And yet, how groundbreaking is this? Aren't television ads already targeted to some degree? One only has to watch the nightly news on major networks to witness how pharmaceutical companies target their ads to a predominantly older audience. Luxury automobiles and brokerage firms advertise during golf events, as do beer companies during football. Certainly, user-specific data provided by the Internet may help fine-tune ad targeting a bit, but this is undeniably an evolutionary, rather than a revolutionary development.
To understand the huge impact that Internet delivery will have on television distribution, one must understand the state of television now, as well as its previous technological revolution.
Cable television has been around since the 1950s, but it was not until the 1980s when consumer adoption of cable really became widespread. In 1972, the U.S. government promulgated "must-carry" rules, requiring cable companies to provide channels that were broadcast within the local area. The problem for the cable industry was that it desired a way to segment its customers and extract additional revenues from premium subscribers.
Making the problem more complicated was the fact that cable was a "dumb" technology in the sense that the distribution company could not choose specific channels to provide to individual customers. Thus, the infamous A/B switch was born. Basic-level customers received only one transmission on one cable, which typically consisted of local networks, and perhaps a small assortment of special-interest channels such as Nickelodeon for children, Lifetime for women, and so on. A collection of premium channels was transmitted on the other cable, but to receive those the customer would have to pay additional fees. Thus, the business model of tiered-television was born.
Tiered-based television continues today, in spite of the fact that modern television distribution technology easily allows the satellite or cable company to activate or deactivate each individual channel to each individual customer. Though no longer bounded by technology, tier-based subscriptions continue to force consumers to pay for channels that they do not want to watch, by inducing them to pay for desired channels.
The ugly part of this is that television companies actively exploit this business model to subvert the negotiation process with cable and satellite distribution companies. Here's how it works. Suppose media giant Disney owns ABC and ESPN, which are both extremely popular channels. Distribution companies must pay content providers "carriage fees" to broadcast their programming to cable and satellite customers. The costs of these carriage fees are then levied upon subscribers in the form of tier-rates.
Let's suppose that Disney wants to launch a brand new channel called "ESPN Classics" which shows re-runs of old sporting events. You might ask yourself, who on this planet would want to watch a baseball rerun from the 70s? If Disney was forced to negotiate the price of providing this channel directly with the end consumer, the vast majority of the population would not even consider paying a dime. The remaining few would probably not pay very much for the nostalgia of watching old sports.
But of course, this is Disney, and since they also control the rights to ABC and ESPN, they can effectively tell the cable or satellite company "either you provide ESPN Classics or we don't give you ESPN and ABC." In 1994, the FCC permitted local television networks to withhold permission from distribution companies to rebroadcast their signal. This afforded media giants who owned major networks vast bargaining power over cable and satellite companies, because they could use rights over local channels to leverage inclusion of fringe channels such as ESPN Classics on lower, more popular, tiers.
At the same time, the end consumer is divorced from the negotiation process. If he sees ESPN or his local ABC affiliate disappear, he's going to be angry with his cable or satellite company. Note that the media giants are clever; they will not negotiate this way with a satellite company and a cable company at the same time. Thus, while one set of consumers is deprived of their precious sports, the media company exerts further pressure by pointing out the fact that the distribution company's competitors are still providing the programming.
Another more recent case is the arrival of the NFL Network. This channel is owned and operated by the NFL and not surprisingly, broadcasts football games. Even though football is unquestionably popular, the NFL network has essentially demanded that distribution companies provide their channel on basic tiers at a relatively high carriage rate. Some cable companies have offered to carry the NFL Network on "sports tiers" but the NFL has balked at this proposal. Thus essentially, the NFL has stated that it would like all cable and satellite customers to pay for football, regardless of whether they actually enjoy it or not.
In the end, this is where the transition to the Internet as a television distribution medium really has an opportunity to destroy the broken business model that persists today, and again empower consumers who have, up until now, had very little indirect power over pricing negotiations.
The exciting thing about the Internet is that not only is there absolutely no need to "tier" groups of channels together, there is actually no need even for channels themselves. Under a truly perfect scenario, content providers would be forced to negotiate the price of every program they produce with customers. For example, just because I want to watch Battlestar Galactica does not mean that I want to watch Doctor Who. I'm willing to pay for one and not the other.
In much the same fashion, iTunes already shows how the growing transition to Internet distribution for music has empowered consumers. iTunes has forced the recording industry to sell individual tracks of music, rather than entire CDs stuffed with unwanted "filler" songs.
HBO may be a prime example of how Internet distribution might revitalize television. Typically, HBO is sold to customers on its own, demanding its own subscription fee, and not bundled with a tier of other channels. Therefore, HBO prospers or fails solely on the merits of its own programming. Perhaps the pressure of directly servicing the customer, ideal in a capitalistic market, led to HBO's success in dominating Emmy award nominations. In 2003 HBO's programming was nominated for 109 overall nominations. Its closest competitor, NBC was nominated for only 77.
On the other hand, selling individual programming a la carte over the Internet could devolve into a race to the bottom where every producer dumbs their programming down to the least common denominator, ensuring its widest possible audience. Even still, is this so much different than the American Idol, COPS, and Friends television we enjoy today?
The way that the market works now is like a buffet-style restaurant with two or three separate serving tables. If you just want to eat a little, you are still paying the same price as the fat pig who wants to gorge himself. With a true Internet model, you would only be charged what you order, and what you'd like to eat.
Or you could read a book.