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Free Net TV threatens telecoms and cable

Is spending billions on network upgrades worth it? ABC's free Net TV could undermine paid-TV models.

Walt Disney's bold move to let people download TV shows for free could spell trouble for cable and satellite providers, but it also throws into question the strategy of telephone companies spending billions to get into the paid TV business.

On Monday, Disney-owned ABC announced plans to put "Lost," "Desperate Housewives," "Alias" and "Commander-in-Chief" on the Internet for free as part of a two-month trial beginning in May. The Net-accessible episodes, which will be available the day after the shows air, will be archived so viewers can watch any shows they miss.

Viewers will access the shows on the ABC Web site where they'll be able fast-forward, pause and rewind entire episodes. Short commercials will be aired with the programs; viewers will not be able to fast-forward through them.

Disney's ABC has been at the forefront of experimenting with new ways to distribute content over the Internet. Last year, it struck a deal with Apple Computer to sell individual episodes of some of its popular shows via the iTunes Music Store for $1.99 per episode. The two other major networks, NBC and CBS, soon followed suit by offering programs of their own on iTunes.

While the iTunes deal may have been a harbinger of bigger things to come in the realm of fee-based content downloads, Disney's move to offer shows for free on the Internet could be viewed as a direct threat to the business model of cable companies, which have been the gatekeepers of television programming in America for the last few decades. The news is equally grim for phone companies, especially Verizon Communications, which is aggressively moving into the TV business.

Over the past two years, Verizon has spent billions of dollars to build a fiber network directly into people's homes that can deliver a triple-play package of services including ultra-fast broadband, phone service and TV. It has bet the farm, so to speak, that the best way to compete against the cable companies, which are now offering phone service, is to try and beat them at their own game. But building and upgrading telecom networks for video is a capital-intensive strategy fraught with risks.


Disney's plans "raise big questions for the phone companies' long-term strategy," said Joe Laszlo, an analyst with JupiterResearch. "To some extent, building a faster network is smart no matter how content delivery evolves. But if we reach a point in five to 10 years when video over the Internet becomes a bigger part of how we consume video, then the phone companies will have to find other ways to make their video services relevant."

No one is expecting Internet television to cannibalize traditional TV models overnight. Despite advancements in streaming technology, video delivered on the Web can still be choppy, with frequent interruptions as data packets buffer and reload on the screen. In fact many viewers who watched the NCAA tournament aired by CBS on the Internet last month complained about the network being overloaded.

No panic among telecoms
A Verizon spokeswoman said the company does not feel threatened by Disney's move to offer some of its shows on the Web. And executives at the National Cable and Telecommunications Association convention in Atlanta this week also said they aren't especially worried about Disney's plans.

"It's speculative to assume people will abandon one model in favor of another," said Sharon Cohen-Hagar, a spokeswoman for Verizon. "That's quite a leap into the future. Given the kind of network we are building, we believe we're well positioned to go wherever the market takes this."

Indeed, Verizon, as well as the entrenched cable operators, are already offering on-demand programming that lets viewers select movies or TV shows and watch them whenever they want. They are also offering consumers digital recording services that let them record programs and watch them at a later time.

But advancements in technology could eventually eliminate the need for consumers to subscribe to a third party such as a cable operator or a telephone company to schedule programming. Companies such as Kontiki and EdgeStream are improving the quality of streaming video on the Net. And others such as Cisco Systems and Microsoft are working on products that will let people watch video downloads from the Net on their TVs.

These advancements, coupled with the fact that broadband penetration continues to grow, makes it possible for millions of people to watch TV directly from the Internet. In 2005, roughly 55 percent of all online users had broadband, according to JupiterResearch. That figure is expected to reach 69 percent by 2010.

A step toward a la carte
If content providers are willing to distribute their shows over the Internet themselves, viewers could simply use a search engine to find what they want to view, and then watch it directly from the Internet anytime they want.

Clearly Disney's move signals that content owners are feeling more comfortable about Internet distribution. Others have also started distributing video over the Net.

Even though Disney is delivering content independently of the cable operator or the telephone company, it would be interesting to see if network providers respond by blocking content.
--Joe Laszlo,
JupiterResearch analyst

Warner Bros., for example, has teamed with AOL to distribute classic sitcoms such as "Growing Pains" and "Welcome Back Kotter." In March, CBS offered free online streaming of the NCAA basketball tournament. In November, NBC started offering its Nightly News broadcast on the Web for free after the newscast airs on TV. MTV's Comedy Central also launched a site called MotherLoad in November that offers clips of existing shows and airs new shows only available on the Web site.

And just last week, a group of Hollywood studios said they will sell digital versions of films such as "Brokeback Mountain" and "King Kong" through Movielink.com and CinemaNow with certain restrictions.

While experts agree that most people will continue to subscribe to a paid TV service for a long time coming, some research indicates there is consumer appetite to watch downloaded content from the Internet.

Parks Associates predicts that roughly 60 percent of broadband users will be downloading some video a la carte from the Web in 2010. These estimates were calculated when it was assumed that people would pay $1.99 an episode to download shows from iTunes, according to Kurt Scherf, vice president and principal analyst with Parks Associates. The figure could be even higher if content is offered for free, as Disney plans to do. Today, only about 3 percent of broadband subscribers download video from the web.

Increased competition in the video market from Internet-based video services could cause network operators to look for other ways to make money, added JupiterResearch's Laszlo.

"Even though Disney is delivering content independently of the cable operator or the telephone company, it would be interesting to see if network providers respond by blocking content," he said.

The issue referred to as Net neutrality centers on whether carriers should be able to charge different fees to content providers who access their network. For weeks, the topic has been hotly debated in the industry as lawmakers draft legislation that addresses the issue.

"I think Disney's move could open up this debate even more," Laszlo said. "I wouldn't be surprised if we saw large media companies getting into the debate soon."