The reported deal between Comcast, the nation’s largest cable operator and NBC-Universal, part owner of Hulu, could have serious consequences for the Internet’s most popular destination for online television shows and movies.

In just a year, Hulu has enjoyed a quadrupling of visits well into the millions, streaming dozens of network television series, specials, and movies, all supported by commercial advertising.  Devised to help combat online video piracy and earn additional advertising revenue from web watchers, Hulu partners NBC, Fox and Walt Disney Co., have been successful at drawing scores of Americans to the video website.  Program distributors have also been pleased, earning money from shows like Lou Grant that haven’t been on network television in decades.  But after the economic crash of 2008, the venture has proven costly for the partnership, challenged by an advertising marketplace on life support and outright hostility by broadband providers, cable operators, and Wall Street investors, upset that the service is giving it all away for free.

Among the loudest to complain is Comcast, which is now angling to acquire NBC, and its 30% ownership stake in Hulu.

Comcast CEO Brian Roberts has repeatedly complained about the implications of giving away online video, which for some have begun to replace cable television subscriptions.

“If I am any one of these programmers, not just ESPN but the Food Network and I have a business in that 50 percent, 60 percent, 70 percent of my business comes from subscriptions, I want to think long and hard before I just put that content out there for free and not think through what it is going to mean to my business,” Roberts said at an investors conference in May.

Roberts view was shared by the CEO of the nation’s second largest cable operator, Glenn Britt of Time Warner Cable.

“If you give it away for free, you’re going to forego that subscription revenue,” Britt said. “And if you actually think the ad revenue can make up for that, then God bless you and go on your way. But I don’t think that’s the case, and (networks) don’t really think that’s the case either.”

The difference between Comcast and Time Warner Cable is that the former could gain part ownership in the largest service now giving it all away for free, and that has major implications for Hulu’s future.

“Would Comcast put an end to the Hulu model of using the Web to distribute free TV content?” asked Michael Nathanson, senior media analyst at Sanford C. Bernstein & Co. “Will Comcast continue to support Hulu?”

The Los Angeles Times reports there is already a precedent for Hulu limiting content for online viewers in response to complaints:

Hulu already has limited users’ access to certain cable programs, including FX’s “It’s Always Sunny in Philadelphia,” in response to an outcry from the TV producers and cable companies that object to paying TV programmers hundreds of millions of dollars each year for shows that are offered free online.

“Arguably, their ability to shape online content distribution, and to recast windows for video on demand, would be an important attribute of any deal,” wrote Craig Moffett, a cable industry analyst at Sanford C. Bernstein.

Comcast’s interest in NBC Universal would dramatically expand its entertainment portfolio with such attractive cable channels as USA Network, MSNBC and CNBC as well as the Universal Pictures movie studio. The proposed Comcast-NBC Universal venture also would give the cable operator a greater role in deciding how and when TV shows and movies are distributed online and at what price to consumers.

Comcast’s influence would primarily be felt in cable network programming streamed online, as Comcast has a vested interest from the millions it currently pays those programmers to carry their networks on Comcast cable systems nationwide.  Comcast could advocate Hulu become a partner in the TV Everywhere cartel, providing video content only to “authenticated” pay television subscribers, or it could limit the number of episodes available for free, or when those episodes appear on the service.

Soleil Securities media analyst Laura Martin thinks an even more likely possibility would be charging a fee for some of its more popular content.  Martin points to Hulu’s own financial problems, a consequence of the crash in the advertising market.  Soleil estimates that the three partners subsidize $33 million of the losses at Hulu even after earning $123 million this year from advertising.  Even worse, Martin says, is the cannibalizing of the networks’ own advertising earnings from broadcast runs of those shows now available online.  She told the Times that for every viewer who migrates to the Internet, the companies forfeit $920 a year in ad revenue.

But not everyone believes the Comcast-NBC deal is such a great idea.

Time Warner CEO Jeff Bewkes today told an industry conference in Manhattan that large media mergers have had a lousy track record.  Still, he said the merger would probably benefit the cable industry as a whole, because broadcast networks content with giving away content for free online will now be a part of the very industry hurt by that formula and will be more friendly towards arguments to stop it.

“We love to see our competitors taking risks,” Bewkes said.

[flv width=”400″ height=”300″]http://www.phillipdampier.com/video/CNBC Hulu 9-7-09.flv[/flv]

CNBC’s Julia Boorstin talked with Hulu CEO Jason Kilar in September about the desire for the company to partner with the cable industry’s TV Everywhere project.

AT&T Entertainment: AT&T's answer to TV Everywhere

AT&T, not wanting to be left behind in the race to provide online video content to subscribers, has soft-launched its own video portal site, AT&T Entertainment.  The site, primarily for AT&T’s U-verse customers, is also available to anyone else who drops by to visit, although the content currently available to view is already available online elsewhere.

Current AT&T customers already have an account on the site based on their att.net Member ID.  Logging in adds several additional features, including:

• Viewing age restricted content (if you meet minimum age requirements)
• Rating shows and movies
• Creating and managing a personalized library and queue
• Sharing videos with friends via email
• Viewing your U-verse guide and managing recordings on your DVR (if you have an AT&T U-verse account associated with your ATT.net Member ID)

At present, none of the content is exclusive to AT&T — it’s mostly a mix of videos from Hulu, CBS, and a few cable networks that allow videos to be embedded on other websites.  AT&T has promised it will expand the service when it officially launches at a yet to be determined date.

Ironically, while watching one Hulu-based TV show, the first thing shown to me was an advertisement from Sprint bashing AT&T for overcharging customers.

There was quite a buzz this week over a story in The Business Insider reporting that Hulu reaches more viewers than Time Warner Cable (the nation’s second largest cable operator) has subscribers.  They found 38 million Americans watched Hulu and just 34 million Americans are Time Warner customers.

It’s interesting trivia, but really doesn’t mean all that much… yet.  In fact, Comcast, the nation’s largest cable operator has 62 million subscribers, so Hulu has a long way to go to beat Comcast, not to mention websites like Google Video and YouTube, which have more than 120 million combined viewers.

More importantly, Time Warner Cable has no trouble monetizing its business, as any cable subscriber knows when that ever-increasing bill arrives every month.  The same cannot be said for Hulu, which originally depended on an advertising model to sustain itself, at the same time the domestic online advertising marketplace imploded with the near-economic collapse last fall.  If television networks and newspapers can’t sell their ad inventories, the online advertising market, still a novelty for many advertisers, is in even worse shape.

Time Warner Cable is not losing any sleep over Hulu at the moment, and if they do become a nuisance, that consumption billing concept (or hard usage cap) is always an option to deter people from watching too much.

Broadband providers who pass along video content to their customers, without any ownership interest in those videos, are stuck in the position of owning “dumb pipes.”  In the month of July alone, comScore estimated that more than 21.4 billion videos were viewed on American-owned video websites.  Those videos ranged from the five minute karaoke performance from the guy in Des Moines who posted his performance to YouTube, to hour long dramas watched on a network TV website.

What people didn’t watch were all of the most popular shows from cable networks.  Dedicated viewers who needed to watch the entire second season of A&E’s Crime 360 show had to head to Usenet newsgroups or Bit Torrent websites to ferret out someone’s personal recording collection uploaded to share.  A&E only streams one episode from the second season at a time.

That explains why the cable industry is in a hurry to test their TV Everywhere project.  Cable and other pay-television customers will discover a lot more videos hosted on cable network websites suddenly “authenticating” their subscription status, and locking out those who don’t have a subscription (or offering teaser videos or a much more limited menu of viewing choices).

The upsides for TV Everywhere include pleasing existing pay television subscribers with more online videos.  They also get to sell advertising to accompany these on demand videos.  Those cable network websites may also have ads on them and can also promote their other programming.  Perhaps even more importantly, the industry will have a new tool in their subscriber retention arsenal — the ability to delicately remind subscribers wavering over whether to continue their cable TV package that they can forget about replacing it with watching shows online for free. Owning or controlling the content (and the distribution network) is always better than simply being used to transport someone else’s content.  You can’t giveth and taketh away content you don’t own — you can just make it prohibitively expensive to watch with Internet Overcharging schemes.

The downside, at least in their eyes, is the amount of bandwidth these videos will occupy on their existing distribution platforms.  In 2008, the “big threat” that demanded usage caps and/or consumption billing came from Bit Torrent.  In 2009, it’s online video.

Of course, two of the nation’s largest providers that have “appreciated” consumption billing and usage caps — Comcast and Time Warner Cable — are also enthusiastic founding partners of TV Everywhere.  That presents a problem.  A video platform like TV Everywhere, which may one day usurp Google’s dominance in online videos, is being run by the same people trying to convince Americans of broadband capacity problems and the need to cap usage or switch to consumption billing schemes.  TV Everywhere effectively takes the wind out of that argument because, as any consumer will ask, if your platform is too congested to handle online video, why in the world would you seek to make the “problem” much worse?

That’s a rhetorical problem astroturf groups are being hired to explain away.  They apparently couldn’t sell it to consumers during focus group testing, so now they’ll try the sock puppets instead.

While researching some stories this afternoon, I spoke with an executive at one of the major broadband providers serving consumers with Internet service who told me the company was simply tearing its proverbial hair out over how much online video services like Hulu were costing them — at least $1-2 per gigabyte.  He also said it was putting serious strain on their broadband network.  He didn’t agree to go “on record” putting his name with his views because he was not authorized by company officials to do so, but he was well armed with talking points that said online video is such a problem, Canada, South Africa, Australia, and New Zealand couldn’t take it any longer and they adopted usage allowances to limit customers watching Hulu and other online video services “like from the BBC.”

These Amateur Hour talking points written at company headquarters will work with a bobblehead-like nodding reporter at a local station getting a 10 second unchallenged sound bite, but they don’t work here.

My industry friend didn’t agree to be on the record, so he’ll remain anonymous, but the points raised are on the record so here we go:

Myth: Hulu is costing broadband providers a ton of money – at least $1-2 per gigabyte.

Truth: Hulu, and other online video services like it, do generate a considerable amount of broadband traffic in the United States.  That online video has posed a potential threat to my provider friend, who faces the prospect of some consumers deciding to disconnect their cable TV service and stick solely with broadband for online video.  However, my friend ignores the fact his company has a way to solve this traffic issue by considering upgrades to DOCSIS 3 technology.  After all, his bosses are actively seeking a way into the online video marketplace themselves.

Dave Burstein, DSL Prime

His employer is testing an online video delivery platform that could easily dwarf Hulu.  Of course, they don’t happen to own or control Hulu, open to any American.  The establishment of an industry-controlled service, available exclusively only to “authenticated” subscribers, really blows the talking point about online video straining their broadband network out of the water.  If Hulu is threatening to do them in, what do they think will happen when their even bigger endeavor launches for millions of users?  Then again, as I told him, such online video drives new subscriptions and they could always take some of that money and invest it in network expansion.

Dave Burstein, a well regarded expert on broadband networks, who writes DSL Prime, obliterates the cost estimate inflation for online video in a short piece titled, HD Video Delivered: 5-8 U.S. cents per hour (SD – 2-4 cents):

Microsoft, Cachelogic and I demo’ed full 6 megabit HD video over the net at Web Video Summit, and the stars are now aligned for HD to become first practical and then common – unless the carriers succeed in taxing the net outrageously. That’s cheap enough that even HD TV over the net can be supported by ads, and it becomes a no-brainer for any movie service that charges to offer true HD.

Dan Rayburn, the guru of the streaming media world, reports “The lowest price I saw in Q1 was two and a half cents per GB delivered for over 500TB of traffic a month. When I questioned many of the major CDNs about this price, nearly all of them told me they don’t price delivery that low, but the contracts say otherwise. That price is not the norm as 500TB a month in delivery is a very large customer.” Repeat: This is not a typical price, even at that large volume. Dan reports more normal prices are 2-4 times this level. So U.S. cents 15-25 is more typical for full HD.

Hulu doesn’t even specialize in HD video programming, so the $1-2 per gigabyte estimate on that talking points handout apparently mistakes a dollar sign for a cents sign.

Myth: Online video is such a problem, Canada, South Africa, Australia, and New Zealand adopted usage allowances to limit customers watching Hulu and other online video services “like from the BBC.”

Truth: My industry friend is apparently unaware Hulu restricts access to the majority of its content outside of the United States.  If you are watching from Canada, Australia, or South Africa, you’re more likely to encounter an error message telling you this content is not licensed for your area.  I’m not sure how that is supposed to impact on overseas ISPs.  The BBC’s iPlayer not only doesn’t provide broadband video content outside of pre-authorized UK-based Internet Service Providers, it offers lower quality streams outside of the UK for what content is available.  It’s a very common complaint heard by the BBC, but they do not have the resources to offer high bandwidth streaming to the entire world.

Most broadband providers won’t use the word “limit” when it comes to controlling subscribers’ access, because that puts them right in the line of fire.  It’s always been our contention that this is about protecting business models and less about “costs.”

There are tremendous differences between online video content services in the United States versus Canada or other usage-capped countries.  In New Zealand, online video services have been shut down because of usage limits.  In Canada, Australia, and South Africa, they’ve never truly gotten off the ground because “bit caps” make them unsustainable.

South Africa this week celebrated the opening of a new underseas cable to bring additional global connectivity to the continent of Africa.  Broadband service in South Africa today has very little video content at all – usage caps are punishingly low across the region because unlike in the USA, international connectivity has traditionally been obscenely expensive.  Many South African ISPs distinguish themselves by placing heavier limits on sites hosted outside of the country than on those hosted domestically, a nod to the connectivity reality.

The truth is that some ISPs in the United States are looking for arguments to justify Internet Overcharging to maintain high profits and keep demand in check.  Consumers are not buying these industry talking points at any price.

It has been a busy week for the TV Everywhere test project.  First, two premium movie networks — HBO and Starz agreed to participate in the trial, and now CBS, the first broadcast television network, today announced it was signing on as well.

CBS will be running a mix of older and current shows as part of the trial with Comcast subscribers, probably including its popular shows like CSI and NCIS, which are already available in some areas online through Comcast’s “Fancast” portal and through Time Warner Cable’s Primetime on Demand channel, available on digital cable.

“CBS and Comcast share the same vision of giving consumers more — more content, in more places,” said Matt Bond, Executive Vice President of Content Acquisition, Comcast Cable.  “On Demand Online is a major step in extending consumers’ television experiences online, and ultimately across platforms by giving any television network, including top brands like CBS, the ability to make their content available on the Web.”

CBS historically has avoided partnerships with the cable industry.  It is the only network that never launched a cable network (ABC Family, MSNBC, CNBC, fX, and others on offer from other networks), and also steered clear of a partnership with Hulu, which has ABC, Fox, and NBC among its partners.

The network is interested in the potential exposure its shows might have on-demand, particularly among younger viewers.  But more importantly, being friendly to the largest cable companies around may prove fruitful when the network wants retransmission consent agreements signed, permitting cable companies to place the network’s owned and operated local TV affiliates on the cable dial without a lot of aggravation and negotiations over fees.

TV Everywhere will offer “authenticated” subscribers to cable television or satellite service access to on-demand, streamed video programming through broadband networks.