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Netflix, Aereo and Unbundling Cable

NEW YORK (MainStreet)—If you're a fan of dry, quirky humor, then you've probably heard: "Arrested Development" is back after a multi-year hiatus. And this time, it's on Netflix, rather than a major television network like Fox, which canceled the show the first time around.

This is great news for fans (though the first few episodes are a bit slow, many people agree that the season hits its stride in the later episodes), though it's less-than-great news for traditional TV networks.

Netflix has been diving into original programming since earlier this year, when it released the original series "House of Cards," which has received rave reviews. And, of course, viewers need only pay $7.99 a month for streaming privileges on Netflix, which stands in stark contrast to the often $100 or more a month charged by cable companies.

In 2011, the average cable bill was about $128, up from $48 in 2001, meaning that cable rates have nearly tripled in a decade. So, as much as Netflix's bold foray stands for fun, interesting content, it also may signal a shift away from the old-school cable model, in which users have to pay a pretty penny for a large, bundled package of channels that they might or might not want—and which, now, disappointingly lack some of the newest Netflix shows.

The cable industry seems to have realized that rising prices are a deterrent for users. In an effort to keep costs down, Verizon has suggested a new model: pay-per-usage.

Verizon's new plan may be the first step toward cable companies unbundling their content. Although Verizon, the sixth-largest provider of paid television in the U.S., isn't prepared to offer an à la carte viewing to consumers, it has started talking to midsized and smaller media companies about paying for their content based on viewership. Right now, Verizon pays networks for their content, so this shift would mean that networks getting more eyeballs would also get more cash. If Verizon manages to spread this model to all of its channels, it would balance out the very unequal power among networks: Last year, ESPN averaged slightly less viewership than USA Network, yet Verizon paid ESPN an average of $5.04 a month per household, compared to USA's 68 cents a month.

In addition to settling this internal pay discrepancy, the hope is that paying per usage should level out prices for consumers. If more people started watching smaller channels, then yes, retail prices would increase proportionally. All the same, as long as viewers don't suddenly start watching a lot more TV than before, then this model should help stabilize the fees Verizon pays to its providers, and therefore the prices passed down to customers, Terry Denson, Verizon's chief programming negotiator, explained to the Wall Street Journal.

We can see the trend of unbundling and shifting toward on-demand viewing through the success of online services like Hulu and Amazon Prime Instant Video, with which users navigate to exactly what they want to see and watch it when they want. That contrasts with the top-down model of cable, in which you passively stare at the tube and hope something good is on.

Yet, despite buzz about how streaming services are usurping cable, there's a high bar to widespread acceptance. A recent study found that 85% of those who own streaming players also subscribe to cable or satellite services, indicating online resources like Netflix, Hulu, Amazon and iTunes aren't enough to wean them off of cable. For now, one of the big motivators for maintaining a cable subscription is that relying solely on online services precludes watching live television.

That could be changing, thanks to the new startup Aereo. In a nutshell, Aereo is a cross between:

  • Live broadcast television
  • Online services and tools that let you watch TV on any device, including computers and tablets
  • DVR

The service only lets you watch broadcast channels like ABC and NBC rather than any cable channels, but for many users it fills the void: live television, particularly special events and sports.

Because the service is so provocative and presents a threat to the major networks, Aereo has faced lawsuits from the country's biggest networks. So far, it has triumphed. "We don't see [Aereo] as disruption," said Chris McKay, Aereo's head of customer support. "We see it as giving consumers opportunities they didn't have before ... I think with a lot of people, the common question is who do we compete with, or is this competition with cable. In my mind, it's not."

Instead, he argues, Aereo works in tandem with many services and fits in a variety of situations, from a family that has cable but wants to watch TV on an iPad when the main screen is busy, or cord-cutters who want to wean themselves off of cable entirely. Regardless of whether Aereo is directly competing with cable or even enabling its demise, it does seem like a harbinger of the increasing freedom and autonomy of viewers to view what they want, when they want it.

If Europe is any indication, other Internet-based, pay-as-you-go television services could be on their way. Sky Sports is a channel on the Internet-based Now TV; it costs £21 (about $33) a month for unlimited viewing, but consumers can choose to buy a 24-hour access pass instead. Though the day pass is rather pricey, at £9.99 (about $16), it's another example of unbundling services and content—if, for example, you don't watch enough sports on a monthly basis to merit a subscription, but you wanted to have friends over for all-day marathon of less-covered sports like the Grand Prix and ATP Tennis.

Given their clout and market share, cable companies will probably be around for a long time. But perhaps, rather than simply chronicling the fall of cable or its conquest over competing online services, history will note the ways in which traditional companies have evolved to meet the needs, demands and freedoms of their users.

--Written by Allison Kade for MainStreet

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