The week started off Monday morning with this article – “In the Living Room, Hooked on Pay TV” – by Matt Richtel and Brian Stelter in the New York Times.

The proliferation of Internet video has led to much talk of “cord-cutting” — a term that has come to mean canceling traditional pay TV and replacing it with programming from a grab bag of online sources.

But so far Americans are not doing this in any meaningful numbers. “Nor is there any evidence of it emerging in the near future,” said Bruce Leichtman, the president of Leichtman Research Group, which studies consumer media habits.

Good news for cable. But the next day, SNL Kagan reported that the 2Q numbers for paid TV subscriptions fell for the first time ever. Kagan attributes the downturn to the weak housing market and high unemployment (plus the loss of customers who had initially signed up during the DTV transition).

NewTeeVee reported this as “New Numbers Reveal: Cord Cutting Is Real,” despite including cautionary quotes from SNL Kagan analyst Mariam Rondeli. Then, NewTeeVee’s Ryan Lawler claimed “The Future of TV Is Not on Cable.” (There was also this disappointing NPR story.)

It’s important to look at these numbers in context:

• Second quarter subscriptions dip every year, as students go home from school and “snow birds” close up their winter homes.
• The Multichannel Video Programming Distributor (MVPD) market is quite mature and penetration is high. Most households that want multichannel video service have already subscribed.
• Some former over-the-air households, who had long held out on getting cable, took advantage of deals offered during the DTV transition of 2009 to become multichannel customers, but as those deals expired, they’ve cancelled. While looking like a group of disconnects, it’s more representative of people that resisted such services before and are now going back to their old ways.
• Total housing units were essentially stagnant for the previous five quarters (from Dec. ‘08 to March ‘10). Even so, over the last six quarters, the number of MVPD subscription additions (+2.1 million) have outpaced additions to housing units (+0.3 million) by 6.5 times. But a weak economy is having an effect. Even Karl Bode, in a post that said “Cord Cutters Are Very Real,” admitted that “it’s being driven primarily by the economy.”

A Merrill Lynch report on the 2Q numbers pointed out that the Netflix platform is growing (available on Xbox 360, PS3, Wii, and many Blu-ray players) and Hulu engagement is now up to 2.6 hours, but that Nielsen says that “American [households] are watching more TV than ever before,” up to eight hours a day (with that figure rising each year).

As if to put the icing on the cake, Wednesday brought a Bloomberg story that reported that Apple was looking to introduce 99-cent rentals of television shows. Some interpreted this as a threat to cable and the advent of true “à la carte.”

Jason Perlow at ZDNet ran some numbers to see if such a “pay as you go” approach makes financial sense (also see the analysis at GigaOM).

Previously, TechnoBuffalo noted that 99-cent rentals might not make much sense; last week, they pointed out that $40 per month for 70+ channels comes to less than $1 per channel.

So now Apple wants to charge you $1 per episode of any particular show?  Remember it’s a rental and if Bloomberg is correct, it’s only yours for 48 hours.  Pff.

Joe Flint notes some other causes of skepticism, including the critical point that “content providers need to make sure that their eagerness to embrace the future doesn’t undercut the present because if it does, there won’t be a future to embrace.” Robert McGarvey at Internet Evolution also said it might be a little too early to declare Apple’s victory.

It’s worth pointing out that 2Q reports also showed that cable took all of the net adds for broadband service. You have to connect to the Internet to get that streaming video. And Joel Johnson at Gizmodo answered the question “Why Are You Still Subscribing to Cable Television?” with some pretty good reasons to not cut the cord. Plus, some have noted that in tough economic times, cable can provide great entertainment value.

We’ll continue to see consumer have more choices for ways to enjoy video content both in and out of the home.  But it’s clear that cable’s video service is a viable choice for many.

I don’t want to come across like I don’t think that over-the-top video services are great for consumers. I’m a consumer and I love ‘em. So, I wanted to point a few cool things you can see via online video.

Hulu is known primarily for its ability to catch up on the last few episodes of TV series, primarily from broadcast television. But did you know you can also watch movies?

If you like documentaries, there’s Dig!, a profile of the amusing friendship/rivalry between the bands The Brian Jonestown Massacre and The Dandy Warhols, and Big Rig, Doug Pray’s artful look at the world of long-haul truck drivers. If you enjoy Samurai cinema, check out the Zatoichi: The Blind Swordsman series (26 films were made from 1962 to 1989, plus a TV series); you can start with The Tale of Zatoichi. For comedy, revisit Mystery Science Theater 3000 or watch An American Werewolf in London for scary laughs.

If you do want to watch TV, you are strongly urged to check out the British series Spaced, with Simon Pegg and Nick Frost, plus director Edgar Wright, known from Shaun of the Dead; Jessica Hynes stars with Pegg and the two created the program. Hulu has all the episodes.

I’ve written many times about the assertion that Netflix is a perfect substitute for cable service, which doesn’t make sense. Netflix’s Watch Instantly feature is limited in its offerings, but it has a lot of excellent films tucked away in dark corners.

The Swedish version of The Girl with the Dragon Tattoo has recently become available and it’s a great adaptation of the popular book. If you like foreign movies, there’s also Costa-Gavras’ classic thriller Z, Jean Renoir’s 1939 film The Rules of the Game, the soon-to-be-remade vampire film Let the Right One In, and the gritty immigrant drama Entre Nos. For documentaries, there’s the Oscar-winning Man on Wire, The King of Kong (a hilarious look at competitive arcade gamers) and It Might Get Loud (a look at electric guitarists Jimmy Page, The Edge and Jack White).

For TV, you can catch up on all three seasons of Veronica Mars and all the seasons of Lost.

As for pure Internet content, I’ve been feeling really bad lately about not watching more of Felicia Day’s Web series The Guild, a comedy about online gamers, since the bits I’ve seen are so funny. On the other hand, I’ve become a regular viewer of Kevin Pollak’s Chat Show. Pollak has described his show as “Charlie Rose with a sense of humor” and that’s a good way to put it. As I said on my pop culture blog, it’s refreshing to see lengthy meaningful conversation. There are various ways to stream shows like these to your TV, such as through Xbox LIVE, PS3, TiVo, or the forthcoming Boxee Box.

With all these options, why still subscribe to cable? Well, I have an HD set and I like to watch hi-def programming, whether live or through VOD. Much as I enjoy streaming Netflix, the movies just aren’t as crisp and clear. This is also true of  the Internet content I watch on my TV.

With these cord-cutting options, my viewing choices are limited. I want to be able to watch news, when it happens, on the big screen. There are a number of cable programs I can’t get online. With my subscription to premium services, I get access to a lot of fairly recent theatrical films.

With my cable service, I’m also getting broadband, which enables me to get all this additional content. Even if I was inclined to “cut the cord,” I’d still need cable to get to the Internet.

With all these new services, I need additional equipment to connect the video to my television (For example, I stream Netflix through my Wii and I use a Bose SoundDock to connect my iPod to the TV). That’s fine, but what about my second TV upstairs?

Bottom line: I find the two to be complementary. They’re both useful, but my cable video service is still of value.

FINAL NOTE: I should point out that I’ve said before that any content producer needs to figure out how to recover productions costs and achieve profitability. I’ve also called attention to the news that Netflix (a distributor) is looking at having to spend more to get access to content and also noted that some video distributors have looked at moving from a free model to a subscription business. And I should note that if cable TV is a niche business, then Internet video is a super niche business.

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.

Today, I watch Hulu and I stream Netflix, but I mostly watch cable TV, whether live, from my DVR or via VOD.

Some observers claim that a huge change is happening, with a significant number of consumers opting out of the current multichannel video system entirely (a trend called “cord-cutting”). If that’s true, we should see a drop in subscriptions demonstrating this exodus, but it just isn’t happening.

Big Scary Numbers

Recently, two surveys along these lines received a lot of coverage. And the word “surveys” is important, because these reports compile a small sampling of consumers’ past and probable future behavior,  as opposed to actually measuring consumer behavior over time.

The Yankee Group study claimed that, over the next year, one out of eight consumers planned to “cut off their pay TV services and use their PCs, gaming consoles and other connected devices to access video programming instead.” (Here’s a write-up from DSLReports and a post from one of the study’s authors.)

[EDITOR’S NOTE #1: It’s important to note that the Yankee study actually says that customers will cut or reduce their service, which is an important distinction. Trimming back by eliminating a DVR or cutting a premium service is not the same as canceling.]

The Convergence Consulting Group said in a report that cord-cutting was having an impact on multichannel video subscriptions.

[For 2008 and 2009] almost 800,000 US households had cut their TV subscriptions (to rely solely on Online, Netflix, OTA [over-the-air broadcast], etc). We forecast cord cutters will grow to 1.6 million households by year-end 2011.

Since there were 99.9 million multichannel video subscriptions at year-end 2009, this would be  less than one percentage point of the base, but this TechCrunch post from April 13th made it sound like a big deal.  Just this week, Daisy Whitney’s New Media Minute focused on the Yankee Group claims, as did this Denver Post article. From two weeks ago, here’s an NPR report that quotes the Convergence numbers.

[EDITOR’S NOTE #2: The Convergence report notes that 2 million subscribers were added in 2009 (up from 1.46M for '08) and they predict 1.8M additional subs for 2010 and 1.65M for 2011. By their own math, 2.6 million new subs - 0.6 million cutting the cord = 2.0 million net new MVPD subs.]

(By the way, this Retrevo Pulse Report made similar cord-cutting claims, but didn’t seem to get quite the same coverage as the Yankee and Convergence reports.)

Where Is the Subscriber Migration?

This certainly sounds ominous. “One in 8 to cancel this year!” “Cord-cutting to double over two-year period!” Run for the hills!

NCTA recently held its annual conference, The Cable Show. That week, SNL Kagan released a new report that said that “more people are paying for TV” (about 100 million to be specific). Comcast CEO Brian Roberts scoffed at the idea of a massive cord-cutting trend.

The month of May also brought us the Q1 financial reports from multichannel video providers. They must be feeling the pinch, right? Even a little bit?

Ten of the 12 largest video providers are public companies which represent more than 91 percent of the marketplace collectively reported that 591,000 MVPD subscriptions were added in Q1. Occupied households only increased by 139,000 during this period, so the bulk of the increase in subs occurred within existing households.

These figures fluctuate over the course of the year. For example, Q2 traditionally shows a dip, as students leave college for home and snowbirds cancel their temporary subscriptions. Looking at last year, SNL Kagan showed an increase of 1.8 million MVPD subscriptions in 2009. Kagan also said that 500,000 subscriptions were added in 2008 and nearly 2 million subscriptions were added in 2007.

If accurate, Yankee’s “1 in 8” prediction would mean that 12.5 million subscriptions would need to be canceled by next April (Although, this forecast includes service reductions, not just outright cancellations). If nothing else, I guess they’ll still be able to yell, “April Fools!”

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.]

It’s not a question of whether more television content will move to the Internet or whether IP transport will be used more in the future for video distribution. It’s two questions:

a) Are a lot of people canceling their cable subscriptions for cord-cutting alternatives?

b) Can you replace your cable subscription through online video?

In a previous post I attempted to answer these questions, but it’s quite simple: a) No. b) No.

This debate does show that consumers have more choices than ever before, which one would hope can finally put to an end to the view that insufficient competition exists. I might argue that cable subscriptions provide the best combination of services and value, but those who don’t agree clearly have many other options.

This week also brought two new pieces of evidence which tend to support the subscription model, one scientific in nature and one anecdotal.

Parks Associates released the All Eyes on Video study, which looks at “consumer use of and interest in video experiences.” From this WorldScreen.com article, the report found that “Less than 8 percent of U.S. broadband homes — about 5.5 million homes — are considering canceling their pay-TV subscriptions in favor of online video…”  This Broadband TV News article reports the profile of these consumers.

The households likely to switch or cancel their services watch a whopping 10 hours of online video each week, much higher than typical video consumers. They express strong interest in having online access to pay-TV channels (e.g., TV Everywhere), which highlights an opportunity for traditional pay-TV providers to solidify their base through the deployment of such features. Offline video consumption is also higher. Their median number of DVD rentals from the last six months is 18, compared to two rentals among other households.

Janko Roettgers, in this NewTeeVee post, thinks that the real winners will be DVD rental services like Netflix and Redbox, although it’s worth noting that the DVD business is going through its own problems right now and Netflix does not yet have a deep catalog of content that can be watched online through its Watch Instantly feature.

The Business Insider‘s Dan Frommer quite famously cut the cord on cable, as noted as recently as this December 2009 article on the proposed Comcast-NBC deal:

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.

And here was the title of a Frommer post yesterday: Why I Caved, Bought Cable TV, And Gave Up On My ‘Hulu Household’. Read it for yourself, but you’ll find many of the issues I’ve discussed here before; high-definition television, live sporting events and the costs of high-quality TV productions all play a role.

Final note: I draw your attention to this Mari Silbey tweet from Monday. Roku, frequently mentioned as one of those great alternatives to subscribing to cable, has recently talked about how subscriptions will play a greater role going forward. In fact, they’re “looking to line up at least 100 content partners this year.”

Mari tweeted, “I’m sorry, but does no one else see the irony of Roku’s plans to bundle free hardware with subscription content? It’s called a cable set-top.”

The more things change…

On this blog, I have many times written about so-called “cord cutters” – people who have canceled their cable subscription in order receive movies and television shows over the Internet. CES was filled with talk of Netflix’s deal with Warner Bros, the Boxee box, the introduction of VUDU Apps, and more. Sessions with titles like Rethinking the Future of Creative Works and Defining Internet TV focused on emerging models for the distribution of content.

What struck me at CES – as I have also been reading in the blogosphere and the mainstream press for over a year – is that we’re moving away from the current model, where 85% of U.S. households get video through a Multichannel Video Distributor, to a new disintermediated world, where you’ll get content over the Internet directly from content creators. To hear some talk about it, the current model is a dinosaur and the sooner that the cable industry can figure that out and move on, the better.

But let’s note again that 85% of U.S. households get their television from cable, DBS (DirecTV & DISH) or from the phone companies (AT&T’s U-verse & Verizon’s FiOS). In December, NewTeeVee noted that Nielsen reports that “99 percent of video is watched on a TV in the U.S.”

Americans spent 129 hours and 16 minutes per month watching TV in the latest 3-month period, seven hours and 12 minutes watching time-shifted TV, and three hours and 24 minutes watching online video.

Things will undoubtedly change. But what might account for everyone not rushing to cancel their cable today?

One possible answer can be found by looking at the example of noted blogger Ben Drawbaugh. I don’t mean to pick on him, because he’s a nice guy, but when I last wrote about cord-cutting in December, he posted this comment:

For the most part I agree with the premise of your post, the notion that more than a small percentage of people will cut the cord and use legit streaming services is just crazy.

That being said, I do cancel my cable service in January and don’t feel the need to add it back until August. So yes, I pay $50 a month to Verizon to watch ESPN and the NFL Network — because college and pro football is worth $50 a month to me — but the rest of the crap on cable can wait. What I mean is that instead I subscribe to Netflix and wait another 5 months for Netflix to mail the first Burn Notice Disc to me. So in other words, Discs and OTA HD have everything I need for much less money.

Fair enough.

This week, though, Drawbuagh wrote a post entitled, “Canceling cable: the failed experiment.” He says that he needs to a subscription for work purposes, since he writes about cable technologies. Then, he says this:

The bottom line is that I love me some football in HD, so I can’t ever see myself going without cable year round, and with the hassle involved in canceling and signing back up, the $327 a year ($62 for 7 months minus $110 savings for signing a contract) I’d save just isn’t worth it… I suspect for many it just isn’t worth it either. Sure there is lots of content out there available via other legal means, but the bottom line is that when it comes down to it, cable really isn’t that bad of a deal considering all the HD viewing options you get for the price.

As I’ve said before, cord-cutting proponents love to suggest or outright claim that you can substitute online video for cable service, but there is much you can’t get online. One of those big categories is sports.

The Return of the Subscription Model

But all this discussion may be for naught, because some new developments suggest that online video may be moving to a subscription model anyway, which puts us right back where we are today. Hulu may soon be charging a subscription fee for some of its content, as may Boxee. Brian Barrett at Gizmodo added up the numbers for your access to even get online, plus the subscription for services like Netflix, and concluded that you might end up paying “hundreds of dollars a month,” perhaps “nearly $1,000 a month.” Nicholas Carr, in a colorfully-titled post, also looks at the numbers and asks, “Now somebody remind me how we all came to think that information wants to be free.”

And yet, on that previously mentioned Rethinking the Future of Creative Works panel, the speakers couldn’t think of what the role of service providers (such as cable operators) might be in our connected future. The panel didn’t really answer an audience question on how all the content will be paid for. They didn’t really answer a question on why service providers would invest in infrastructure.

On another panel, Mitch Berman of ZillionTV said that claims that production values for movies and TV won’t be there without subscription model are overblown. On an FCC panel, Commissioner Robert M. McDowell reminded us that quality content costs money and that right now, the ways to cover those costs are through advertising or subscriptions. Even the NY Times has now announced a new plan to require some sort of subscription.

So, we may be moving to a Bright New Future a little more slowly than some are claiming. And it may be that subscriptions serve a purpose after all.

Time will tell.

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.

• Can you really replace your cable service with just online video?
• At the present time, is this really a widespread phenomenon?

On Tuesday, when I addressed that first question, I came to the conclusion that it would be difficult to replace all the programming accessible through multichannel video by just relying on online sources. Now it’s time to look at the second point. As I suggested previously, it’s helpful to read our previous posts on cord-cutting:

• The Roles of TV and the Internet
• More Cord-cutting Coverage
• Should All Content Be Online for Free?
• Are Stories of Cable “Cord Cutting” a Myth?

How Significant Is the Phenomenon?

In my last post, I noted that the perception is that tons of television content are available for free online, but the reality is that this is not completely true for cable programming. It’s also true that, in some circles, there is a perception of large numbers of consumers fleeing cable (e.g., “Cord cutters flocking to online TV at the expense of cable“), but the reality is quite different.

Yesterday, CTAM released a new study entitled Crossing Over: Understanding Viewer Multi-Screen Migration, based on research conducted by The Nielsen Company. The media release for the study says, “The study identified eight distinct broadband user segments, determined by their levels of engagement with video content across TV, online and mobile platforms, the devices they used to consume content and their motivations for and attitudes toward using multiple platforms. ” About 8% of broadband users are identified as belonged to the group “Extreme Techies;” these people are identified as technology innovators and are the most advanced group in their consumption of online video.

How much do the Extreme Techies watch online? As noted in this Hollywood Reporter article on the study, they watch “up to 91 minutes (1.5 hours) per week, compared to the mean of 44 minutes.” That’s it. Overall, 58% of TV viewing time is spent regularly scheduled programming on a television; 20% through use of a DVR; and 6% for online video.

You might think that really young people would skew differently, but a recent survey conducted by analyst Bruce Leichtman found otherwise:

In a nationwide survey of 1,250 broadband households and separate sample group of 250 teens aged 12 to 17, Leichtman found that only 8% of respondents watch repurposed TV shows online, compared to 24% that watch news clips, 20% who view user-generated clips on YouTube and 15% that watch sports news or highlights.

The title of Leichtman’s report? The Phenomenon That Isn’t.

You might have also read about a recent Nielsen Three Screen Report shows that people are still watching TV, on a television set. Or you can check out this SNL Kagan chart on video subscriptions and notice that there doesn’t seem to be a significant decline in people subscribing to cable service. There was a Craig Moffett report written in February that said, “The Fourth Quarter of 2008 may someday be remembered as the quarter when video cord cutting… didn’t happen.” Or you might use your common sense and notice that we live in a time when sales of big-screen hi-def TVs and HD content is on the rise. You might then ask why you’d want to watch all your video on a laptop or a 24″ computer monitor instead of on a high-definition television.

And yet there was also a WSJ story yesterday: More Households Cut the Cord on Cable.

Quote One:

In what’s shaping up as the home-entertainment equivalent of severing a landline phone service, more people are joining the ranks of “cord cutters” by forgoing cable subscriptions that can run $60 or more a month.

Quote Two:

The number of cable cutters remains too small to threaten the pay-television industry.

Quote Three:

Those who end up cutting the cord do pay a price in entertainment. Pay-TV services, like cable and satellite, still carry more live events, TV shows, movies and other content for viewers to watch than what’s available online. Web TV also doesn’t offer as much high-definition content as pay TV… Some would-be cable cutters have pulled back at the last minute, in part because live events like sports are hard to find online.

I think Will Richmond summed it up nicely in the title of a recent blog post: Video Behavior Changes Suggest “Evolution,” Not “Revolution” For Now.

As I mentioned last time, online video is a wonderful thing. If you only watch broadcast TV or if you only watch a few shows, then cord-cutting may be the perfect solution for you. Otherwise, it seems more like a complement to some kind of multichannel video subscription. For robust delivery of high-quality programming to a lot of simultaneous viewers, cable is hard to beat.

For more on this issue, see recent articles from Aaron Barnhart (“Cord-cutting is an urban legend … for now“) and Carol Wilson (“Cable cord cutting debate rages on“).

But if you take the news coverage and blog posts about the “cord-cutting” phenomenon at face value, you would have the impression that this is a widespread phenomenon involving millions of consumers canceling their multichannel video subscriptions in favor of online distribution. I certainly think the issue of online video is worthy of examination, but these articles on cord-cutting seem predicated on two arguments:

• You can easily replace your multichannel video subscription by going online.
• Significant numbers of people are choosing to “cut the cord.”

I thought it would be useful to address this issue again, but this time to split the topic in to two parts. Today, I’ll look at the content portion of cord-cutting.

I also think, before I go any further, I ought to link to our previous posts on this topic:

• The Roles of TV and the Internet
• More Cord-cutting Coverage
• Should All Content Be Online for Free?
• Are Stories of Cable “Cord Cutting” a Myth?

Is Everything Online?

In online circles, there is the impression that almost anything can be found through the Internet. The Library of Congress is “the largest library in the world, with millions of books, recordings, photographs, maps and manuscripts in its collections.” Only a fraction of that material can be found online. The same is true for TV content.

I love online video. I catch up on episodes I miss, do time-shifting while traveling, check out shows that friends recommend. But, there’s an important distinction to be made here: If you’re talking about TV shows streamed free online, that category largely consists of over-the-air broadcast programming from networks like ABC, CBS, NBC, and FOX. (For some reason, The Big Bang Theory is MIA. What up?) Some cable networks do offer some shows online. But not nearly as much as broadcasters do, as noted in this recent Washington Post article on cord-cutting:

Thanks to dozens of videocasting Web sites, such as Hulu, TV.com, Joost and Fancast, full-length episodes of more than 90 percent of the shows carried by the major broadcast networks are legally accessible within a day of being broadcast, according to Forrester Research (only about 20 percent of what’s on cable is similarly available). [emphasis added]

Let’s say I want to watch news. On my way to work, I’ll watch the previous evening’s Countdown and The Rachel Maddow Show on my iPod. But suppose there’s a breaking news story? You can’t watch live streaming cable news. I don’t care about sports, so it doesn’t matter to me that you can’t watch sports programming online. And while some cable programming can be found online, much cannot.

So, the perception is that tons of television content is available for free online, but the reality is that this is not completely true for cable programming. The extra irony is that since the 2001/2002 TV season, the ratings for cable networks have topped those of all national broadcast networks collectively. For the ‘07/’08 season, U.S. homes spent an average of 38.6 hours per week – on a total day basis – tuned in to ad-supported cable networks compared to 26.7 hours per week for all commercial broadcast sources combined.

So, the programming available through broadcast television, with viewership that has been steadily declining over the last 15 years, is freely available online. The programming of cable television, whose viewership has been on the rise for that same period? Not so much.

Why Isn’t All TV Online?

Once you’ve addressed the question “Is all video online?,” you then have to ask, “Why isn’t it all online?” You might take a look at this Online Media Daily article or my recent post on the issue: A Lively Debate About Online Video. But the short answer is that there’s currently a specific business model for cable programming. Most cable networks have a dual revenue stream from advertising and from subscriptions. Right now, although companies are experimenting, moving all their video online for free doesn’t seem to make economic sense.

James Ledbetter accurately addressed the central problem in a recent column: Call It Free, But It Will Cost You:

The problem is that — outside of a handful of examples, almost all of which are Internet- or digital-based — giving things away does not work in any significant way. Here’s why: Just about any activity that merits the title “business” has a cost of producing its goods or services… Businesses need to recover labor and capital costs, and giving things away for free doesn’t meet that need.

Ledbetter talks about how this applies to the business of law or oil, but the television industry absolutely needs to recoup productions costs.

It seems to me that a key factor in cable’s success has long been our original programming. SpongeBob SquarePants, Iron Chef America, Hannah Montana, SportsCenter, The Closer, or Burn Notice – people love cable shows. Those shows cost money to produce; if the revenue for those shows decreases, then their existence may be threatened.

There’s a lot of original video available online and some it is quite good. But where are the online shows that have the quality of these cable shows? It’s not because of talent; it’s a question of how you pay for such programs. To quote again from the Post article:

…there are significant financial questions about whether “free” online video can ever become a viable business. One problem: TV shows that migrate online carry fewer commercials — often no more than two minutes of ads per half-hour program, compared with eight minutes on conventional TV. While the research company eMarketer.com predicts that online video sponsorship will grow 44 percent to $850 million this year, that’s still a tiny fraction of the $70 billion spent on cable and broadcast TV ads in 2008.

And a recent Daisy Whitney column discussed how digital studios that produce online video are struggling with the economic reality that “There’s just not enough money to go around on the Web.”

Some people seem to prefer to see cable operators as hostile to over-the-top online video. NCTA’s President & CEO Kyle McSlarrow recently addressed this point on this very blog:

…it is somewhat tiresome to have Free Press repeatedly assert that every effort by network providers to examine any new approach or idea in our or related industries is somehow designed to protect against the supposed “threat” of “Internet video.” This is so stale, and so at odds with the facts, that it really should not be necessary to point out the obvious:

• Over the last few years, the use of broadband connections to view Internet video has grown at a faster rate than any other application. According to one estimate, traffic generated by YouTube video in 2008 alone was more than the sum of traffic crossing the Internet backbone in 2000.
• Far from fearing online video, our industry is courting and exploring partnerships to bring Internet video to the television screen;
• Our industry has worked – and continues to work – cooperatively with consumer electronics manufacturers to ensure TVs can receive Internet video by building in the necessary ports;
• Our industry is the largest provider of broadband in America, and we view the health and growth of the Internet ecosystem as fundamental to our success, which means the applications and services on the Internet must thrive too;
• Our industry is aggressively deploying next generation broadband across America in order to enable, not restrict, new applications.

This analysis, of course, refers to current business models. Even now, the cable industry is experimenting with methods of offering cable programming online to subscribers, and things may change even further in the future. In my next post, I’ll examine whether people are really cutting the cord in significant numbers. [ed. note: the follow-up is here.]