Last night, 60 Minutes featured an interview with Conan O’Brien. From the transcript:

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.

I don’t like to single out people for criticism. But Techdirt’s Mike Masnick is a high-profile tech blogger, he attracts a lot of traffic and he’s written a lot over the years about how content should be distributed online (For example, see here).

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.

Here at Cable Tech Talk, I generally try to keep it civil. I believe in a discourse based on facts, not emotion. I think that the best ideas win.

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.

You might have read news coverage this week that the motion picture studios and cable companies are joining forces to “launch a $30 million marketing and promotion campaign touting the virtues of movies on demand” (See Multichannel News:” “Studios, Operators Team To Promote Movies On Demand“).

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.

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.]