Five ways the big networks are monetizing online video

August 12, 2010: 1:19 PM ET

From a lá carte to all-you-can-eat, Internet video programming has many pricing options -- none of which are 'free'

By John Patrick Pullen, contributor

I'm blacked out. Again. Earlier this spring, I subscribed to MLB.TV, Major League Baseball's online video service, and was told I'd have access to every regular season game live or on demand, where available, on the device of my choice. For $119 that seemed like a fair deal, especially for days when I'm cranking away at work on my laptop. Then, two weekends ago when my Red Sox were being aired nationally on Fox, the only way I could catch the game live, thanks to the fact that the local team was also playing, was if I could somehow pick up and move my West Coast home to another time zone. I wish I could say it was an aberration, but then, a few days ago, the Boston tilt against the Yankees was on ESPN, but I am without cable for the summer. That meant I'd either have to head to a bar or -- unthinkable -- miss the game altogether.

As coincidence has it, I remembered my story assignment -- online video -- and in three mouse clicks I'm watching the game on ESPN3.com. For one night, I'm saved from the digital blackout, but this was no gift from the baseball or television gods. Online video has moved far beyond its experimental stage to become big business for the networks. ESPN's (DIS) latest offering is just the most recent way the industry has been able to monetize television content on the web. Like baseball, online video is a numbers game, and it remains to be seen which strategy -- if any -- will shake out as the standard for the web. But here are five strategies the big players are all hoping will be home runs.

Digital Download (iTunes)

Launched alongside the video-playing iPod, digital downloads of popular television titles first became available in October 2005 on iTunes. A year and a half later, Apple (AAPL) proclaimed iTunes "the world's most popular online movie store" after having sold more than 50 million television programs. Competition, in the form of Amazon's (AMZN) Unbox service, was welcomed by the networks when it launched in September 2006, but there has always been the impression that studios were only lukewarm about selling their programs digitally. This premonition was confirmed in March 2007 when NBC, Fox (NWS), and ABC teamed up to launch the video-streaming website Hulu.

Streaming Ad Supported (Hulu)

Prior to Hulu's launch, networks had streamed limited amounts of programming through their own websites, but Hulu's centralized location and uniform technology attracted users quickly, and advertisers followed. "There's plenty of content that benefits from being available in an ad-supported basis online," says Eugene Wei, Hulu's senior vice president of audience. "A free offer is critically important because it generates huge scale for advertisers."

But is the offer really free? The hunger for ad revenue has encouraged cable providers like Comcast (CMCSA) to launch online video portals of their own. By creating value-ad bundles that include access to television programming online, these multi-service operators hope to retain customers who are unplugging their cable in favor of online viewing through sites like Hulu. Development of these services are being funded by increasing the fees that cable companies charge subscribers. And what's worse, for all the money being pumped into services like Comcast's Fancast, the difference between them and Hulu is stark. Hulu's viewing and navigation experience is smooth, while Comcast's, in order to authenticate paying users, has more more plug-ins than the Glade factory outlet store.

Streaming Subscription (Hulu Plus)

Further fiddling with its experiment in online video, Hulu is currently beta testing Hulu Plus, a $9.99 monthly subscription service that offers online access to more programming than is available through its free site. "There's a number of advantages to a subscription," says Wei. "One is that if you go an a lá carte route, you'll have to field a huge number of transactions, episode by episode." Another is added income -- Hulu Plus still runs advertisements, but it collects subscription fees in return for gives subscribers exclusive access to a larger library of programming, including full series runs and programs not available on Hulu's free site.

Application Up-sells (MLB)

Major League Baseball's approach to online content is a lot like the Oakland Athletics' "Moneyball" approaach -- both innovative and tightfisted. At $119, MLB.TV's season-long pass is no great bargain, but it's right in line with television-bundled options from cable and satellite providers. Yet as if the price of admission wasn't high enough, the service's best parts -- the At Bat mobile apps which provide on-the-go access -- cost even more. Last year the app cost $9.99 on Apple's App store, and this year (similar to how stadium ticket prices keep climbing), the iPhone, Android and Blackberry apps cost $14.99. In addition, Apple customers with iPads and iPhones have to pay for each device's application individually, and the applications expire at the end of the season. As can be imagined, fans have been outspoken on the price gouging, but baseball's brass are enjoying the financial spoils of playing hardball: MLB At Bat 2010 is one of the year's top grossing apps in iTunes, and its back-end technology has been licensed to run ESPN3.

Affiliate Model (ESPN3)

ESPN's new online video site, ESPN3, takes a page from cable television's playbook by generating revenue from affiliate fees charged to Internet Service Providers. In exchange for the fees, ISP subscribers can access content on ESPN3's web site -- programming that includes more than 3,500 live events from across the globe. "It's sort of like the new Wide World of Sports in a certain way," says John Kosner, ESPN's senior vice president of digital media. As a result of these affiliate agreements, the service is already available in more than 50 million broadband homes and is available for free to 21 million college users and U.S. military servicemembers around the globe.

The revenue model is unique to ESPN in the online space, and is remarkable in its scope. Sports content is some of the most expensive programming to produce, and as such, ESPN is one of the most expensive networks for cable companies to maintain. "It's among the most valuable channels that they have, the most valuable by fans and advertisers," says Kosner. "It's a high quality product and there's an expense to acquire, produce and distribute that."

In fact, says Kosner, the cost is so high that ESPN couldn't shoulder it alone. A major difference between television and Internet distribution is that the more people who watch online, the higher the distribution (or bandwidth) costs. "There's a lot of demand for the inventory on ESPN3," he says. "We don't think it would be successful as a strictly ad-supported project."

Though programmers are making money, it remains to be seen which model will emerge as the standard for online television revenue. "To say that one model fits everybody, is not accurate," says Hulu's Wei. "We'll continue to have multiple models, and over time, content providers will continue to learn which model generates the most revenue for them." And for consumers, the upside is that they'll be less likely to be blacked out in the future. The downside, however, is at what cost? For now, there's still nothing simpler than flipping on the cable box, sitting back, and watching grown men play a child's game.

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Paul Smalera
Paul Smalera

Paul Smalera is a senior editor for Fortune.com, guiding the website's coverage of tech, finance, investing and the economy. He has written about a wide variety of topics -- from the inner workings of the Google search engine, to the biodiversity protecting Svalbard Global Seed Vault, to the economics behind online dating websites and the impact of the Fed's policies on the national and global economy. A true generalist, Smalera believes every story is a business story if you follow the money.

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