There is a simple business reason why top movie and TV content will be offered "for fee" in online venues, not primarily "for no incremental cost": industry economics.

 

Put simply, the movie and TV industries have a highly-evolved way of monetizing new movie and hit TV series content, and most of the money is made after theatrical releases of a movie or initial running of a TV show.

 

If online distribution follows theatrical release or network premiere, it will cannibalize the lucrative downstream markets. And those markets are huge. Only about 17 percent of total revenue from any movie actually is made in theatrical release. All the rest of the revenue is earned downstream.

 

Advertising will provide a partial offset to cannibalized downstream revenues, if content is made widely available on Web portals. But initial experience suggests advertising cannot replace all the lost downstream revenues, even for hit TV series content that typically is monetized by advertising and royalty fees.

 

In other words, if one is cannibalizing an existing packaged video business (DVD sales, rentals or online streaming), the move has to be revenue neutral, at the very least. In some cases the business case is helped by the lower costs of online distribution or different profit margins for online compared to packaged goods.

 

But to this point most analyses have assumed that "delivery" costs were nearly zero, as subscribers paid for their broadband connections, not programmers. That might not be the case in the future, where delivery might actually entail some cost.

 

The emerging changes are putting strains on traditional programmer-distributor relationships, say researchers at The Diffusion Group. As the programmers and content networks become more active in online video distribution, tension with traditionally important distributors is growing.

 

We should see a gradual evolution of contracts, for example, to give studios and networks more freedom to experiment with new release windows and deals for online distribution, even as distributors seek greater control of content they have licensed as well.

 

Without question, new distribution modes will disrupt the current pattern. Equally clear is that content owners will not move in any significant way until they are confident they understand the revenue impact on existing distribution channels.

 

Each of those channels represents a significant hard dollar revenue stream, and content owners will not relinquish older methods until they understand how the revenue will be offset. And it is hard to see how most movie content can be offered in a complete "ad support" model in an "available online at the same time as DVD release" window.

 

To the extent that TV or movie content competes with the "over the air broadcast" window, primary ad support clearly is feasible, though even there it is likely there will be some amount of end user fees.

 

Advertising does not now support all of the distribution channels and it is hard to see how that can change radically as channels change. The best revenue analogy?

 

More online distribution will shift current end user spending for DVD purchases and rentals or pay per view fees, not suddenly lead to a new explosion of advertising support.

 

If you look at today's distribution window, user fees support all four of the five major windows, and if you consider satellite, cable or Telco video subscription fees, "for fee" now is a key part of all five major release windows, while advertising supports only one window.

 

Theatrical release is the normal start of a movie release window. Theatrical release is followed in about 4.5 months by DVD sales and rentals. After 45 days later movies tend to be available for pay per view.

 

About six months later movies can be seen on premium channels such as HBO, Showtime or Starz. Some 15 months later movies can be viewed on over-the-air TV.

 

TV series have their own syndication rules, and these also look to change. By the time a series such as "The Office" airs on a cable network, it will already have aired on NBC networks, will have been sold on DVD, been available for ad-supported viewing on NBC.com, paid downloads at iTunes and paid VOD through cable operators.

 

All that new competition for the viewer means a syndicator still must attract enough viewers to satisfy its advertisers and justify the estimated $650,000-per-episode licensing price. That is going to put pressure on the traditional syndication rules as well.