First, a little history.  When Congress adopted program carriage rules in 1992, it cited then-present concerns about high levels of vertical integration between cable programming and cable distribution.  Regulation was necessary, so the story goes, to ensure that content creators could reach consumers and so that MVPDs could not favor program networks in which they had an ownership interest over “similarly situated” program networks owned by someone else.  If they did, the government could order the MVPD to change its programming line-up so that the affiliated and unaffiliated networks were treated “equally.”

For starters, the factual predicate used to support the case for program carriage rules has virtually disappeared.  In 1992, consumers that wanted multichannel video service typically had one choice available to them – the local cable operator.  DBS service hadn’t even launched and the telephone companies were statutorily barred from offering video services to consumers.  Cable systems themselves had limited capacity – the largest systems only had about 60 channels – and about 53% of cable programming networks were affiliated with cable operators.

Today’s marketplace has changed completely.  DBS operators control almost 35% of the MVPD marketplace.  The statutory bar on telco participation was lifted in 1996 and now two of the top ten MVPDs are telephone companies.  Due to advances in technology, all of these platforms, including cable, now offer consumers hundreds of channels to choose from.  And vertical integration of cable networks has plummeted from 53% to only 14% — even after Comcast’s merger with NBCU.  Finally, of course, online video is booming, with companies like Google, Apple, and Microsoft jumping into the fray.  Netflix alone has more video subscribers than the largest cable operator.

In other words, whatever concerns may have led Congress to adopt the program carriage provision in 1992 no longer exist.  Amazingly enough, however, the FCC recently released an Order expanding the program carriage rules and some are pressing it to expand the rules even further.  We have filed an appeal of the FCC’s recent Order and look forward to our day in court.

These marketplace changes lay bare some of the fundamental problems with the program carriage regime itself.  First, the government’s abrogation of freely negotiated contracts between sophisticated parties is a danger to the foundation of free markets.  The security and stability of the marketplace depend upon the predictability that contracts, once entered into, will be enforced.

That’s especially true where free speech is involved.  We should all be alarmed when the government starts favoring certain programming over others and dictating channel line-ups.

But it’s not just government carriage mandates that raise serious free speech concerns; it’s the creeping government involvement along the way.  One of the first things the FCC does in assessing a program carriage complaint is to determine whether the programming networks are sufficiently “similar” to make a case actionable.  Is a channel that carries documentaries similar to a news channel?  Is it similar to a science or history channel?  What if the documentary channel also has some news and interviews – what percentage of its programming has to qualify as news to be considered “similar”?  And do we really want the government making those distinctions?

These questions aren’t academic.  Programming that is deemed “similar” by the government falls into a favored category under the program carriage rules.  Fall outside that favored category and you’ll get no help from the FCC.  And the irony here should not be lost.  In the name of “diversity,” the program carriage rules provide a perverse incentive for new networks to look and feel as much like existing networks in order to gain FCC favor.

The time has come to stop the madness and to replace mythology with intellectual rigor.  In today’s video marketplace, innovation, investment, and, yes, editorial discretion, are more important than ever in ensuring that consumers get the content and technological services they most value.  The world has changed and the regulatory world has to change with it.

Congress and the FCC should take stock of the fundamental changes since 1992 and remove the regulatory underbrush that too often leads to the government picking winners and losers in the marketplace of speech, content and ideas.  This is especially important now, when the shape and form of the video marketplace is in such ferment and transition.  As the Internet emerges as an important source of video content, all media – new and old – need the freedom to experiment and compete.

Nobody knows where this is new world going.  Even the government.  It’s time to reset, step back, and let the marketplace work.

Instead, I usually read some “kill your cable” rhetoric.

So, that’s why I return to the topic of cord-cutting: Because everybody else keeps writing about it, often in an oddly hostile fashion.

CNET’s Marguerite Reardon started off an Ask Maggie column on cord-cutting this way:

If you are like me, you cringe every month when you pay your cable bill. And you dream of the day you can cut your cable cord and stop paying that monthly bill.

It’s not that I don’t like to watch TV. I do. But I can’t stand that I pay $140 a month to watch a handful of shows on five or six channels.

First, that $140 probably covers more than just standard programming . I pay about $180 a month to Comcast, which includes video, Internet and phone, including HD, a DVR, premium channels, and so on.

When a reader writes in how to watch video online, Reardon answers, “Good for you for cutting the cable cord!”

There are certainly people who choose not to subscribe to multichannel video services. Nothing wrong with that. But if you want to watch the programming – cable’s original shows, news, sports – then that’s how you get it.

Aaron Barnhart of TV Barn helpfully points out that, for all the complaining, people are continuing to subscribe to multichannel video service in growing numbers. But, counterintuitively, Reardon love to recommend that people unhappy with cable service should turn to cord-cutting – which doesn’t allow you to access all you can get from cable programming.

It would probably be along the lines of suggesting that people unhappy with cable should try reading a book. Did you know that libraries loan them out for free?

Replacement v. Substitution

This is a critical point: Cord-cutting is not a replacement, it’s a substitution.

What do I mean by this? If you subscribed to cable to get access to over-the-air broadcast channels – like NBC, CBS, ABC, FOX – and then canceled your service and instead used an antenna to get that programming, that is a replacement. You get the same content through alternative means.

But if you have cable to watch cable shows, as most people do, and then cancel cable, turning instead to the Internet to watch non-cable content on YouTube and Hulu, it means you substituted one kind of content for another.

There’s certainly some cable programming you can watch for free online, but there’s lots you can’t.

As I already noted, people continue to subscribe to cable in relatively stable numbers (as we’ve covered before) and they watch TV a lot (Nielsen reports 158:25 monthly hours, as opposed to “a handful of shows.”). Recent data shows that “for the most part online-video viewing continues to be a work-time distraction,” with the 4:00 – 5:00 p.m. slot showing more video streams than any other daypart.

And it’s probably worth noting NewTeeVee’s post on the study from online video search site Clicker, which showed that even though 90% of broadcast content is put online, it’s typically removed in six weeks or less.

Meanwhile, some think the current system is a conspiracy, and they find the new “TV Everywhere” service to be a conspiracy designed to stave off cord-cutting and the inevitable migration of all content to the Internet for free or for some minimal price.

The Salvation of Over-the-Top Video

What about competitive services like Netflix? Their latest Q2 reveals that they’re increasingly about streaming, so why aren’t they a threat?

Well, as they continue to build their business, access to exclusive content gains in importance.  That’s the importance of their deal with Relativity or their deal with Warner Bros. At some point, getting access to content, especially very popular content, gets expensive.

Suppose that’s the Netflix model: They deliver video directly to your television; you pay a monthly subscription fee and get to watch as much as you want. In order to offer you the content you want, Netflix then has to make further deals with studios, eventually ponying up real money in order to get the content. In order to recoup those costs, they may eventually have to increase their subscription fee.

Is that a substitution  or a replacement?

UPDATES: NewTeeVee hits exactly on my point: The Real Cost of Netflix Streaming is the Movie, Not the Bandwidth. Key quote: “…the real cost of running its streaming business is in acquiring the content, not delivering it.”

In addition, I linked to an article in my post that I felt exemplified the notion that online could provide a substitute for cable. I received a message that the author of that piece felt I had made an unfair comparison; I have removed that link.

Before we start, it’s worth noting that much of the cord-cutting coverage I see online seems to begin with frustration at prices (somehow never compared to the costs of other entertainment options) or by desired flexibility in purchasing options (they just want to get the one network or the one show).

Then, the subsequent reporting or blogging is driven by a fierce conviction that the Internet and the Digital Age is changing the “cable model” – as everything must be changed under the new regime (“Resistance is futile!”) – and that it’s only a matter of time before the whole existing infrastructure comes tumbling down, to be replaced by a Bright New Tomorrow.

I must point out that the Internet offers a technical solution to delivery of content. It does not address the business models involving the production of content.

Everybody’s Dropping Cable and Its Days Are Numbered

“It’s only a matter of time,” critics will say. Pretty soon, a Hulu subscription will “kill your cable.” Or perhaps Google has the answer to “kill your cable bill.” In fact, it’s already happening now! The cord-cutters are taking over!

Just as a brief sample of cord-cutting claims, here’s Fierce IPTV from April and the L.A. Times from eight months ago.

About a month ago, I fact-checked two major cord-cutting reports from earlier in the year. Now, a new Nielsen report confirms that “cord cutting to date has been limited to very specific demographic segments.” See this finding from the report, as quoted by Connected Planet:

The survey’s key metric: 3.9% of the U.S. population had broadband Internet but no cable TV service in January 2010. That’s the same percentage reported for the same month a year earlier. In January 2008, it sat at 3.2%.

At the same time, the percentage of people with both cable TV service and broadband was 66.3% in January of this year, compared to 61.6% in January 2009 and 54.8% in January 2008.

But maybe there’s another threat to cable.

Drop Cable and Still Get Sports

About a week ago, ESPN and Microsoft accounted a deal that would bring the ESPN3 online service to Xbox 360 customers. There was much rejoicing in certain quarters, with MG Siegler writing at TechCrunch, “Xbox 360 Gets Live Sports In HD From ESPN. Canceling My Cable In 5, 4, 3…” Two days later, Karl Bode noted at DSLReports, “ESPN/Xbox 360 Deal Less Sexy Upon Closer Inspection.” He noticed that ESPN’s streaming video service has a model similar to its multichannel video business. ISPs are affiliates, much as cable operators are. And ESPN3 doesn’t offer all the same content that the television version does. (Also, see this post from the Sonic.net CEO Blog, arguing that “the Internet is ‘à la carte’, and it should remain that way.”)

So, I Should Still Cancel Cable, Right?

People like to complain. They threaten to cancel their service. But if you like to watch the programming, how else are you going to watch it?

CNET’s Rick Broida writes The Cheapskate column about saving money. He posed the question this week, “Is it time to pull the plug on cable TV?” He notes that you can use streaming services or a media center PC.

However, these options will get me only so far. If I want to watch shows like “Breaking Bad” or “Mad Men,” I’m sunk: they don’t air anywhere except on AMC. My only option would be to wait for them to come out on DVD. And even then, they won’t be high-def.

I also have kids who would probably require hospitalization without daily doses of “iCarly” and “Phineas and Ferb.” Granted, both are available through Netflix, but not the latest episodes.

And then there’s sports. I don’t watch a ton, but I do like my college basketball. The question is, do I like it enough to justify $70/month (especially when the season lasts only six months or so)? Dunno.

If You Want a Revolution, What’s the Solution?

As I’ve said before (see this post), people like to claim you can replace cable with something else, but the “something else” is often just broadcast programming streamed online.

Broadcast television has been around since the 1940′s and has a business model based on broad distribution; the free online viewing of those shows is just ancillary revenue. Cable has always offered niche content and has a dual revenue stream of advertising and affiliate fees.

Cable and other multichannel video providers are now responding to consumers’ interest in accessing cable content in new ways; that’s why we’ve seen the launch of “TV Everywhere” kinds of services, which allow subscribers to watch online the content they’re already paying for.

All those prognosticators who claimed that the cable model is doomed should try to answer the fundamental questions of how the television business is supposed to transition into this Bright New Tomorrow, while still maintaining the ability to recover production costs and generate revenue.

To start the conversation, Powell asked Brian Roberts if cable should be worried about online video.  Roberts responded that every new medium presents a new opportunity, but said they all present avenues to deliver lawful content; the more opportunities for that, the better.

Andreessen (who shared details of his 36 port HDMI switch with 36 different inputs and a $4,000 per month commercial Internet connection) said that was the right way to look at the future – since every device is now expected to be Internet-enabled, and to allow content consumption.

Rothman chimed in to agree, but said that creates a requirement that content be compelling.  Without compelling content, you just have a bunch of devices to check baseball scores.  Rothman says the key to content online is two-fold.  First, the most important piece of content is good storytelling.  Second, that storytelling must be accompanied by a way to protect and monetize content.

The various models of monetization became a hot topic and Powell noted that customers may have different thoughts about the monetization process – so cable operators may end up fighting with consumers.

Moonves answered by noting that, for his company, there used to be one source of revenue – advertising – but now there are many more, such as syndication, retransmission fees, DVDs,  iTunes, Hulu, etc.  That presents more options to address the monetization question.

The introduction of the topic of advertising led Powell to ask what impact services like Facebook will have, since they present a new, and possibly competing, set of audience segmentation data.  Powell noted the industry no longer has the exclusive on audience data.

Bewkes suggested all the different entities must become partners in the sharing of audience data, and Moonves said one of the essentials is accurate eyeball measurement – and we don’t have that yet.

Andreessen suggest Facebook can be an enabler of content by providing data, and also by sharing content with friends.

Roberts said people may go to other providers  – not because the content is different, but because the experience is different or cooler.  As a result, it is incumbent upon cable to stay fresh and cool, and spend more time on the interface.

Asked what makes them nervous, the panelists suggested that the uncertainty of regulatory change was a great challenge.

Moonves joked, “Whenever they say it’s not about the money, it’s all about the money.”

John Eggerton’s story explains what happened: “FCC Grants Partial Waiver for Early VOD Release of Theatricals.”

[The waiver gives] studios and multichannel video programming distributors, or MVPDs, the ability to disable certain set-top outputs so they can copy-protect the release of theatrical films to VOD closer to their release date.

We issued a statement attributed to NCTA President & CEO Kyle McSlarrow:

We’re pleased that the FCC has granted MPAA’s request to permit cable customers to receive first-run theatrical movies before their release on DVD. The Commission recognized that waiving its selectable output control rule would permit cable operators and other multichannel video programming distributors to provide their customers a new service which would not be available absent FCC action. This decision serves consumers well by allowing us to provide them more choices in how and when they can view new movies.

For a better understanding of the issue, it’s helpful to read some of our old posts. We had a post answering some of the SOC waiver’s critics (including responding to the charge that SOC “breaks 25 million television sets.”). The blog Ars Technica weighed in and we responded to their response, which lead to even more discussion here.

As we move into a world of great digital distribution of content – including, in this case, the possible earlier release of theatrical films to VOD – it’s understandable that “content owners [i.e., movie studios] rightly need adequate protection against indiscriminate and unauthorized distribution of their content…” (as we put it here). The group Public Knowledge (as quoted in John Eggerton’s story above) said that SOC  “will allow the big firms for the first time to take control of a consumer’s TV set or set-top box, blocking viewing of a TV program or motion picture.”

Consumers today routinely deal with content or software that has copy protection. To describe this as “breaking” or “taking control” of your device seems over-the-top. Instead, what this hopefully means, is greater viewing options for you.

STEVE KROFT VO: LAST MONTH, CONAN FINALLY PULLED THE TRIGGER ON HIS FUTURE, RAISING SOME EYEBROWS BY SIGNING ON TO DO AN ELEVEN O’CLOCK SHOW FOR THE CABLE CHANNEL TBS AND NOT WITH A BROADCAST NETWORK.

CONAN O’BRIEN: I do not look down my nose at cable. And I think anyone who does isn’t paying attention to television these days. ’Cause it is– this world is changing very quickly.

So I feel I need to respond to some of his arguments, particular his contention that television programming should be distributed for free over the Internet.

In this recent post, he writes, “It’s really stunning to see people who obviously should know better continually insisting that content can’t possibly be free to consumers.”

There’s a key point right there, because that’s not the argument. Obviously, someone can make content and give it away, whether it’s a video, a song, a novel, a comic strip, or whatever. Sometimes those people can give content away for free and still generate some income.

What we’re talking about is scripted television, shot on sets, with union actors and crew, and actual production values. Not a Flash video you made on your laptop, not a talk show with two guys in chairs, not a kitten playing piano. I’m talking Lost, House, Burn Notice, The Pacific, Battlestar Galactica. (Although, even reality fare like Top Chef isn’t necessarily cheap to produce.)

Analyst Dan Rayburn said, “Sorry, Video Content Can’t Be Free.” Masnick then replied that Rayburn “appears to be wholly unfamiliar with network TV,” since “advertisers have always paid the freight” in that business.

Again, we have to stop right there, because this is an important point. The history of broadcasting (first radio, then television) goes back almost a century. The business model was that the networks would sell advertising time, based on audience size. A popular show reaches a lot of people and becomes an efficient way for advertisers to reach customers.

But back in the old days, from the Fifties up to the Eighties, the broadcast television networks were the only game in town. There was only CBS, NBC and ABC, plus the independents in some markets.

Cable was able to build a business appealing to niche audiences, but it required a dual revenue stream, to offset the fact that any one cable network doesn’t generally attract as large an audience as a broadcast network might (Although on occasion, cable programs get broadcast-level ratings, such as here, here and here) . This business model has enabled cable to create quality programming that’s won both accolades and viewers (See this post from 2008).

When Masnick accuses the cable industry of “trying to turn the internet into cable TV with extra ads,” he’s ignoring the issue of the dual revenue stream. Or when he says, that TV Everywhere is designed “to keep you from cutting the cord from the cable company,” he’s failing to answer the question of how big television productions will recover their costs.

If an Internet outlet – such as Hulu, YouTube or Revision3 – could attract the viewership of broadcast or cable television that might be a different story. For example, as per Variety, last week’s episode of The Office garnered 7.2 million viewers, while Grey’s Anatomy got 11.4 million. What is the Internet content that hits these levels on a consistent basis?

According to NewTeeVee, “Three million people used the March Madness On Demand video player to catch the first round of the NCAA Men’s College Basketball Championship online” on March 18. Variety reports that last Thursday’s televised “tournament coverage [had] 11.1 million viewers overall.”

Masnick clearly thinks that the old broadcast television model proves that you can give video away for free and make money. And he doesn’t understand why the programmers don’t just do it. As he recently tweeted: “basic economic: if by giving away the content, you can increase the pie and put in place a better biz model, why not do it?”

So, let’s say that you could get those viewership levels online. Let’s also forget that giving away content for free, without realizing significant revenue from that distribution outlet, reduces the value of your other platforms. (Ask the newspaper industry about this strategy.)

As Mark Cuban recently argued (and I reported here), the Internet offers so many options you will incur significant marketing expenses in order to stand out. As he put it, “In an a la carte world, you’re one of zillions. Marketing is expensive.”

Things will likely change over time. But I don’t think Masnick wins this argument right now.

But I’m going to come right out and say it: The Atlantic‘s Max Fisher has written one of the most uninformed articles I’ve ever seen on the cable industry. (It feels like he has inserted a vague reference to the just-released National Broadband Plan to increase his likelihood of getting page views.)

His thesis is “Cable TV Is Doomed,” which is fine. One could make a rational case that other competitors will eventually overtake cable or you could argue that consumers will eventually seek other entertainment choices over television. But I got as far as the second paragraph before the thing fell apart.

Cable TV was always a bad model for the consumer because, in a sense, you’re paying twice. When you watch The Daily Show, for example, you pay the cable company to bring Comedy Central’s programming into your home. But you also contribute to Comedy Central’s bottom line by watching its ads. However, the Internet allows you to connect directly to Comedy Central without the cable company go-between. You only pay once — either with your eyeballs on ComedyCentral.com, or with your wallet on iTunes. (Sure, you have to pay for Internet access, but if you consider it a necessary utility rather than an optional luxury, as the FCC’s national broadband plan clearly does, then that cost is incidental. That is, access to streaming TV shows isn’t the primary reason you buy Internet access. It’s a bonus.)

For thirty years, cable (and, more recently, satellite and telco providers) has been based on a dual revenue model. Currently, just over 100 million Americans are making a conscious choice every month to subscribe.  And the evidence shows that subscriptions keep increasing (300,000 new multichannel video subscribers were added in the last quarter) and the number of hours that people watch cable programming continues to climb.

Broadcasting is, by definition, “broad.” It reaches a lot of people and makes money from advertising, but now even broadcasters are looking at generating revenue from distributors since the ad market has been suffering.

Cable programmers are able to target niche audiences and collect carriage fees from operators for the distribution rights and advertising for delivering desirable viewers. Without the advertising, consumers would have to pay a larger fee for access. If a programmer went ad-free, (a few basic cable nets don’t have advertising) it would be tougher to produce compelling new content. Fisher seems to see this as some sort of scam, but then he goes on to immediately note that you don’t really get Internet content for free either, since you’ll first have to pay for broadband access.

Fisher thinks that Hulu (ad-supported) and iTunes (which he calls a form of “micro-payment,” which it isn’t) are “more cost-effective,” because you only pay for what you watch. Of course, content on Hulu has already made its money elsewhere and is being offered on a secondary basis; even with that, Hulu is not proving to be profitable and the company has already indicated it is considering moving to a subscription model. And as for iTunes, I recently pointed out on this blog, that you might pay $40 for a season of a single cable program. Fisher buries down in a footnote this admission: “Five hours of TV a day multiplied by $2 per hour-long show would means $300 a month on cable. That’s too much.”

But back to the programmers’ dual revenue approach. That’s how they can afford to produce the programming. Fisher says that the goal is to eliminate the “cable-bill middle-man,” and instead pay Hulu a subscription fee. But Hulu would then have to turn around and pay the programmer a fee for distribution rights and you end right back up with the cable model.

Mari Silbey at the MediaExperiences2Go blog addressed the issue that it’s a lot easier for cable operators to add Internet content than for over-the-top video providers (such as Hulu) to add “a full slate of premium TV content to their services.” She also hits the other key point: the “model is moving toward IP (not Internet) delivery.” A cable operator could use Internet Protocol to move the bits that make up your favorite TV show; that’s not the same as Internet content. What makes the difference between services like Hulu & iTunes versus cable is about what content you can offer. You either have to produce the content yourself or you have to be willing to pay for it.

Take a look back at my write-up of the Cuban-Ronen debate. You might also want to take a look at an article Fisher’s own Atlantic colleague Derek Thompson, who made the case against paying for individual shows.

I’m happy to discuss the future of video entertainment and how it will reach the home in the future. But the sticking point is almost always in how to recover the production costs.

(Even Lauren Weinstein, at the Network Neutrality Squad forum, acknowledges that “the concept of purely ‘a la carte’ programming (regardless of the delivery mechanism) carries with it the risk of a ‘race to the bottom’ of lowest common denominator programming that will appeal to the most people.”)

Consequently, I have a knee-jerk visceral reaction when I read things like this: “I’m thinking something bigger — like tens of thousands, maybe hundreds of thousands, or even millions of customers canceling their subscriptions or deciding not to pay their cable bill, meanwhile educating each other on how to find other ways to get the same programming.”

But you can’t duplicate your cable line-up online for free. Not yet. And I have difficulty seeing a future in which you will.

The three month, multi-media campaign titled “The Video Store Just Moved In” will shine a spotlight on the burgeoning movie on demand category, according to operator and studio executives. The campaign… will focus on the fun and ease of ordering and watching top theatrical movies at home as compared to trudging out to rent movies from the local home video store, according to campaign officials.

Developed in association with CTAM, operators participating in the campaign include Armstrong, Bend Broadband, Bright House Networks, iO TV, Comcast, Cox, Insight and Time Warner Cable. Studio partners include 20th Century Fox, Focus Features, Lionsgate, Rogue, Sony Pictures Entertainment, Summit Entertainment, Universal Pictures and Warner Bros Entertainment, Inc.

In an odd bit of timing, I was reading Edward Jay Epstein’s 2005 book The Big Picture, which looks at the modern film business and how it got to where it is. The section on Steve Ross, who built Time Warner, had some relevant background.

To Ross, cable was much more than an alternative to broadcast television. For one thing, since there was room on cable for hundreds of different channels, it offered the potential for creating cable networks that segregated audiences by their particular interests for advertisers…

Another major application of cable, in Ross’s view, was as a means of delivering Warner Bros.’ movies into homes. When he had first been briefed by Warner Bros. executives about the plan to sell his company’s films to independent video stores… he shook his head in disbelief… He asked: “Can we really expect millions of busy people to get in their car, drive to a store, pick out a movie, stand in line, fill out a rental agreement, pay a deposit, drive home, play it on their VCR, and then, the next day, repeat the procedure in reverse to return it?” …he saw video rentals as a stopgap measure.

Ross saw the cable system he was assembling piece by piece as a far more efficient way of delivering films into homes on demand… Unlike over-the-air (including satellite) broadcasting, cable wiring could be used to send as well as receive signals. it could allow viewers, while watching programming on one channel, to signal back on another channel by clicking on their remote controls.

Of course, home video rental did become a big business, for a time, but that time may have passed. At the VideoNuze blog, Will Richmond noted:

Aside from whatever else can be said about Blockbuster in recent years – vast over-expansion, poor financial management, slowness to respond to new competitors like Netflix and Redbox – the company’s potential bankruptcy is surely one of the most vivid reminders of how much the movie rental industry has changed in the last 10 years and how much it is yet to change in the next 10 years. Blockbuster will likely be remembered as a temporary player that drove wider movie access in the analog era, but then got crushed as rentals shifted in the digital era.

It’s a reminder that cable technology, originally built just to retransmit broadcast signals to consumers, has moved way beyond that.

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.]