Winning the Broadband TV Game

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startups are working to offer a similar service that should prove at least as popular in this country.

However, it is the third Trojan horse—the video game console—that promises to make the biggest inroad of all. The latest generation of consoles already offers consumers both Internet access and the ability to display digital content on their TVs. At today's rapid rate of adoption, we expect there will be 35 million TV-compatible gaming consoles in American homes by 2010, representing about one-third of all households. That is a market!

Our conversations with gaming providers indicate that they are beginning to grasp the broader opportunity of becoming the prime intermediaries between all consumers (not just game players), the Internet, and their TVs. Gaming, after all, connects players not only to online communities but to in-game advertising and all kinds of commercial and entertainment possibilities.

Consumer Customization Will Rule

Taken together, broad-scale Internet access, new hybrid delivery systems, and gaming platforms will provide the foundational tools needed for widespread Internet-TV connectivity. The resulting incentives for content aggregators, their distributors, and new entrants to help consumers connect the few remaining dots will be overwhelming. If not Comcast, then Google (GOOG). If not Verizon (VZ), then Apple (AAPL). Or maybe Sony, Nintendo (companyid=), or Microsoft (MSFT).

And consumers will find themselves in a position to do what they do best. Consumers have proven time and again that they are highly skilled at arbitraging one service opportunity against another on the basis of pricing, ease of use, and the richness of content. In a few years, the typical Internet TV consumer will pay for a core palette of 10 to 12 channels drawn from a far wider range of both commoditized and customized content, both broadcast and narrowcast. The mixes will be infinitely varied and highly personal: NFL football, commodity news, bass fishing, physics lectures, home decorating tips, Jimmy Cagney movies—whatever.

Meanwhile, traditional everything-for-everyone content aggregation—the proverbial 500 channels with nothing to watch, packaged in two or three service tiers—won't do the trick anymore. That business model—still pursued by cable providers and even a surprising number of Silicon Valley startups—will suffer from both a lack of customer enthusiasm and an ever-tighter squeeze on profit margins by Hollywood content providers.

Indeed, Hollywood is now blessed with a plethora of ways to reach the audience, from traditional distribution channels like cable to online video streams and downloads. And by pitting those channels against one another, content providers may gain enough negotiating leverage to boost their share of distribution revenues from 60% to as high as 85%.

That's the future as we see it. The barriers that have long inhibited Internet-based TV are beginning to crumble. The TV manufacturers will win; the gaming companies will win; the best new platforms blending personalized and branded content will win; Hollywood will win; and consumers will win. And, unless they find ways to adapt very quickly, telecoms and cable companies will lose. Messy? Absolutely. The process will, we predict, prove to be another example of long technological gestation followed by abrupt, even breathtaking, change. This is "creative destruction" at its best.

Herve Utheza is vice-president and executive producer for TV properties at Orb Networks, a provider of Internet content streaming services. Gary Morgenthaler is a partner at Morgenthaler Ventures, an investor in Orb and Building-B, a hybrid broadcast and narrowcast startup.