The Tennis Channel and ESPN have teamed up to offer live coverage of the US Open online. Not only is this a wonderful thing for consumers, but it also demonstrates just how easily content creators (including traditional television programming networks) can completely bypass cable companies, who once supposedly used their “bottleneck” power to act as “gatekeepers” over the content Americans could receive. If this was ever true, it certainly isn’t true in the era of Internet video!

The venture will, of course, be ad-supported. But just how much content such a  model can support will depend  heavily on whether Internet video programming distributors like this venture (or Hulu.com) will be able to personalize the ads shown on their videos based on the likely interests of users.  Ad industry observer David Hallerman has predicted that spending on behavioral advertising:

is projected to reach $1.1 billion in 2009 and $4.4 billion in 2012 [a quarter of U.S. display advertising].The prime mover behind this rapid increase will be the mainstream adoption of online video advertising, which will increasingly require targeting to make it cost-effective.

The problem isn’t just the expense involved in streaming online video, it’s that contextually targeting advertising (based on keywords) is easy when the content is text but far more difficult when the content is video.

So if you’re hoping to cut the cord to cable and save the expense of a monthly cable subscription, you’d better hope the privacy zealots don’t wipe out advertising model necessary to make Internet video a true substitute for traditional subscription video sources!

This ongoing series has focused on the growing substitutability of Internet-delivered video for traditional video distribution channels like cable and satellite.  YouTube has recently begun exploring adding traditional television programming to its staggering catalogue of mostly amateur-generated content.  

But now YouTube is going one step farther by exploring  the possibility of signing Hollywood professionals to produce “straight-to-YouTube” content:

The deal would underscore the ways that distribution models are evolving on the Internet. Already, some actors and other celebrities are creating their own content for the Web, bypassing the often arduous process of developing a program for a television network. The YouTube deal would give William Morris clients an ownership stake in the videos they create for the Web site.

This kind of deal would make Internet video even more of a substitute for traditional subscription channels—thus further eroding the existing rationale for regulating those channels.  

But what’s even most interesting about this development is that YouTube’s interest seems to be driven primarily by the possibility of reaping greater advertising revenues on such professional content than on its currently reaps from its vast, but relatively unprofitable, catalogue of user-generated content:  

YouTube’s audience is enormous; the measurement firm comScore reported that 100 million viewers in the United States visited the site in October. But, in part because of copyright concerns, the site does not place ads on or next to user-uploaded videos. As a result, it makes money from only a fraction of the videos on the site — the ones that are posted by its partners, including media companies like CBS and Universal Music. The company has shown interest in becoming a home for premium video in recent months by upgrading its video player and adding full-length episodes of television shows. But some major television networks and other media companies are still hesitant about showing their content on the site. The Warner Music Group’s videos were removed from the site last month in a dispute over pay for its content.

This ongoing series has explored the increasing ability of consumers to “cut the cord” to traditional video distributors (cable, satellite, etc.) and instead receive a mix of “television” programming and other forms of video programming over the Internet.  As I’ve argued, this change not only means lower monthly bills for those “early adopter” consumers who actually do “cut the cord”, but, in the coming years, a total revolution in the traditional system of content creation and distribution on which the FCC’s existing media regulatory regime is premised.   

This revolution has two key parts:

1. Conduits: The growing inventory—and  popularity—of sites such as Hulu, Amazon Unboxed and the XBox 360 Marketplace (or software such as Apple’s iTunes store), that allow users to view or download video content.  Drawing an analogy to the FCC’s term “Multichannel Video Programming Distibutor” or MVPD (cable, direct broadcast satellite, telco fiber, etc.), I’ve dubbed these sites “Internet Video Programming Distributors” or IVPDs.
2. Interface:  The hardware and software that allows users to display that content easily on a device of their choice, especially their home televisions.

While much of the conversation about “interface” has focused on special hardware that brings IVPD content to televisions through set-top boxes such as the Roku box or game consoles like the XBox 360, at least one company is making waves with a software solution.  From the NYT:

Boxee bills its software as a simple way to access multiple Internet video and music sites, and to bring them to a large monitor or television that one might be watching from a sofa across the room. Some of Boxee’s fans also think it is much more: a way to euthanize that costly $100-a-month cable or satellite connection. “Boxee has allowed me to replace cable with no remorse,” said Jef Holbrook, a 27-year-old actor in Columbus, Ga., who recently downloaded the Boxee software to the $600 Mac Mini he has connected to his television. “Most people my age would like to just pay for the channels they want, but cable refuses to give us that option. Services like Boxee, that allow users choice, are the future of television.” …. Boxee gives users a single interface to access all the photos, video and music on their hard drives, along with a wide range of television shows, movies and songs from sites like Hulu,Netflix, YouTube, CNN.com and CBS.com.

With 200,000 users thus far, Boxee is quickly taking off and made a big splash at CES this year.  Boxee may be a scrappy start-up but is founder realizes the revolutionary implications of his product:

Mr. Ronen also shared what he called his “politically incorrect” vision of how the Internet would upset the television business by giving people on-demand access to the array of Web content. “The challenge for the cable industry is how they grapple with the fact that this is in some way a substitution for some of the things they do,” he said.

The NYT rightly observes that, whether Boxee really takes off as the Next Big Thing, its success thus far is at least driving other “consumer electronics companies to move faster to bring the Internet to their devices.”  I suspect that what we’re seeing now is a “tipping point” on both sides of the business:  As IVPDs gain popularity and larger inventories, “interface” developers like Boxee (or others on the hardware side) will proliferate rapidly.

The venerable Economist magazine has made a hash of my research on the growth of the Internet, which examines the rich media technologies now flooding onto the Web and projects Internet traffic over the coming decade. This “exaflood” of new applications and services represents a bounty of new entertainment, education, and business applications that can drive productivity and economic growth across all our industries and the world economy.

But somehow,  The Economist was convinced that my research represents some “gloomy prophesy,” that I am “doom-mongering” about an Internet “overload” that could “crash” the Internet. Where does The Economist find any evidence for these silly charges?

In a series of reports, articles (here and here), and presentations around the globe — and in a long, detailed, nuanced, very pleasant interview with The Economist, in which I thought the reporter grasped the key points — I have consistently said the exaflood is an opportunity, an embarrassment of riches.

I’ve also said it will take a lot of investment in networks (both wired and wireless), data centers, and other cloud infrastructure to both drive and accommodate this exaflood. Some have questioned this rather mundane statement, but for the life of me I can’t figure out why they deny building this amazingly powerful global Internet might cost a good bit of money.

One critic of mine has said he thinks we might need to spend $5-10 billion on new Net infrastructure over the next five years. What? We already spend some $70 billion a year on all communications infrastructure in the U.S. with an ever greater portion of that going toward what we might consider the Net. Google invests more than $3 billion a year in its cloud infrastructure, Verizon is building a $25-billion fiber-to-the-home network, and AT&T is investing another $10 billion, just for starters. Over the last 10 years, the cable TV companies invested some $120 billion. And Microsoft just yesterday said its new cloud computing infrastructure will consist of 20 new “super data centers,” at $1 billion a piece.

I’m glad  The Economist quoted my line that “today’s networks are not remotely prepared to handle this exaflood.” Which is absolutely, unambiguously, uncontroversially true. Can you get all the HD video you want over your broadband connection today? Do all your remote applications work as fast as you’d like? Is your mobile phone and Wi-Fi access as widespread and flawless as you’d like? Do videos or applications always work instantly, without ever a hint of buffer or delay? Are today’s metro switches prepared for a jump from voice-over-IP to widespread high-resolution video conferencing? No, not even close.

But as we add capacity and robustness to many of these access networks, usage and traffic will surge, and the bottlenecks will shift to other parts of the Net. Core, edge, metro, access, data center — the architecture of the Net is ever-changing, with technologies and upgrades and investment happening in different spots at varying pace. This is not a debate about whether the Internet will “crash.” It’s a discussion about how the Net will evolve and grow, about what its capabilities and architecture will be, and about how much it will cost and how we will govern it, but mostly about how much it will yield in new innovation and economic growth.

The Economist and the myriad bloggers, who everyday try to kill some phantom catastrophe theory I do not recognize, are engaging in the old and very tedious practice of setting up digital straw men, which they then heroically strike down with a bold punch of the delete button. Ignoring the real issues and the real debate doesn’t take much effort, nor much thought.

In her latest column, Media Post media market guru Diane Mermigas wonders how long it will be before we see a traditional over-the-air (OTA) broadcast TV network (like ABC, NBC, CBS, or Fox) dump their old broadcast business altogether and just move all their properties to cable and satellite TV. And, in response to Mermigas, Cory Bergman of Lost Remote argues, as I did last week, “the real future of TV is not linear cable, but non-linear video delivered seamlessly via IP to multiple devices, including your TV set. But mass adoption of this approach is still several years away.”

Bergman is right. It would be foolish to think any traditional network is going to rely exclusively on IP-based distribution any time soon; they see it as more of a compliment (or another product window). But Mermigas may be on to something in predicting that broadcast networks may soon be looking to get out of the OTA television business altogether and essentially become “a glorified general entertainment cable network.”

The strain on their dysfunctional paradigm is emanating from a devastating recession and the ongoing digital revolution. Both are permanently altering the rules of play for the networks. A case can be made for at least one of the Big 4 broadcast networks emerging as a glorified general entertainment cable network within the next several years. The economic advantages: more steady ad revenues and consistent subscriber fees as content is distributed cross-platform. It would be a bold move that a free-spirited company such as News Corp. might already be contemplating for its Fox Broadcast TV Network, or NBC Universal for its peacock network. Industry analysts increasingly wonder how an independent CBS can prattle on under the crumbling old rules. In a world of exploding access and choices, the prime-time ratings (even with Live plus 3 configurations) spell diminishing returns. For Disney, ABC’s general entertainment status is on par with ESPN in sports; the new multi-platform model is in place except for formally moving the ABC TV Network to the cable side of the ledger.

Such a suggestion would have been considered outlandish even just a few years ago, but now it seems like it’s only a matter of time before one of the majors makes the jump to being a cable-exclusive “super-station.” It’s another sign of the radical metamorphosis underway in our modern media marketplace. Mermigas notes that “The most compelling argument for the Big 4 surviving as cable networks is economic”:

Digital distribution is a long way from yielding the financial returns needed to offset the dilution of old-line mainstream revenues. The vulnerability of the broadcast networks’ $9 billion in upfront ad revenues will be starkly evident next spring amid the protracted recession. Major ad categories–such as autos, financials, real estate and retail–will be markedly altered in their spending as well as structure. The Big 3 U.S. automakers account for 6% of the Big 3 broadcast networks’ ad revenues (9% for Fox) and 2.5% of cable networks’ overall advertising (7% for ESPN). On the cost side, less than 30% of core expenses can be eliminated from program production budgets and legacy operations, which means that the entire broadcast network dynamic must be reengineered. Despite all the complications, the easiest, most efficient business model conversion would be to reset broadcast networks as general entertainment cable networks. […]

While the most competitive cable networks have closed the ratings gaps with broadcast networks, they still fail to command similar ad unit prices. Prices have failed to reflect changed value propositions; that dilemma will be resolved in a digital marketplace. Bottom line: the alignment of broadcast and cable networks is already in place. Cable’s niche appeal, parallel to the Internet’s special interest “long tail,” will continue to nudge advertisers, consumers and content providers toward a more fully monetized online business model.

It is my belief that this migration would have already been occurring had broadcast spectrum holders been granted flexible use and resale rights for their spectrum long ago. Unfortunately, the same old command-and-control system of spectrum regulation that the FCC put in place seven decades is still haunts us today. That system literally makes it a crime for television broadcasters to sell their existing spectrum for anything other than broadcast television. They can’t repurpose their spectrum for an alternative purpose. Nor can they sell it to someone else who might put it to different use (say, high-speed wireless broadband). Just think, if they would have had unambiguous property rights in their allocation, they might have had the incentive to already have thrown the switch on the plan to migrate their content from OTA to cable and satellite entirely.

Of course, that now may happen anyway for the reasons Mermigas suggests. And the migration of more and more content to the Internet will only speed that process along. It’s just a shame that regulation prevents markets from reallocating spectrum efficiently.

Finally, if the networks begin to make this jump, it raises another interesting question: What about the local broadcast television operators who are not owned by a major network? What’s going to happen to them?

Interesting days ahead.

Back in the mid- and even late 1990s, I was engaged in a lot of dreadfully boring telecom policy debates in which the proponents of regulation flatly refused to accept the argument that the hegemony of wireline communications systems would ever be seriously challenged by wireless networks. Well, we all know how that story is playing out today. People are increasingly “cutting the cord” and opting to live a wireless-only existence. For example, this recent Nielsen Mobile study on wireless substitution reports that, although only 4.2% of homes were wireless-only at the end of 2003…

At the end of 2007, 16.4 percent of U.S. households had abandoned their landline phone for their wireless phone, but by the end of June 2008, just 6 months later, that number had increased to 17.1 percent. Overall, this percentage has grown by 3-4 percentage points per year, and the trend doesn’t seem to be slowing. In fact, a Q4 2007 study by Nielsen Mobile showed that an additional 5 percent of households indicated that they were “likely” to disconnect their landline service in the next 12 months, potentially increasing the overall percentage of wireless-only households to nearly 1 in 5 by year’s end.

And one wonders about how many homes are like mine — we just keep the landline for emergency purposes or to redirect phone spam to that number instead of giving out our mobile numbers.  Beyond that, my wife and I are pretty much wireless-only people and I’m sure there’s a lot of others like us out there.

Anyway, I’ve been having a strange feeling of deva vu lately as I’ve been engaging in policy debates about the future of the video marketplace.  Like those old telecom debates of the last decade, we are now witnessing a similar debate — and set of denials — playing out in the video arena.  Many lawmakers and regulatory advocates (and even some industry folks) are acting as if the old ways of doing business are the only ways that still count.  In reality, things are changing rapidly as video content continues to migrate online.

I was reminded of that again this weekend when I was reading Nick Wingfield’s brilliant piece in the Wall Street Journal entitled “Turn On, Tune Out, Click Here.”  It is must-reading for anyone following development in this field.  As Wingfield notes:

In the past two years, nearly every major network show and many of the biggest cable programs have become available on the Internet. The virtual library of content includes everything from “Desperate Housewives” and “CSI” to “The Colbert Report” and “Mad Men.” Some of the biggest hits online are memorable TV moments. More than half of the people who saw recent “Saturday Night Live” skits featuring comedian Tina Fey as vice presidential candidate Sarah Palin watched the skits over the Internet, according to a survey of 500 viewers on Monday by Solutions Research Group. Nearly a quarter saw them on YouTube and 21% saw them on NBC.com or Hulu.com. Many shows can be viewed for free and are accompanied by a dollop of ads that’s small when compared with the number of commercial breaks on television. As a result, some cost-conscious consumers are ditching their cable subscriptions altogether.

And the migration of video online is really picking up speed as a result.  According to Wingfield, “Complete episodes of about 90% of prime-time network television shows and roughly 20% of cable shows are now available online, according to Forrester Research analyst James McQuivey.”  However, Wingfield points out that “the number of people watching all of their programs online is still small; some estimates put the number at just 1% of the total television audience. In part, that’s because watching online isn’t as easy as channel surfing on the couch, TV remote in hand. Viewers must either watch shows on their personal computers, or use a device like Apple TV, which allows them to download shows from the Internet onto their television sets.”  That being said, he goes on to note that:

Within the next several years, however, media and technology executives say that a host of new technologies will make television access to online video a mainstream phenomenon. Vudu Inc. already sells a $299 set-top box with a remote control that allows users to download television shows for $1.99 per episode. Microsoft and Sony both sell television shows that users of their Xbox 360 and PlayStation 3 videogame consoles can download over the Internet for viewing on television sets. Netflix subscribers can buy a $99 set-top box from Roku Inc. that streams videos on their television sets. The service is included at no extra charge in the monthly Netflix fee for renting DVDs.

And that’s just what’s happening today.  There will be a lot more options coming online soon.  Remember, most of these changes have all taken place in just the past couple of years.  If you look at the FCC’s last “Annual Video Competition Report” from two years ago, you won’t find much discussion of these new developments. But, if the FCC ever gets around to releasing another annual report, the regulators won’t be able to ignore these trends and developments any longer.

OK, so the point is clear: The video marketplace is changing rapidly. Meanwhile, however, back in the surreal regulatory la-la land of Washington, DC, it remains business as usual.  As Brian Anderson and I point out in our new book, A Manifesto for Media Freedom, policymakers are still trying applying a host of unique regulations to “old media” providers, including: various censorship rules, educational programming mandates, special campaign finance advertising laws, must carry regs, media ownership caps, broadcast “localism” requirements and various other “public interest” obligations, and much more.

At what point does this charade end?  When do we realize that substitution is occuring and giving people alternative places to camp their eyeballs?  Or doesn’t that make any difference?  Should we just continue to regulate the old platforms and players the same was as always?  Or, worse yet, should we “level the playing field” by regulating the Internet and online video providers the same way?  I hope most people would understand what a disaster that would be in practice.  The Internet and digital video delivery is offerning society an unprecedented abundance of media riches.  They last thing we need to do is screw it up by laying on reams of regulation.