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Cover Story March 11, 2010, 5:00PM EST

Revenge of the Cable Guys

If you think online TV will be free forever, think again. The cable companies have a plan to keep control—and stick you with the bill

By Ronald Grover, Tom Lowry and Cliff Edwards

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Matt Mahurin

Once upon a time, not so long ago, a bunch of small companies in Silicon Valley thought the future of television was theirs. Soon, the thinking went, TV would be everywhere. Frequent fliers would tune in on laptops and vacationers on tablets from the beach. If so inclined, you'd be able to watch Glee on a cell phone in a tree house. The network suits and the cable guys just didn't have the digital chops to make it happen. Fueled with venture money, tech companies with names like Boxee, Roku, and Sezmi pursued their dream of untethering viewers from their TV sets—and owning a piece of the advertising revenue.

As the big picture comes into focus though, it looks like the cable guys are playing the lead roles, using the $32 billion they pay content providers each year as leverage. The alphabet soup of newbies is still waiting in the wings for a moment that might never come.

What happened? Part of the answer is TV Everywhere, a service in its infancy, conjured up in quiet strategy sessions by Jeff Bewkes and Brian Roberts, the CEOs of Time Warner (TWX) and Comcast (CMCSA). They took a lesson from the music labels, which looked up one day to find that Steve Jobs and Apple (AAPL) had taken control of their inventory. The cable guys came up with a quick fix, one so technologically simple that you don't have to be a geek to get it: Viewers can watch shows for free, but only if they're cable subscribers first. In other words, as long as you tap a subscription code into your device—any device—you can watch anything you want, whenever you want.

It's worth hitting pause here for a moment. Right now, Time Warner is offering the service in only a few markets. Comcast has rolled out a trial, or beta, version to about 80% of its subscribers. There are plenty of kinks to be sorted out. And as usual when it comes to show business, nothing is quite as simple as it appears. For TV Everywhere to work, the behemoths of the business must stand together and stamp out the rampaging weed called free. After all, if you can get programing for free—real free—why would you ever pay a cable bill?

SELF-PRESERVATION

That's what was worrying Time Warner's Bewkes in the fall of 2008. Back then, Time Warner ran the country's second-largest cable operator (spun off in March 2009) and was also a content provider. Bewkes had previously been in charge of the company's HBO unit, turning the premium cable channel into a profit machine with 30 million subscribers.

Bewkes watched with growing alarm as Hollywood stampeded online to offer TV shows and movies for free, say two Time Warner executives. At the time, Hulu, a video site operated by Fox (NWS), NBC Universal, and Disney, (DIS) was about a year old. For TV addicts, Hulu was a near miracle. Miss the latest episode of Damages on the FX channel? If so, you could watch Glenn Close play a conniving lawyer on Hulu 24 hours later for free. Hulu's owners shared the advertising revenue from the site, but everyone knew it wasn't making money and there was no clear path to profitability. As he watched one entertainment company after another put their TV shows and movies online for free, say the executives, Bewkes began to fear that the pay TV industry would eventually find itself in the same untenable position as newspapers.

That's when the scene shifts to Wisconsin, where HBO was running an experiment in Milwaukee and Green Bay. HBO was letting people watch its programing online as long as they could prove they were HBO subscribers.

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