@Walt — I think that you’ve got a lot of the end-state situation correct; however, I might quibble a bit with how things “emerged”. The cable operators (“MSO’s”) developed the two revenue stream model to support the cable programmers to allow these programmers to get started, so that the cable operators could get more distribution for their services. Remember that Cable started out as a way to get better television reception for smaller communities and only then began to differentiate via unique programming.

Further, I think it’s important to distinguish between the Basic and Paid cable programmers. The former (networks such as MTV, CNN, Discovery, CNBC, House & Garden, ESPN, etc.) are generally offered as part of the bundled package that comes with “access”. As such, they have lots of free rider benefits. In fact, some of these networks can have as little as a 4-5% cumulative rating some months, which essentially means that 95-96% of the cable subscribers are not watching that network but are supporting it via their cable bills.

The former (HBO, Showtime, and Starz…and their sister channels) largely support themselves and can be cancelled on any given month. It’s probably no coincidence that these networks (particularly HBO and Showtime) have developed some of the most unique and original programming on all of television.

Net, net — it’s not fair to lump all cable networks together from a business model (or future prospects) standpoint.

Further, unlike other media which have been “disintermediated” by the Internet rather quickly (I’m thinking Radio, Newspapers, Magazines), Cable has developed an approach to co-opt and slow the transition. As mentioned earlier in this thread, the MSO’s agreements with the networks require that IF they want to stream video over the web they can only do so IF the viewer of the video is already a Cable subscriber. It’s a smart approach, as it allows users to get their access wherever they choose as long as they remain a paying customer of the Cable MSO.

That said, I think that there is going to be a very interesting set of battles in the next few years. And one of the big fights will be over the a la carte issue: i.e., how many cable networks would be able to support themselves if the artificial subsidy afforded by bundling were to go away? There are very strong arguments for and against such a move.

Netflix can charge $8/month because their programming costs up to this point have been low. But, take a look at what they offer up — older movies and older TV series that have already been distributed and monetized thru other channels. As they venture further into original programming and more recent releases, their costs will escalate quickly. At some point, these higher costs will get passed onto subscribers.

The trend that I’ve seen with a lot of web streaming options is how they’ve begun tying into existing subscription platforms.
Cable providers have been launching mobile apps that allow subscribers to access their programming on the go (of course, the broadcasters are now trying to impose carriage fees on these mobile feeds).
HBO GO allows for on demand streaming from PCs and mobile devices, but you need to be a cable/satellite subscriber.
ESPN now does live streaming of their actual network feed (which their online ESPN3.com service does not do), but again, you need to be a subscriber with one of their partner cable providers.
Similarly, Hulu has been negotiating with cable providers to wall off certain portions of their content for cable/satellite subscribers.

The bottomline is that moving more programming towards internet video does not necessarily liberate consumers from cable/satellite providers, and it does not by definition result in lower costs.

Originally developed as a necessary tactic to help programmers (specifically, originally, HBO), to develop enough quality programming to help cable operators acquire subscribers, these fees are in many cases larger than the revenue these cable nets receive via advertising, (and in the case of ESPN, it’s likely $6-8 billion per year).

It’s going to be tremendously difficult for any major basic cable network to forego those fees and move to the OTO side, (though I suspect that some of the recent programmer skirmishes with Time Warner and Cablevision over whether these two MSO’s are entitled to air basic cable channels on their iPad apps is adding fuel to the fire).

As a consequence, the “revolution” may be driven by new entrants in the programming space, perhaps ones who are paid similar affilate fees by Netflix et. al. (?).

(BTW — in re: Daniel’s question above about Comcast’s penetration in each of their markets…I’m guessing that it averages approximately 75% or so, which is approximately equal to homes past by cable across the country…Netflix has a long way to go to achieve similar penetration across the country; still, its quickly established itself as one of the most impressive media companies of the past 25 years for all of the reasons stated above.

Netflix is nice. My wife and I use it to catch up on TV series that we missed the first time around, and watch the occasional movie. But, is it a replacement for the programming that we get on Directv? Not by a long shot.

For one thing, Netflix’s content is dominated by older movies and TV series. Anyone in the entertainment industry will tell you that the release window is the key marker of demand — a movie or TV show has its highest demand/viewership immediately upon release.

Netflix has indeed seen explosive growth for their streaming service, but as each content contract gets renewed, their programming costs are going through the roof, and far outpacing their subscriber and revenue growth. This is the underreported story that Wall Street is ignoring. At some point, this is going to force Netflix to either dial back on the recently released content (which they clearly are not doing), or restructure their service plans by either raising prices or going to tiered pricing plans. With Netflix now venturing into original programming and negotiating with the studios to shorten the time at which recent releases can go onto their streaming service, the current $8/month unlimited plan is simply not sustainable.

And it’s not like the cable providers and broadcasters are sitting still. Original programming is how broadcasters and premium channels retain subscribers and negotiate higher carriage fees. So long as there remains a demand by viewers to see something immediately when it comes out, these parties will retain significant leverage. The value of a program or movie progressively declines the further you get from the original release/broadcast date, and that’s how Netflix was able to populate its streaming service for so cheap. Now that they’re trying to move more towards recent and original programming, the costs will escalate accordingly.

Also, your example of NBA and MLB streaming for sports programming have one gaping hole — both of those services have local blackouts. In other words, if you live in the Bay Area and want to watch any of the local teams — Warriors, A’s, or Giants — you cannot stream on Apple TV. (And you’re wrong about the availability — many cable systems do offer up the same season package for the NBA and MLB, as do Directv, Dish, and FiOS).

Sports programming is the strongest foothold that the pay TV industry has, and they know it. That’s why ESPN and the regional sports networks that cover the local teams charge by far the highest carriage fees to cable/satellite/IPTV providers. And that’s why Comcast and Cox, which operate their own regional sports networks, have been exploiting loopholes in the telecommunications laws to keep their local sports programming off of satellite and IPTV competitors.

To illustrate the market impact that this has, consider that Comcast Sportsnet in Philadelphia carries all of the local pro teams (except the Eagles). Using the now expired “terrestrial loophole” CSN Philadelphia has only been available on cable, and as a result the Philly market’s satellite penetration is only half of the national average.

And the trend right now on local cable TV deals is moving towards multi-DECADE deals worth billions of dollars. With that kind of investment and the teams and leagues happily going along for the ride, there’s no way that internet streaming can get around the current restrictions without incurring huge costs in the process.

1. An ISP would have to arise that is not interested in delivering media content but in providing price competitive bandwidth and customer service. Considering the CAPEX involved in a project of this magnitude, I find this development highly unlikely. Of course, a company could emerge that is interested in delivering internet to households that is already competitive in internet based media though this is highly unlikely. I don’t care how much cash Apple or Google has on hand.
2. Could you imagine the NFL amending their enormous contracts with television networks in the near future to distribute their games through the internet? Especially now with NBC owned by Comcast? Having ready access to a channel like ESPN or NFL football games is probably enough for most American households to hold on to cable networks.
3. Netflix would have to gain access to a much broader range of content, including newer movies and tv shows, that would probably signal an end to its low prices. Either that or their user base would have to grow so large that studios and other content providers will not be able to ignore Netflix’s pricing demands, which seems to be their current dream.

On the other hand, imagine the developments that must occur for ISPs like Comcast to crush Netflix.
1. Cable providers change their mentality and begin offering competitive content to Netflix. Customers realize that paying for Netflix is paying for the same service twice, so they stop subscribing. This would require developing a user base that is as wide as Netflix’s so that content providers would negotiate on the same terms, something that could emerge through collaboration or M&A. Considering the lack of competition between cable providers, I wouldn’t call this future far fetched.
2. Netflix becomes so successful that customers stop purchasing OnDemand packages from Comcast and other cable companies opting just for basic cable or just internet. These companies begin complaining that Netflix is free-riding on their networks and they start regulating bandwidth usage. Any sort of bandwidth regulation would be devastating for Netflix, because it would limit either the quality of their content, how quickly it can stream into people’s homes, or how much of it can be watched. Sure, the public outcry would be massive, but most people will have no other option but to accept it because of the lack of competition. I see this as the most likely outcome.

The outcome of this competition is certainly not written in stone. Perhaps mobile bandwith and speed will improve to the point where streaming movies can be delivered through a network that is not cable based. Or perhaps a way to deliver streaming movies without large bandwidth requirements will develop. But my bet would be that ISPs like Comcast win this battle, despite the wishes of most consumers. Reed Hastings is one of the best CEOs out there, but Netflix’s upside is limited because it counts on antagonizing the very companies it relies on to deliver its product, unless of course they can successfully execute another pivot.

Lastly, comparing Comcast and Netflix user numbers is not a completely fair comparison, considering that Comcast doesn’t service vast portions of the US population (like NYC). It would be interesting to see a comparison of market penetration rates between the two companies in areas that Comcast services. It would be even more interesting to see numbers comparing the total number of customers that access on demand content through cable boxes compared to Netflix. My guess is that Netflix still lags pretty far behind.

I don’t illegally download movies, but I signed up for Netflix “Watch Instantly” for a free trial month and the selection of movies they have to play instantly is very limited. I wanted to watch the latest season of “Mad Men” — they didn’t have it available. I think I wanted to watch “The Godfather” and “Alien” and they didn’t have those popular movies as well.

And still, NetFlix is discovering how to compete with them, beating them not at their own game, but by being agile & clever about inventing a new future in which they are have the natural combination of features that customers want.

Eventually, we come to a tipping point: where enough people use the new model that programming originators (including MLB, Pixar) have more to lose from holding out from NetFlix because Comcast threatens them with inferior terms. This chart makes it look like that day is coming sooner than I thought, and from an unexpected source.

I, for one, welcome our new content-distribution overlord.