Cable TV vs. Cable Broadband

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That means cable providers are seeing a whole new generation of online users who are perfectly happy to pay $30 a month for a "naked" cable modem or a digital-subscriber-line connection provided by telecom companies, but have no need for the $150-a-month premium programming package. "In the last year we're starting to see from consumers the indication that the broadband part is more the anchor part of the bundle than video—that they value that more highly," Time Warner Cable CEO Glenn Britt was recently quoted as saying by Multichannel News. "I think we're going to see more of that in the future."

You can't blame such customers, many of whom are cash-strapped college students moving into university towns, because they've figured out how to access great video entertainment online. Hulu alone hosts 110 broadcast and cable networks, along with a library of more than 1,000 television shows and 400 movies. Of course, college students aren't the only ones looking for savings these days. With the transition to digital TV taking place in the U.S. later this month, a $40 antenna will get you access to prime-time programming, much of it in high definition. That could further reduce consumers' willingness to pay cable operators hefty monthly fees for video entertainment.

Movie Downloads

Moreover, if you're sophisticated enough to figure out how to plug your Ethernet cable into an appliance—say, a Roku device or Apple TV—that accesses your big-screen TV, then, Presto! All that online entertainment is available on the big screen.

Of course, young consumers seem to have no problem watching TV and movie content on small screens. Laptops and iPhones do just fine for many viewers, which explains why you can now download or stream thousands of movies from Netflix (NFLX), Amazon.com's (AMZN) Unbox, or Apple's (AAPL) iTunes. And on-demand movies may be big business for Big Cable, but they're also big business for Apple—which sold nearly $1.9 billion in movie and music content on iTunes in 2008.

Earlier this year, LG released new lines of plasma and LCD large-format screens with Ethernet ports built right into the sets—another way to skip the cable provider altogether. The price premium on those sets is a couple of hundred dollars. Buy one of those new sets, switch off your cable package in exchange for simple access, and you break even on that Ethernet port in, say, two months max.

Cable TV's Lack of Features

Of course, someone's got to pay for all that "free" content. On Hulu, it's the advertisers. For Unbox and iTunes, it's the retail sale for download or streaming. But, for cable providers, the bypass is clearly a major threat. After all, the cable industry pays $6 billion to $8 billion a year to buy premium content from cable networks. To sustain such payments, cable companies need more than a Net-access business.

But that means they've got to make the experience of using a converter box, digital or not, competitive with the video experience online. Last time I checked, my Comcast screens were appallingly devoid of compelling features. There were no options for customization or personalization; there was no access to rich data for TV or movie selections; no social media components; no tools to curate and collect what we like to watch; and an utter and complete absence of recommendation engines, user ratings, and other guides to selecting content.

If that's the cable industry's best response to the broadband Web, we're going to see an instant replay of the train wrecks that have transpired in the music, the newspaper, and, most recently, the magazine industries in the last decade. Simply put, pay-TV won't be an $80 billion industry for long.

Jeffrey F. Rayport is founder and chairman of Marketspace, a digital strategy and customer experience practice affiliated with Monitor Group. Rayport was previously a faculty member at Harvard Business School.

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