 minutes of live television per week
• On average, only 31 minutes of time shifted video and 22 minutes of Internet video are consumed
• Even men age 18-24 (rumored to have dropped out of TV viewing altogether) watched 22 hours and 44 minutes of traditional TV versus just 35 minutes of web video

These numbers may come as a surprise given the number of people in tech media who have proclaimed live television and cable dead simply based on their own viewing habits.  The facts, however, continue to show that consumers find great value in television programming and likely the time spent together enjoying it.

Sean Fallon has a post up at Gizmodo titled “Life Without Cable or Satellite Is Easier Than You Think.” Fallon’s central argument is that all the shows you watch are available freely online, and you just need to connect a PC to your TV to get all the same content. It’s a premise we have seen before in countless posts and newspaper articles. As in those articles that came before it, however, the premise is simply not true.

Broadcast Programs Aren’t Cable

To begin with, Fallon makes the same mistake others have made in confusing broadcast versus cable content. His list of favorite shows is rich with broadcast content.

I’m not a TV addict by a long shot, but there are shows that I watch religiously. These shows include 30 Rock, Lost, Family Guy, Californication and Dexter. The following graph illustrates the pluses and minuses of viewing a handful of different shows—not just my favorites—from popular networks.

The graph includes those mentioned plus The Daily Show, CSI, Deadliest Catch, and Entourage. Of the nine programs he specifically mentions, four (30 Rock, Lost, Family Guy, and CSI) are broadcast offerings available with nothing more than rabbit ears (for those with an HDTV or rabbit ears and a converter box for those without an HD tuner).

The other 5 are actually cable content. So, let’s focus this discussion on those to see how “easy” it would be to get them online.

The Daily Show makes most of its content available online for free. The program is relatively inexpensive to produce and Viacom has chosen to make it widely available via the Internet. Based on one network’s decision to make its content available for free, Fallon makes the laughable suggestion that all cable operators, regardless of the production costs of their shows, “move away from old revenue models and look towards the future.”

So what, exactly does Fallon’s future business model look like? To answer that, let’s look at one of Fallon’s examples.

Time Sensitivity and Value

Comedy Central’s Daily Show and The Colbert Report are often cited as examples of the new business model based on giving away content for free. For the most part, both of these shows are placed online almost immediately after their original air date. People arguing for “cord-cutting” often cite them in their arguments. Unfortunately, they’re actually very poor examples for one specific reason. They’re time-sensitive.

These two programs, being based on current events, lose value as the viewer is further and further removed from the context of the events. Yes, the shows may still be humorous if viewed weeks later, but what about months? What about years? In other words, their shelf life is limited.

Typical sitcoms, where the humor is situation-based, can be viewed much later and retain relevance. The clothes may appear dated, but the story still rings true. That’s why shows like Friends, Cheers, and Gilligan’s Island may be in syndication for a decade or more after their original air date. Shows like The Colbert Report and The Daily Show have almost no syndication value. Comedy Central can pick up more revenue through online ads in the days and weeks immediately following broadcast than they would be able to with DVD sales months later.

So we see in one of Fallon’s specific examples a clear reason for making the content available online. What about the rest?

Broadcast Versus Cable Business Models

Since we have begun the discussion of value, we should look at the ways that programs earn revenue. Broadcast programs typically earn the bulk of their revenue from advertising based on their original air date. Broadcasters sell ads and support the programs with that revenue. Shows are routinely canceled when they don’t draw enough viewers to earn a return based on advertising. This has become a particularly troublesome business model as ads are increasingly avoided through the use of DVRs and online viewing.

Cable programming is based on a different model. While cable show still feature advertising, cable programmers also earn a per-subscriber fee from the operators who carry their channel. This revenue model works better as it provides a stable source of revenue separate from the regular fluctuations of ad income. Under this model, the subscriber fees are based on exclusivity of content. If the same content were suddenly available for free elsewhere, the incentive to subscribe is gone and you’re suddenly back to a purely ad-supported model.

Fallon cleverly ignores the fact that most of the shows he cites are among the most protected of cable’s programs. Deadliest Catch, Dexter, Californication, and Entourage are exceptionally difficult to find elsewhere. As he mentions, only one episode of Californication and Dexter were made available via Netflix, and only for a short time. He is correct that you can buy entire seasons on DVD, or rent them, but that is typically months after their original air date. If you want to watch these shows when your friends are watching and talking about them, a six month or greater delay is simply not an option.

So How “Easy” Is It To Drop Cable And Get It All Online?

Fallon’s central thesis and the title of his post come down to it being “easier than you think” to have life without cable. Yet his post demonstrates quite the opposite. He freely acknowledges that 4 of the 5 cable shows he watches are not at all easy to find without a cable provider; the one program that is easy to find is available primarily because it carries an expiration date; and the remaining 4 programs aren’t cable programs at all.

We have stated on a number of occasions a simple truth: If you are watching cable to get broadcast programming, you may be paying for a service you don’t need.

If, however, you are subscribing to cable because you enjoy the tremendous variety of cable programming – everything from Entourage and Jon & Kate Plus Eight to Real Housewives of Orange County and ESPN sports, then you simply won’t find the programs, or the quality of programs available anywhere else.