Mark Cuban recently posted on the topic of online video, and the likelihood that it would generate far lower advertising revenue than the equivalent video delivered through the traditional CATV systems. His analysis is centered on and borrows heavily from analysis by Craig Moffett of Sanford Bernstein. Quoting from that report, he says:

Five years into the video-over-the-Internet revolution, we have learned two things. First; consumers won’t pay for content on the web, so it will have to be ad supported. And second; it won’t be ad supported.

This is the main thrust of the argument, again from Moffett:

In the cable TV network world, half of all revenues come from affiliate (carriage) fees paid by the Comcasts and DirecTVs of the world. The other half comes from advertising. But in the TV world, a typical half hour show supports an ad load of about 8 minutes.

On the web, early evidence suggests that consumers will tune out – click away – if they are forced to watch more than 30 seconds or so of advertising up front, and maybe another 90 seconds of advertising over the next thirty minutes. Hulu.com, for example, which has already been lionized by many as the future of TV, serves two minutes of advertising for every 22 minutes of programming (i.e. the programming duration of a typical half hour show from television). Assuming identical CPMs for web video and TV, and after accounting for lost affiliate fees, a 30 minute program on the web with two minutes of advertising yields approximately 1/8th as much revenue per viewer.

Are content producers prepared to reduce production costs…by 88%?

In fact, the actual economics of web-based video are far, far worse than this. Our 88% decline ignores the corrosive impact of à la carte on traditional video economics. In the public debate in Washington, the phrase à la carte refers to the idea that a few strong networks demand the carriage of a host of weaker ones, effectively subsidizing a much larger family of channels. But there’s a much more important aspect of web-based àla carte that is rarely mentioned–that is, the “à la carting” of the few best shows from the rest of the day’s schedule. Or even worse, of the best few moments (news stories?) from the rest of the show. On the web, watching SportsCenter not only robs ESPN of its ability to pull through carriage fees for ESPN Classic and ESPN U (and SoapNet and Toon Disney), it also, and much more importantly, robs ESPN of its ability to use SportsCenter to support the economics of the rest of the 24-hour ESPN schedule. And watching just the best 30 seconds of SportsCenter robs ESPN of its ability to support the economics of… well, you get the idea. Expecting a few ad supported shortclips on the web to substitute for the affiliate fee revenues lost by multiple networks 24 hours a day is lunacy. “

The irony is that all this is happening at the same time as telcos, and especially mobile operators, are attempting to build significant new revenue streams based on advertising. As I’ve posted on a couple of previous occasions, advertising itself is under threat. Customers don’t like it, they bypass it whenever possible, and when they’re offered opportunities to skip it entirely, such as those offered by DVRs and video on demand, they do.

The TV industry needs to realise this, and realise it quickly, and it needs to make some significant adjustments. More of the revenue will need to come from direct payments from customers - whether subscriptions or on-demand fees - and less from advertising. This may mean increasing prices of both subscription and on-demand options, but it may well also mean producing less overall content. Whereas the Internet is said to have enabled the long tail of content and media, this trend actually argues in the other direction.

When the stuff of niche interest is no longer cross-subsidized by the stuff of broader interest, it will no longer get made, because there will no longer be a way to fund it. Everything will have to stand on its own, because the costs of production for a TV show are far greater than the costs of production of an individual music track or the other items for which the long tail theory works. This may well mean less documentary and other fact-based content and more big-bang, high production value content, which is probably a bad thing. But it will also mean that networks become a lot more selective about the kinds of things that get funding, so it may also have a beneficial effect in reducing the amount of trash we’re subjected to.

Without a doubt, this is a long-term trend, and not a short one, and we’re in the very early phases. But over the next few years, the adjustments the TV industry will have to make will be at least as significant as those the music industry is already having to make, and probably much more so.