But while the industry keeps a nervous eye on prime time, other players are looking beyond ratings and time slots. They want to break down traditional viewing habits, expand the definition of a hit to include Web-original programs and remake the cable television business model, which relies on charging viewers for hundreds of channels they never watch.
These would-be disruptors might eventually do to television what iTunes did to music and Amazon to books. Cracks are already appearing in the foundations. Cable and satellite TV distributors recorded their biggest subscriber decline ever in the second quarter, and Nielsen has discovered a cohort of younger viewers who are watching traditional TV less and streaming video more.
Among the disruptors are the fast-growing video-streaming services Netflix and Hulu, and tech companies Roku and Boxee, which have developed set-top devices to bring the Web onto television sets with no monthly charge.
Image via WikipediaPerhaps most significant, the group includes Apple, which currently markets an Apple TV set-top device and is rumored to be working on a television set that will appear within the next two years.The system won't be dismantled overnight. Big guns Comcast, DirecTV and Time Warner Cable are all doing well, and programmers such as Fox and Turner are keeping new content from anyone who doesn't have a multichannel video subscription. And for all the talk about people cutting the cable cord, viewers who watch TV only on the Web remain a tiny fraction of television households.
Evolution before revolution
But as book publishers and music labels can attest, digital transitions can take years to build before they happen all at once. Media observers note growing dissatisfaction with the high price of cable TV packages and the number of alternatives as signs that the market is ripe for change.
“There are a lot of forces putting pressure on the living room,” said Gene Munster, an Internet analyst at Piper Jaffray. “The genie's already out of the bottle from a consumer experience point of view.”
Mr. Munster expects to see big changes starting in the next couple of years. These would include Apple's finally getting serious about the television business and coming out with its own Internet-connected TV set.
From what Mr. Munster and other observers have pieced together, this Apple product would have a built-in DVR, connect to the App and iTunes stores, and allow viewers to store their digital purchases in the iCloud. Like the company's current set-top device, it would interact with other Apple devices in the household.
The Apple TV could provide much of what consumers want from television: à la carte pricing, control over when they watch programs, and a hub for their own media—from photos to home videos.
Roku and Boxee already do many of those things. The Roku player, which sells for between $60 and $100, brings streaming video and music from some 300 Web channels directly to a TV set. There are games, subscription services like Hulu Plus and Netflix, international news and endless Web-original programming.
The Boxee Box, priced at $200, offers more than 200 apps, or channels, including MLB.TV, Netflix and Vudu. It will soon carry Hulu Plus. The service also includes a Web browser and can connect to the user's own media. Neither Roku nor Boxee provides live local sports or much local news. And forget about watching live programming like the Academy Awards.
But as current Web TV devices improve, Mr. Munster says, programmers and television system operators will be forced to respond. “They have to make changes because people are going to continue to cut their cable cord,” he said.
The television industry has faced threats before, most notably when TiVo arrived a decade ago. Viewers began skipping commercials, giving rise to fears that advertisers would flee. Since then, the DVR has become a mainstream device, but marketers still see broadcast and cable programming as the best place to spend their money.
Some observers argue that the current dangers are also being overstated and that the traditional pay-TV model won't be changing anytime soon.
“There are alternatives,” acknowledged Bruce Leichtman, a cable industry analyst. “But the average home is still watching five and a half hours of TV a day.” He blames declines in cable and satellite subscriptions on the economy.
The cable operators are planning ahead, however. While generally dismissing the cable-cutting phenomenon, they've introduced lower-priced packages and new products. Both Time Warner Cable and Cablevision have launched highly popular streaming video iPad apps, and Cablevision has a new DVR service that can record four shows at once.
There has also been progress on rolling out TV Everywhere, a long-discussed system for authenticating multichannel subscribers to provide them exclusive access to content online. The problem that creates for the disruptors is that premium content becomes harder to get.
In addition, networks and studios are increasingly leery of making deals with Netflix, whom they see as a competitor, and Hulu has been put up for sale by its owners: ABC, NBC and Fox. The networks have always worried that the video hub would undermine their core business.
Despite the obstacles, the budding Web TV remains confident.
“The trend is pointing very clearly toward more premium content online rather than less,” said Avner Ronen, CEO of Manhattan-based Boxee. Netflix, Microsoft, Amazon and others “are all investing more than ever in licensing content, and new players are expected to come in as well.”
Boxee is certainly planning for growth. The 4-year-old company recently moved into new quarters in the Flatiron district. With the help of $16.5 million from its latest funding round, it will almost double its workforce to 50 by the end of the year.
The company's aim is to improve its service and to grow its base of 1.7 million users. Mr. Ronen declines to say how many Boxee Box units have been sold since the device went on sale last November. Before that, users downloaded the software and connected to televisions through their computers.
YouTube as cable competitor
The online entertainment universe is also growing rapidly, led by YouTube, which Google has reconfigured into a cable TV competitor that gets more than 90 billion video views a month—up 50% from a year ago, according to the company. (Google is reportedly one of the bidders for Hulu. The company has Google TV devices similar to the Boxee service, but they have failed with consumers.)
Blip.tv, a top aggregator of original Web series, is also booming. It has tripled its video views in the past year, to 330 million a month, according to CEO Mike Hudack.
Producers are getting more ambitious. Digital Broadcasting Group, maker of the successful Web series The Confession, starring Kiefer Sutherland, will double its slate to 40 shows this year. Episodes of one of the new series will run 22 minutes—standard for television—rather than the five to 10 minutes that are the norm for the Web, according to CEO Chris Young.
And then there are niche Web channels like Revision3, whose Tekzilla and Diggnation are hits with the digerati.
“We used to have four television channels; now we have 300 [on cable], and with the Web, it's maybe 3,000 or more that are relevant,” said Mr. Ronen. “We're getting to the point where there's a critical mass of content [online].”
Analysts say that new televisions and Blu-ray players will have the same access to the Web—making set-top devices redundant—but both Roku and Boxee see continued demand for their services. They both filter the endless quantities of Web content through a user-friendly interface, and they can innovate faster than people get televisions.
“It costs much more to replace a television than to add or replace a $79 box,” a Roku spokeswoman said.
Boxee is primarily a software developer whose service could run on a variety of devices, including televisions and Blu-ray players.
“The work we're doing now is laying the foundation,” Mr. Ronen said. “The next three to five years are going to see huge growth in our space, and, hopefully, that will translate into a real business.”
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