By shifting programming from television to the Web, TV networks are on a "slippery slope" that puts the combined $300 billion market valuation of the industry at risk, warns a new report.
Analyst Laura Martin of Soleil Securities points to the implosion of the music and newspaper businesses as cautionary examples of what happens when media companies "unbundle" content (selling individual songs via iTunes instead of albums) or give it away free online.
The same destructive trends are now threatening to undo the business models of CBS, NBC Universal, Disney/ABC, Fox and other TV networks through their own online TV initiatives such as the NBC-News Corp.-backed Hulu and CBS' TV.com.
Martin argues that by offering single episodes of shows such as "The Office" or "The Simpsons" on-demand online -- separate from cable, satellite or other pay TV packages -- they are letting consumers watch the hits without funding other programming.
"As we've seen with music, when the consumer is allowed to buy fewer tracks (about 20% of the album), thereby generating up to 60% less revenue than in the bundle," she wrote in the report titled "Content's $300B Gamble."
While online video CPMs have been 30% to 50% higher than for TV, each online episode carries only a quarter the number of advertising minutes as the on TV. Martin estimates that those figures add up to a 60% decrease in ad revenue when shows are moved from TV to the Web, unless the Internet actually expands viewership.
"Bottom line, the consumer is being retrained to view the TV as a lower price/value platform than the Web, which potentially threatens the TV platform's price umbrella," according to Martin.
To date, people haven't started canceling their cable TV subscriptions en masse in favor of Hulu or Web-to-TV services such as boxee. But Martin maintains that eventually a tipping point is reached where consumers find enough free professional material online that they'll stop paying $60 a month for 300 channels on TV.
Hulu CEO Jason Kilar has maintained that the site doesn't steal viewers from cable TV, as the number of pay TV subscribers continues to grow.
So what are the signposts to watch regarding TV's future as a viable industry?
The upfronts, for one. If broadcasters fall victim to price competition in the midst of one of the worst ad markets in 30 years, it suggests they won't stick to the "economic protection of the bundled TV offering," states the report.
The expansion of free TV programming is another indicator. With Disney recently agreeing to put ABC shows on Hulu, another entertainment giant has taken the step to make its content more widely available online. The more free shows available online, the harder to go back to the pay TV model.
Attempting to check the free TV movement is Time Warner's proposed "TV Everywhere" strategy that would give consumers access to Hulu, TV.com or other Web video hubs as long as they can be verified as subscribers of cable, satellite or telco services that offer the same content.
Martin seems to favor this approach, as it wouldn't devalue consumers' perception of professional content. Windowing -- the entertainment industry practice of making content available on certain platforms earlier than others -- could also be used to preserve the value of pay TV over free online distribution.
For its part, Hulu Tuesday announced the release of its latest ad featuring Alec Baldwin as an undercover alien with "an evil plot to destroy the world." Or at least an industry, in Martin's view.