Online Video Might Not Save You Money

There is a widespread notion that a shift from today's packaged, linear video entertainment service to new on-demand, Internet-delivered alternatives will save consumers money. In principle, one can envision ways that could happen. But it is almost impossible to see how those alternative payment schemes could work without the cooperation of the firms that own the content. And that's the rub.

If one assumes, or hopes for, a world where a user can buy and watch only the shows that user wishes to watch, one has to assume that the content owners would agree to supply it. That, in turn, assumes the money those content firms now make from the existing order is not disrupted.

It is hard to see rational executives willingly making that choice. In a market-driven scenario, one would argue, alternative suppliers with lower cost structures could create enough competition that this would happen. It is hard, at the moment, to see where such competition would arise.

Of course, there is supply, and there is demand. If enough consumers decide linear programming is not interesting or valuable, pressure equivalent to new competitors will be created. But that means end users--lots of them--will literally have to stop watching linear video. So far, there is precious little evidence of that sort of refusal.

Nor is there any appetite on the part of the larger distributors to help. Comcast, for understandable reasons, says it has no intention of making its programming available to non-subscribers. So while the utility of linear video one already has paid for will get a boost from Comcast's extension of viewing rights to new devices, there will be no cost savings. Users will still have to buy the full linear packages to get the online or mobile viewing rights.

But that arguably is a secondary issue. The content owners are key. They will have all the incentives they need to make linear content available directly to end users if they do not risk losing the revenue they now make from licensing their content. The amount of money end users collectively could save is the difference between the revenue content owners now make and what they would make under new distribution arrangements, less any avoided costs the current distribution channels now impose.

Basically, that works out to the actual wholesale cost of program rights, less the costs of administering a direct-to-end user system, at pricing levels and end user volume that allow content owners to make at least as much money as they now do, less the "overhead" imposed by use of cable, satellite or telco distribution mechanisms.

Are there potential incentives even for the cable, satellite and telco distributors? Possibly. If video distributors themselves can replace the value of their "video" services in some other way, such as by raising broadband access fees, then a revenue-neutral shift could happen.

The issue is that consumers might want something different. They might want a revenue "not neutral" solution that allows them to watch what they want, and save money.

In the absence of a significant shift of demand (people simply deciding they can live without linear video), it is hard to see how end users wind up saving much money in the shift to online viewing.

Comcast CEO Has No Fear of Web Video - WSJ.com (subscription required)