Will TV Succumb to the Internet?

The Internet has transformed the music industry. Sales of CDs in retail music stores have been steadily declining while sales of songs downloaded through the Internet to iPods and other portable music players are skyrocketing. Moreover, the music industry is still contending with millions of people illegally downloading songs for free. Will the television industry experience a similar fate?

Widespread use of high-speed Internet access, powerful PCs with high-resolution display screens, iPhones, iPads, other mobile handhelds, and leadingedge file-sharing services have made downloading of video content from movies and television shows faster and easier than ever. Free and often illegal downloads of some TV shows are abundant. But the Internet is also providing new ways for television studios to distribute and sell their content, and they are trying to take advantage of that opportunity.

YouTube, which started up in February 2005,quickly became the most popular video-sharing Website in the world. Even though YouTube's original mission was to provide an outlet for amateur filmmakers,clips of copyrighted Hollywood movies and televisionshows soon proliferated on the YouTube Web site. It isdifficult to gauge how much proprietary content fromTV shows winds up on YouTube without the studios'permission. Viacom claimed in a 2008 lawsuit thatover 150,000 unauthorized clips of its copyrightedtelevision programs had appeared on YouTube.

YouTube tries to discourage its users from postingillegal clips by limiting the length of videos to 10minutes each and by removing videos whenrequested by their copyright owner. YouTube has alsoimplemented Video ID filtering and digital fingerprinting technology that allows copyright owners tocompare the digital fingerprints of their videos withmaterial on YouTube and then flag infringing material. Using this technology, it is able to filter manyunauthorized videos before they appear on theYouTube Web site. If infringing videos do make itonline, they can be tracked using Video ID.

The television industry is also striking back byembracing the Internet as another delivery systemfor its content. Television broadcast networks such asNBC Universal, Fox, and CNN have put televisionshows on their own Web sites. In March 2007, NBCUniversal, News Corp (the owner of FoxBroadcasting), and ABC Inc. formed Hulu.com, a Web site offering streaming video of television shows and movies from NBC, Fox, ABC, Comedy Central, PBS, USA Network, Bravo, FX, Speed, Sundance, Oxygen, Onion News Network, and other networks. Hulu also syndicates its hosting to other sites, including AOL, MSN, Facebook, MySpace, Yahoo!, and Fancast.com, and allows users to embed Hulu clips in their Web site. The site is supported by advertising commercials, and much of its content is free to viewers.

CBS's TV.com and Joost are other popular Web television sites.

Content from all of these sites is viewable over iPhones. Hulu has blocked services such as Boxee that try to bring Hulu to TV screens, because that would draw subscribers away from cable and satellite companies, diminishing their revenue.

According to Hulu CEO Jason Kilar, Hulu has successfully brought online TV into the mainstream. It dominates the market for online full-episode TV viewing, with more than 44 million monthly visitors, according to the online measurement firm comScore.Monthly video streams more than tripled in 2009,reaching over 900 million by January 2010.

What if there are so many TV shows available for free on the Web that "Hulu households" cancel their cable subscriptions to watch free TV online? Cable service operators have begun worrying, especially when the cable networks posted some of their programming on the Web. By 2010, nearly 800,000 U.S. households had "cut the cord," dumping theircable, satellite, or high-speed television services fromtelecom companies such as Verizon's FiOS or AT&T'sU-verse. In their place, they turned to Web-based videos from services such as Hulu, downloadable shows from iTunes, by-mail video subscription services such as Netflix, or even old-style overthe-air broadcast programming. Although the "cordcutters" represent less than 1 percent of the 100million U.S. households subscribing to a cable/satellite/telco television service, the number of cord-cutting U.S. households is predicted to double toabout 1.6 million. What if this trend continues?

In July 2009, cable TV operator Comcast Corporation began a trial program to bring some of Time Warner's network shows, including TBS's My Boysand TNT's TheCloser,to the Web. Other cable networks, including A&E and the History Channel, participated in the Comcast test.

By making more television shows available online,but only for cable subscribers, the cable networkshope to preserve and possibly expand the cable TVsubscription model in an increasingly digital world."The vision is you can watch your favorite network'sprogramming on any screen," noted Time WarnerChief Executive Jeff Bewkes. The system used in theComcast-Time Warner trial is interoperable withcable service providers' systems to authenticatesubscribers.

The same technology might also allow cable firmsto provide demographic data for more targeted adsand perhaps more sophisticated advertising down theroad. Cable programmers stand to earn more advertising revenue from their online content becauseviewers can't skip ads on TV programs streamedfrom the Web as they do with traditional TV. Webversions of some television shows in theComcast-Time Warner trial program, including TNT's The Closer, will carry the same number of adsas seen on traditional TV, which amounts to morethan four times the ad load on many Internet sites,including Hulu. Many hour-long shows availableonline are able to accommodate five or six commercial breaks, each with a single 30-second ad. NBCUniversal Digital Entertainment has even streamedepisodes of series, including The Office, with two ads per break. According to research firm eMarketer,these Web-video ads will generate $1.5 billion in adrevenue in 2010 and $2.1 billion in 2011.

For all its early success, Hulu is experiencinggrowing pains. Although it had generated more than$100 million in advertising revenue within two years,it is still unprofitable. Hulu's content suppliersreceive 50 to 70 percent of the advertising revenue Hulu generates from their videos. Some of thesemedia companies have complained that this revenue is very meager, even though use of Hulu hasskyrocketed. One major supplier, Viacom, withdrewits programming from Hulu after failing to reach asatisfactory agreement on revenue-sharing, depriving Hulu viewers of such popular shows as The DailyShow with Jon StewartandThe Colbert Report.

Other companies supplying Hulu's content havepressured the company to earn even more advertising dollars and to set up a subscription servicerequiring consumers to pay a monthly fee to watchat least some of the shows on the site. On June 29,2010, Hulu launched such a service, called HuluPlus.For $9.99 per month, paid subscribers get the entirecurrent season of Glee, The Office, Houseand othershows from broadcasters ABC, Fox, and NBC, as wellas all the past seasons of several series. Hulu willcontinue to show a few recent episodes for freeonline. Paying subscribers will get the same numberof ads as users of the free Web site in order to keepthe subscription cost low. Paying subscribers are alsoable watch shows in high definition and on multipledevices, including mobile phones and videogameconsoles as well as television screens.

Will all of this work out for the cable industry? It's still too early to tell. Although the cable programming companies want an online presence to extendtheir brands, they don't want to cannibalize TVsubscriptions or viewership ratings that generateadvertising revenue. Customers accustomed toYouTube and Hulu may rebel if too many ads areshown online. According to Oppenheimer analystTim Horan, cable companies will start feeling the impact of customers canceling subscriptions to viewonline video and TV by 2012. Edward Woo, anInternet and digital media analyst for WedbushMorgan Securities in Los Angeles, predicts that in afew years, "it should get extremely interesting." Huluand other Web TV and video sites will have muchdeeper content, and the technology to deliver that content to home viewers will be more advanced.

1. What competitive forces have challenged the TV industry? What problems have these forces created

2. Describe the impact of disruptive technology on the companies discussed in the case.

3. How have the cable programming and delivery companies responded to the Internet?

4. 4) Have the cable companies found a successful new business model to compete with the internet? Why or why not?

5. Provide an example of a product innovation and process innovation from this case.

6. If more television programs were available online, would you cancel your cable subscription? Why or why not?

7. What management, organization, and technology issues must be addressed to solve the cable industry's problem?

Innovation - What it is and why it matters

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