Here's one way of looking at "video substitution," the process whereby consumers use online video sources instead of multi-channel video services sold by cable, telcos or satellite providers. Currently, 11 percent of all U.S. active streamers of video, or 7.7 million, do not subscribe to cable, telco or satellite services, Interpret said. Virtually all the other online video watchers do have such subscriptions.

 

Some other observers, such as Brian Mahony, Trender Research CEO, think 7 percent of U.S. households might abandon multi-channel video subscriptions by 2012. Assuming there are 115 million U.S. TV households, that notion implies a possible universe of 8 million households might "cut the cord" or remain non-subscribers.

 

Over the last several decades, television mostly has been a matter of growing subscription rates for multi-channel TV services, to the point where 88 percent or more TV households are subscribers. The new issue is whether online video can supply enough value to displace those subscriptions.

 

"TV Everywhere," the initiative by cable operators to create a business model for on-demand, online versions of some of the fare one can watch on linear TV, potentially would allow cable subscribers to access their favorite cable content on other devices, but that would also require that cable customers view the content, media research firm Interpret says. Assume that model also is available to satellite and telco video customers.

 

To the extent that such online viewing services represent incremental added value for no incremental cost, video substitution is blunted. To the extent that a "for-fee" model ultimately is created for online video that might not be tied to a multi-channel subscription, matters are more complex.

 

There are several types of new value we have seen in the video business.

 

Cable TV grew because of a simple value proposition: "more choice." It offered channels not available over the air, in new genres. VCRs, DVD players and digital video recorders offer a different value proposition: "watch when you want."

 

Online video now offers a mix of those values, but with no clear, sizable and sustainable revenue model. YouTube (News - Alert) offers "more choice." Hulu and other on-demand services offer "watch when you want" value.

 

Slingbox and "TV Everywhere" offer "watch where you want, when you want" value. 

 

If online video can be packaged in ways that allow users to watch only what they want, at reasonable retail prices, where they want, and that video conveniently can be watched on primary TV sets, PC or mobile screens, video substitution likely will grow, likely because of the "watch when you want and where you want" value proposition.

 

Near term, the business model for much on-demand programming is likely to resemble that which developed in the public Wi-Fi hotspot market, which is that such access is a “value add” for fixed broadband access services.

 

That, in fact, is precisely the tack "TV Everywhere" is taking. Revenue primarily will follow.