This just in: Many consumers are tuning out, clicking on

By Nick Wingfield

The Wall Street Journal

Kenny Johnson, a senior credit analyst for Fox Home Entertainment in Garden Grove, Calif., recently took a hard look at his finances – and canceled his cable-television subscription.

With a newborn child at home and growing household expenses, he said, the decision saved him and his wife more than $40 a month – or roughly the increase he is paying at the gas pump every month for his commute to work. The couple held onto their DSL Internet connection, which costs about $38 a month.

Now the Johnsons access most of their TV shows online through Web sites such as Hulu.com , in addition to the free broadcasts they pick up over the airwaves. They also bought a set-top box that allows them to stream shows via Netflix.com to their TV set, including episodes of NBC’s “The Office” and Showtime’s “Weeds.”

“To me, it looks just like my cable,” Johnson said.

In the past two years, nearly every major network show and many of the biggest cable programs have become available on the Internet. The virtual library of content includes everything from “Desperate Housewives” and “CSI” to “The Colbert Report” and “Mad Men.”

Some of the biggest hits online are memorable TV moments. More than half of the people who saw recent “Saturday Night Live” skits featuring comedian Tina Fey as vice presidential candidate Sarah Palin watched the skits over the Internet, according to a survey of 500 viewers earlier this month by Solutions Research Group. Nearly a quarter saw them on YouTube, and 21 percent saw them on NBC.com or Hulu.com.

Many shows can be viewed for free and are accompanied by a dollop of ads that’s small when compared with the number of commercial breaks on television. As a result, some cost-conscious consumers are ditching their cable subscriptions altogether.

“I’m saving a lot of money,” said Tony Leach, a product manager at an online stock brokerage firm . Leach canceled his $60-a-month cable subscription two years ago and has watched all his favorite television shows on the Internet ever since.

The online TV bonanza reflects a scramble by networks and cable stations to avoid the fate of the music business, which is still reeling from the effects of piracy and early missed opportunities to capitalize on the Internet.

Complete episodes of about 90 percent of prime-time network television shows and roughly 20 percent of cable shows are now available online, according to Forrester Research analyst James McQuivey. There are still notable holdouts, such as Fox’s “American Idol” and current seasons of HBO series such as “Entourage.”

By aggressively seeking to stay ahead of consumer behavior, content providers also are fueling the growth of this new form of distribution, and that could undermine the economics of the television business, critics have said. More than 80 percent of U.S. households pay an average of $70 a month to get programming piped into their homes via cable, satellite or telephone companies. Most of the remaining households watch advertising-supported shows on their TVs – programs that are broadcast the old-fashioned way, over the public airwaves.

The number of people watching all their programs online is still small; some estimates put the number at just 1 percent of the total TV audience. In part, that’s because watching online isn’t as easy as channel surfing on the couch, TV remote in hand. Viewers either must watch shows on their personal computers or use a device such as Apple TV, which allows them to download shows from the Internet onto their television sets.

Within the next several years, however, media and technology executives said a host of new technologies will make television access to online video a mainstream phenomenon. Vudu already sells a $299 set-top box with a remote control that allows users to download television shows for $1.99 per episode. Microsoft and Sony both sell television shows that users of their Xbox 360 and PlayStation 3 video-game consoles can download over the Internet for viewing on television sets.

Netflix subscribers can buy a $99 set-top box from Roku that streams videos on their TV sets. The service is included at no extra charge in the monthly Netflix fee for renting DVDs.

Patrick Crowley, a 35-year-old freelance Web designer who lives and works in a loft in downtown San Diego, has configured his computer and his space so he can shift easily between work and play. His Macintosh has a 24-inch monitor and sits on a desk on one side of his living room, where he spends most of the day working on projects for clients. After hours, the Mac serves as his entertainment center, which explains the couch, lounge chair and coffee table positioned across from it on the other side of room.

Seated at his computer, Crowley types Hulu.com into the Web browser. (The site is a joint venture of NBC Universal and Fox, whose owner, News Corp., also owns The Wall Street Journal.) That’s where he goes to watch many of his favorite shows, such as the Comedy Central’s “The Daily Show with Jon Stewart.” He also downloads programs from iTunes, where advertising-free episodes sell for $1.99 each. His library has about 100 episodes, including installments of Showtime’s “Weeds “ and NBC’s “Studio 60 on the Sunset Strip.” He’s even installed an application onto his iPhone that turns the device into a remote control for his iTunes video downloads, so he can change clips without getting up from his couch.

It takes about 10 minutes to download a half-hour TV show on iTunes, though Crowley said he can usually start watching it a few seconds after the download begins. Shows on Hulu and the TV networks’ own Web sites are “streamed,” a method that allows videos to begin playing nearly instantly but leaves no permanent copy on users’ computers.

Since canceling his cable tv service from Cox a year and a half ago, while maintaining his high-speed Internet connection through the company, his monthly service bill has gone to about $60 a month from $160. “It’s a much more efficient way of watching TV,” Crowley said. He figures he spends about $8 a month at the iTunes video store and watches about as much television as he did before he cut the cable cord.

A survey of NBC.com users in the second quarter of 2008 showed that 83 percent of respondents watched a show on the network’s Web site because they missed its original airing. “We see no evidence of a substantial number of people choosing to watch online instead of on television,” said Alan Wurtzel, president of research for NBC Universal.

Most TV shows are available online only after a delay from their original air dates, anywhere from a day to months later. TV networks take down many older episodes after a while, so users don’t have a permanent library of some shows.

The online selection of live sports games is spotty as well. This season, for example, the National Football League will make Sunday night games available live on the Net, but those amount to only about 7 percent of all regular-season NFL matchups . Cable and broadcast news shows typically aren’t streamed live on the Internet, unless there’s a major breaking news event such as Hurricane Katrina.

Still, research firm Nielsen Online estimates that in June, 3.2 million Internet users watched more than 106 million video streams on Hulu.com, a site that wasn’t available to the public until March. Walt Disney’s ABC.com delivered nearly 27 million streams to 2.9 million viewers that same month, according to Nielsen. The data include everything from behind-the-scenes clips and segments of shows to complete episodes.

Other research indicates that online video-watching is cannibalizing TV audiences. According to a spring survey by Integrated Media Measurement Inc., a research firm that tracks media consumption, more than 20 percent of viewers in the firm’s 3,200-person panel watched some prime-time network television online, up from roughly 6 percent in the fall. Half of those online viewers said they were no longer watching those shows on television.

“What this study is showing is that the long-vaunted convergence of the TV and the computer is happening faster than anybody thought it was happening,” said Tom Zito, Integrated Media’s company’s CEO.

Craig Moffett, a cable-industry analyst at Sanford Bernstein, said he believes TV and cable companies are recklessly pursuing Web viewers to avoid seeming like “Luddites,” without considering the long-term consequences if too many customers pull the plug on their service in favor of free Web video.

A typical half-hour TV show contains about eight minutes of advertising, while that same show online contains about two minutes of ads, or about a quarter of the “ad load,” Moffett said.

Cable channels, meanwhile, may be taking an especially big risk because they typically get half or more of their revenue from subscriber fees shared by cable and satellite operators – a business that could be jeopardized if people start canceling their pay-TV subscriptions. (Broadcasters such as ABC, Fox, NBC and CBS don’t get a cut of subscriber fees from cable carriers, since the networks’ channels are also available free.)

Tensions are beginning to heat up between cable operators and cable channels over free Web video. Glenn Britt, CEO of Time Warner Cable, has been one of the most outspoken people on the topic, telling cable program executives to not expect to continue sharing subscription revenue if they keep giving their top shows away for free online. When asked how programmers have been responding to such comments, Britt said “Not well.”

Executives at several cable channels were reluctant to discuss the topic, at the risk of further straining discussions about Internet television with their cable-operator partners. “We can’t just cut the cable companies out,” said one of those executives.

Of course, Web watchers still will need fast Internet connections to get all that video, a potential boon for the broadband Internet businesses at cable and telecommunications companies.

Consumers’ sympathy for the cable operators is in short supply after years of rate increases. Between 1995 and this year, cable and satellite prices have increased by 79 percent, almost double the level of inflation during that period, according to the Bureau of Labor Statistics. Total U.S. cable-industry revenue from TV subscriptions hit roughly $53 billion in 2007, plus an additional $23 billion when Internet access and telephone fees are included, according to Bernstein Research.

And while cable operators have said that the industry has provided far more value over the years, with everything from more channels to video-on-demand, most consumers actually use only a small portion of the cable-TV offerings they pay for. Last year, the average home received 118.6 cable channels but tuned into only about 16 of them, or 13 percent of the total available to them, according to Nielsen.

Jeff Pulver, founder of PrimetimeRewind.tv , which makes it easier to locate Web TV shows, said he believes the Facebook and Google generation won’t look askance at getting TV shows from the Internet.

Still, adds Pulver, who also co-founded the Internet phone company Vonage, “Some people will continue to subscribe to cable, the way their grandparents did.”