Commentary: There's a Web of differing opinions about what comes next in online video business

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Online video and its possible effects on entertainment, cable and telecoms has become a hot topic on Wall Street, and Time Warner's "TV Everywhere" initiative to make cable-network content available online has put an even brighter spotlight on the issue. So it's a good time for Street Talk to look at highlights from a recent slew of analyst reports and studies on the matter.

-- YouTube, Hulu and broadcast networks' Web sites are popular destinations for online video, but do they hurt TV viewing and revenue?

A few weeks ago, my colleague Paul Bond wrote in this space about a ChangeWave Research study that showed a majority of baby boomers using online video, though they also expressed ongoing love for their TVs.

Around the same time, though, a report from Sanford Bernstein analyst Michael Nathanson concluded that in the Web-video space, "current consumption appears greatly exaggerated." He cited a study that showed the average U.S. person consumes two minutes of Web video a day, compared with 309 minutes of live TV.

Similarly, a recent study of U.S. teenagers' media usage by THR parent Nielsen found that youngsters are watching more TV than ever before and use digital media not instead of but in addition to traditional media.

"The shift of video content toward Web distribution is perhaps the single-largest investment controversy in the media sector," Nathanson says. "We believe that the intense focus on this issue is materially overstated given the reality of the present situation."

-- Is TV Everywhere simply a way to prolong traditional business models, or can it change the business and add new revenue?

Time Warner and Comcast recently unveiled a trial of the concept in a symbolic partnership between one of the biggest entertainment firms and the largest U.S. distributor. But critics hoped for more than just giving consumers who already have a cable subscription delayed access to hit cable shows on the Web. A Web-only offer of cable content and live streaming of shows out of the gate, for example, would have been nice.

The lack of focus on such offers proves that TV Everywhere is mainly defensive for now. "This is a way to stem concern about cable infrastructure being bypassed by free online viewing," Collins Stewart analyst Thomas Eagan says.

Nathanson predicts cable networks won't make much content available online for free, "given the importance of this revenue stream in media-conglomerate growth," as cable-network owners get anywhere from 39%-94% of their revenue from those carriage payments. Disney's unit leads that charge as ESPN traditionally commands high carriage fees and its flagship Disney Channel has no advertising.

But some on Wall Street see longer-term revenue upside for cable-network owners.

Miller Tabak analyst David Joyce suggests that TV Everywhere could strengthen ad revenue by providing "metrics to advertisers to appropriately price ad impressions, which could create greater demand for ad time on cable shows that are going to be available online."

Similarly, Pali Research analyst Richard Greenfield argued recently that Disney's ESPN360 broadband service, for which Comcast's high-speed Internet unit has agreed to pay a carriage fee, should become a model for companies with attractive content.

"We believe the stage is being set for other programmers to follow in ESPN360's path," he says. "Fox Sports, Disney, Fox News, Nickelodeon, CNN and other programmers should all be thinking about unique ways of packaging content online that has enough leverage to drive monthly broadband sub fees from ISPs (and ideally accelerate broadband net additions to ISPs), rather than just giving away online content to protect their existing sub fees on traditional television."

-- Who in the broader media and entertainment realm is likely to benefit from or be hurt by online video?

Bernstein analysts have presented the most comprehensive outlook, suggesting that everyone from film studios and broadcasters to cable-network owners and operators will tweak their online video businesses to optimize the financial effects.

For example, Nathanson says that "while in its current form, Hulu is too small to matter, this model may be cannibalistic to the broadcast ecosystem." As a result, he adds, Hulu's owners (News Corp., NBC Universal and Disney) could put the genie back in the bottle by increasing commercial loads or switching to a subscription model "if negative effects occur."

Overall, for broadcasters and studios, "the future impact of online video is uncertain," Nathanson concludes, adding that TV stations and DVD retailers and renters are likely to be hurt, and cable networks and VOD distributors will see their positions strengthened.

For cable operators, the big question is whether they will become a "dump pipe" in the Web-video age, according to Bernstein distribution analyst Craig Moffett.

"Surprisingly, the economics of a dump-pipe scenario, as measured by purely financial metrics, are actually better than those of the business today," he says, adding that satellite TV firms could become "obsolete." Usage-based pricing is among the strategies cable firms could use to become "economically indifferent at all points along the Web-video adoption curve."
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