Free Video Content and Cutting the Cord

The intersection of television and the Internet is quite interesting.  It has Hollywood shivering, fearing that its industry is going to head the way of the record industry; it has technology entrepreneurs giddy, excited by the prospect of using Internet-connected TVs to disrupt content providers by providing free video content; it spells trouble for cable providers; and it reads opportunity for streaming video services.

Here are a few great articles and thoughts on why this “inevitable” switch to free video content might not happen so quickly (or at all), and how Netflix is evolving to become a potential threat to cable operators, while at the same time it’s a slave to the very cable firms that it is disrupting.

First, Bill Gurley, a partner at the venture capital firm Benchmark Capital, throws a bucket of ice water on the idealized view held by some entrepreneurs, who, as Bill eloquently puts it, believe:

“The argument goes something like this: There is nothing Hollywood can do to stop this train. The problem, you see, is that technology is merciless, impersonal, and unforgiving. Video can be turned into bits; Moore’s Law will make a pile of bits smaller and smaller over time; and efforts to erect pay walls will prove fruitless and even Quixotic. Studio heads should simply throw in the towel now and take what’s coming to them. Denial equals delay, and delay costs you time away from learning how to execute within your new constraints. All content will be free, and you simply have to live with that fact. The sooner you get in touch with it the sooner you will learn to execute in the new reality.”

Bill points out 32 billion reasons why content providers aren’t going to give away their content for free: $32B worth of annual affiliate fees paid by cable companies to content providers.  If you want a great look at the innerworkings of the cable TV industry, read Bill’s whole article (here).

Second, and more recently, Mark Cuban has chimed in, providing his view on why he believes Google TV may be handing the online streaming video market to Netflix.  Guess what, again, the discussion revolves around paying fees to content providers.  Far from viewers getting all content for free, they will now be paying for it in other forms: 1) a Netflix subscription, and (or) 2) increased Internet bills.  Under this scenario Netflix is starting to look more like a cable company, charging a subscription fee and relaying a portion of it to content providers in the form of an affiliate fee.  To read Cuban’s full perspective, here is his article.

Next, NewTeeVee, a GigaOM network blog, has also chimed in, taking the notion of Netflix as a cable company one step further.  It suggests that even as Netflix becomes a cable provider, it will be beholden to the very competitors that it is usurping.  NewTeeVee notes a study by Sandvine, which observes that 20% of the peak-hour U.S. bandwidth is being used by Netflix’s streaming service.  This figure is stunning; and it’s a sign of things to come.  As Netflix becomes an increasingly better substitute, it will begin to pose a greater threat to cable providers for two reasons.  First, if more people cut the cord in favor of Netflix’s streaming service, cable companies will lose cable revenues.  Second, as customers switch to Netflix, data consumption is going to skyrocket.  This poses a capacity issue for service providers and reduces them to a dumb pipe.  So, how should cable companies counterbalance these two issues?  Tiered pricing.  This could get ugly for all involved (including the consumer).

Finally, today, Mark Cuban gave us one more thought on the topic.  If Google TV makes Netflix the cable company of Internet-connected TV, where is the opportunity?  Games. Mark puts forth the idea that the business of TV (the physical item that sits in our living rooms, not Hollywood) is to quash boredom, and that the second best item behind programming for killing time is none other than games.  Thus, Cuban argues that Google TV and Apple TV are in a unique position to enable massively multiplayer online games (MMOGs) via their developing platforms.  It would be interesting to see Zynga or another social game company seize this opportunity.