Video: Nothing in Life is Free

A series of recent press and articles have me thinking about the concept of "free" on the Internet and more, specifically, the evolution of television/video in this world of "free" textual content online.

Specifically, Malcolm Gladwell's insightful article in a recent New Yorker about Chris Anderson's new book, FREE (full disclosure: I have not read Anderson's book), Alan Patricof's interview of Fox about the evolution of television, and Fred Wilson's blog post about his love of the word freemium in the context of the web all got me thinking.

So, for starters, freemium is by no means a new concept. It's existed in the world of television since the earliest days (so I struggle to understand why it deserves such branding & hoopla). Broadcast television was free (and still is), but most of us now spend $50-100 a month for our cable/satellite bill. And, many folks now spend $12.95 a month for satellite radio, when traditional radio has been free for over 100 years (and continues to be).

Taking this a step further, those actually ARE freemium concepts. Why? Because television programming AND television broadcast reception are free. Because radio programming AND radio wave distribution are free. My Internet connection is not free, I pay an ISP roughly $30 a month for service, therefore my Internet content is not free. Accordingly, mobile content isn't free either, as pay wireless carriers roughly $50 a month for data.

Ironically enough, the old adage, Nothing in Life is Free, rings true here. But, I actually think it becomes more apparent as one thinks about television and online video.

I struggle to believe quality/produced online video can be supported solely through the traditional display advertising model. So, contrary to the popular opinion, I predict that online video will not become a new platform in its own right. The profitability of quality online ventures will likely be curtailed by excessive production costs, expensive distribution infrastructure, and limited focus.

Setting the stage; the average 30 minute sitcom costs about $1-2 million to produce. A high quality 60 minute action drama costs from $3.5 million (Lost, ABC) to nearly $10 million (Rome, HBO). Today, Lost has roughly 11 million viewers per episode. Lost is, by all accounts, a blockbuster success. If Lost were a web only video stream and were monetized at today's $40 CPM, then Lost would generate roughly $440,000 per episode in gross ad revenue. Even at twice that CPM, and $880,000 in gross ad revenue, that's a far cry from the $3.5 million in production cost.

Basically, I see no way for a show like that to survive outside the mainstream broadcast model because there is no way to cover the production costs and generate a profit. The free video strategy consistently forgets that production costs exist. Current models for production of TV shows requires the prospect of hits that generate a lot of money. In the current television scenario, shows air at a deficit (advertising covers about half the production cost) and Syndication / DVD sales make up the long tail profits. If the show was on the web for free, then all of those revenues from Syndication / DVD sales would disappear.

In addition to a questionable economic model, the pay television industry (Time Warner, Comcast, Cox, etc) has a lot at stake with the growing share of online video. And, unlike the Newspapers and Magazines that preceded them, these players happen to also be the service providers that provide broadband Internet to most folks.

The core risk for the industry would be to see consumers cutting their video cord, canceling their cable subscription, and moving back to a single play broadband service. At $30 a month for broadband service, that just won't fly. This cannibalization risk of the traditional business model is one of the key reasons for the fervent debate about net neutrality in Washington DC.

Of the estimated $1.6 billion in online video ad spend today, roughly $1 billion+ of which goes to content owners directly. That is a small fraction of the $17 billion in carriage fees generated from basic cable networks in affiliate revenues, but it's a threatening amount (to both the affiliates and the content producers).

So, as I see it, highly quality content producers are economically aligned with their affiliate partners (the pipe) for the foreseeable future. Syndication businesses, DVD season sales, and pricing for cable networks and broadcasters could all be affected as online video attempts to become a core distribution platform. Are new video portals (Hulu, Veoh, etc) capable of replacing broadcast networks (NBC, ABC, etc) as distribution moves on-demand? I find it hard to believe, because ultimately they provide very little in the value chain.

With the understanding that high quality video can't be economically supported by online ad sales, we have to look at the service provider that delivers the pipe. As the cable operators did with television, segmenting video content by basic content, premium sports packages, and movies channels, these same ISPs are readily in a position to meter our Internet habits.

US cable and telecom operators are already testing monthly Internet traffic caps that would vary from 40GB (Time Warner Cable) to 150GB (AT&T), and 250GB (Comcast). And, I fully expect to see more of this in the coming months/years.

If I am to consume hours & hours of Hulu & YouTube video online, at some point it will start costing me more than the $100+ a month I already spend on Television/Internet with Time Warner. Again, not free.

Someone will collect and someone will pay, because nothing in life is free.
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