Internet’s role in cable TV debated

The cable TV industry, confronted with the rapidly rising popularity of watching TV shows online, is grappling with how to prevent the Internet from undermining its business.

Hot Internet sites Hulu, YouTube and CBS-owned TV.com have become favorite ways for viewers to watch episodes of television shows. It wasn’t too long ago that the idea of people turning to their computers to catch episodes of such series as “The Office,” “Wizards of Waverly Place” and “It’s Always Sunny in Philadelphia” wasn’t considered a serious threat to the broadcast and cable networks.

Allowing free viewing of marquee prime-time shows on the Internet is causing anxiety among some in the media industry, who worry that the practice mirrors the potentially fatal error newspapers made of losing subscribers by not charging for online editions.

TV program producers and distributors “are desperate not to make the same mistakes by giving away their intellectual property for free,” said Craig Moffett, an analyst with Bernstein Research. “Content companies seem to be terrified.”

The cable networks and studios want to preserve their current relationship, which generates significant revenue and underwrites the high cost of producing TV shows, and prevent new powerhouses Hulu and YouTube from rewriting the rules.

But individual media companies are divided over how to tame the Internet while also embracing it, with Time Warner Inc. and Walt Disney Co., two of the biggest players in both cable networks and Hollywood, taking contrasting views.

The differences were on display Thursday at a cable TV industry trade show in Washington, D.C., where the chiefs of the two media giants outlined opposing approaches.

Jeff Bewkes, chief executive of Time Warner, offered a glimpse of HBO Go, a new service that would provide online viewing of HBO shows “Big Love” and “In Treatment.” The service, however, would be available only to cable or satellite subscribers who already pay for the premium channel.

HBO Go, now undergoing a test at Time Warner Cable in Wisconsin, has been positioned as a benefit to HBO subscribers because it makes the network’s shows available anywhere they find an Internet connection. All users would have to do is prove they are an HBO subscriber through an online “authentication” process.

The Time Warner approach is designed to preserve the program exclusivity for which cable operators pay cable networks. The fees by some estimates account for half a cable network’s revenue -- and in the case of HBO, which does not carry advertising, all of it. The cable industry fears that it will lose subscribers if its shows pop up for free on the Internet.

Time Warner’s service is similar to that of Comcast Corp., the country’s biggest cable TV system operator. Comcast plans to launch a service called On-Demand Online, which would allow its cable TV subscribers to log onto Fancast, the company’s video website, to watch premium cable TV shows.

But Robert Iger, chief executive of Walt Disney Co., cautioned that requiring user authentication could encourage piracy by creating barriers to the content.

“Preventing people from watching any shows online, unless they subscribe to some multi-channel service, could be viewed as both anti-consumer, and anti-technology, and would be something we would find difficult to embrace,” Iger said in a speech.

Disney has found that a variety of approaches works for its cable networks without undermining the media company’s business relationships responsible for generating revenue. Disney has placed episodes of shows from its cable networks Disney Channel and ABC Family online to build awareness and audience, in addition to selling them through iTunes.

NBC Universal plans to participate in Time Warner’s test. Jeff Gaspin, president of NBC’s Universal Television Group, says his company is willing to try the experiment because it wants to find an approach that preserves both sources of revenue for cable networks: cable subscription fees and advertising.

“We believe this will be a good solution to maintain the dual revenue and still allow viewers to see shows wherever and whenever they want,” Gaspin said. “As long as someone is paying for video, then they should be entitled to the content.”

Disagreements over whether online video is a promotional boon for cable networks -- or a threat to the very economics that pay for the development of original programming -- played out elsewhere at the trade show.

Some participants warned that online distribution would threaten the monthly fees cable operators pay to the networks for the rights to offer shows as part of their lineups. Others, such as Rich Battista, president of Fox National Cable Networks, said the ratings for one FX series, “It’s Always Sunny in Philadelphia,” benefited from its exposure on Hulu, a site jointly owned by Fox parent News Corp. and NBC Universal. He said it attracted viewers who didn’t necessarily watch television.

But some analysts doubted that the cable industry’s ultimate fear -- that subscribers would drop their cable or satellite subscription and watch TV for free online -- was a significant threat.

“I call it the phenomenon that isn’t. People aren’t abandoning their cable to watch online,” said Bruce Leichtman, president of Leichtman Research Group Inc., noting that cable and satellite services added 1.7 million subscribers over the last year. “This cord-cutter stuff is anecdotal. There is no trend in it happening, nor is there any evidence in our data that it will happen.”

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