05/17/2010 05:12 am ET | Updated May 25, 2011

The Future of Cable Television

I decided to stop paying for cable last August, despite the fact that half of the first-run shows I watch are cable series. So when Comedy Central pulled The Daily Show from Hulu last week, and placed it on with three times as many commercials and a player that forced me to choose between watching in full-screen on my second monitor (a TV) and simultaneously working on my laptop, I took notice.

This week, the FCC laid out its vision for a future where everything is carried over the Internet, and Comedy Central cut the commercials back down to one per break for all but the first ad block. The future is clearly up for grabs. So I couldn't help but wonder, how long will I be able to avoid paying for cable, and more importantly, if everyone adopted my viewing strategy, would it be sustainable? Would someone still make Mad Men?

The numbers were just too compelling. All but two of the cable shows I watched were available legally and for free online, and my broadband connection wasn't going anywhere. As for those last two shows, one was available online for roughly $30 a season, leaving me to ask, "Do I really want to pay $600 a year to watch one show?" So I bought a $15 VGA cable to connect my laptop to the TV, and I opted to wait for the box set of True Blood. Netflix takes care of reruns and movies. I still get local channels over my rabbit ears, and thanks to digital broadcasts, I don't have to put up with static. For the most part, the news junkie in me is satiated by print, radio, and online outlets. How long that will last is another question altogether.

I can't help but think of those biodiesel proponents who fuel their cars on fast-food waste. When gas prices rise, they're fond of pointing out the relatively low cost of vegetable oil, but If everyone used biodiesel, the market would react by raising prices. Am I doing the same thing? Am I a digital free-rider, legally sitting atop cable subscribers and television advertisers, exploiting inefficiencies in the market? After all, the TV I watch online has nearly a fifth as many advertisements and cost me about one twentieth what cable would.

Hulu, where I watch most of my online TV, charges advertisers somewhere between $30 and $60 for a thousand viewer impressions. This is on par with standard television advertising, just with fewer ads. Assuming five ad placements an hour, an hour-long drama could pull in roughly $300 for every thousand viewers. The average production costs for a drama range from $2 to 5 million an episode, absent distribution and promotional costs. So breaking even requires more than 6 million viewers. Assuming a one-to-one replacement of viewers and setting aside the increased costs that come with success (e.g., the cast demanding $1 million an episode), popular shows like CSI Miami wouldn't be run into the ground. CSI regularly pulls in more than thirteen million viewers. For a show with a smaller following like Mad Men, however, there is a problem. Mad Men gets somewhere between 2 and 3 million viewers, and their production costs are estimated to be around $2 million an episode. That would put each episode more than $1 million in the red.

Interestingly, the first of my outliers was Mad Men. Since it wasn't available for free, I actually ended up buying the whole season. This arrangement might work out. If all of its viewers payed $1.99 a pop, it could produce a small profit. Reality TV could easily get by on ad support, given its low production cost and mass appeal, but I'm not worried about killing reality TV. If I had to make a prediction, I'd say the future funding of television is to be found somewhere between ad-support and pay-per-view, be it via micro payments, subscriptions, or standard pay-per-view. If I had to pay $1.99 for every hour of television I watched online, I wouldn't have stopped paying for cable, and if my options were limited to programs that could be funded by current online ad revenue, I'd probably watch a lot less TV.

Of course, we'll see the emergence of new formats. I love The Guild and Doctor Horrible as much or perhaps more than the next guy, but this is about the hour-long television drama. My guess, the drama will survive, what won't is today's cable company. Cable television is the antithesis of net neutrality. I quit cable because I didn't want to pay more for bits of information just because they're called television. When ISPs fight net neutrality, they mostly talk about bandwidth hogs and copyright pirates, but I'd be willing to pay for metered bandwidth, and more than that, I'm willing to pay the content creator.

If someone is willing to pay more for some content over another, she shouldn't have to pay that difference to a middle man as is currently the case with cable. That difference should go to the content creator not the distributor. Trucks on the information super-highway shouldn't care about what they're carrying, only how heavy it is. Cable companies should bundle all of their services and call it broadband. The margins are too small for anything else, and yes, this probably extends to the traditional network as well.

Things will change. However, this need not threaten the media creator. Quality television is expensive, just look at the credits of your favorite shows. A lot of work goes into their production, but my guess is that TV could get by on digital dimes because many of the current ad dollars don't actually pay for production. Networks pool the risk of failed shows and help grow an audience, but as with the music industry, there's probably a good deal of room to cut out the middle men. But what do I know? Maybe I should feel guilty for watching my legal television online. Why don't you use the comments to tell me what I'm missing?