Winning the Broadband TV Game

The holy grail of Internet TV is closer to becoming a reality, and the players who are making it happen are not cable TV providers or telecoms

by Gary Morgenthaler and Herve Utheza

The dream of watching both Internet video and regular TV programs on the same television is not as distant as many observers fear (BusinessWeek, 11/19/07). Despite the dust and confusion from the maneuverings of the major players in telecommunications—primarily content providers, cable and phone companies, television makers, and console producers—the outlook for Internet TV is getting clearer.

Within three years, it now appears likely that a full 40% of U.S. consumers will have some way of connecting their TV displays directly or indirectly to the Internet. Within five years, the percentage of such viewers will reach 70%, laying the foundation for a true mass market. Ironically, the prime beneficiaries of this shift won't be cable TV companies like Comcast (CMCS.A) or phone companies like AT&T (T)—even though they're the ones pouring billions of dollars into building the high-speed bandwidth infrastructure that's makes this upheaval so unstoppable.

Cable's traditional business model, a "take-what-we-offer-you" approach to customers, is being undermined by consumer demand for an à la carte, "give-me-what-I-want-when-I-want-it" model. Meanwhile, the new subscription television services from the phone companies—even AT&T's, which is being delivered with Internet technology—are largely "me-too" products that compete with cable on cost more than on features. Moreover, phone company TV will require too much time to roll out on a broad scale to capitalize on the melding of Internet video with television.

We see a strong analogy between the present era and 1993. Back then, the phone carriers were talking loudly about the inevitable coming of the "information superhighway," with the speedier pipes they planned to lay playing the central role by linking everyone and everything. Little did they realize that the superhighway was already arriving over their slow-poke pipes, courtesy of Netscape, whose novel Web browser was helping people make sense of the Internet and creating a whole new marketplace.

Progress Arrives from Unexpected Quarters

Similarly, the drivers of the today's Internet TV revolution are coming from a direction the carriers have failed to forsee. They are arriving by stealth in the form of three Trojan horses.

First, Internet connectivity is quietly appearing on most high-end TV sets with the addition of Ethernet jacks by manufacturers such as Matsushita, Sony (SNE), Samsung Hewlett-Packard (HWP), and Philips. Initial uses of these jacks, for viewing family photos and home videos stored on a personal computer, are effectively opening a pathway between the TV and the Internet via the PC's broadband connection. From there, new uses will emerge. Exciting new TV features typically migrate over time to lower-cost models, so we expect the number of homes with Ethernet jacks on their TVs to reach at least several million over the next few years.

The second Trojan horse is the emerging hybrid delivery model: free, over-the-air, digital broadcasts combined with on-demand delivery of premium content over a home broadband Internet connection. This model, pioneered in Britain by Freeview, connects TV and computer via a set-top box. It has won over nearly 13 million British households during the past three years, outpacing both satellite and cable providers. U.S.