How the Internet is Changing TV

By Chloe Lutts

How Conan was Undone by Media-Hoppers

The Times They are A-Changin’

Apple TV: A Good Gateway Device

Note from Cabot Wealth Advisory Editor Elyse Andrews: As longtime readers know, we have expanded over the last three years to include the voices of nearly all of our editors in Cabot Wealth Advisory. Today I’m bringing you the first issue written by Chloe Lutts, the editor of Dick Davis Digest and Dick Davis Income Digest and a third-generation Cabot employee (her grandfather, Carlton Lutts, founded Cabot and her father, Tim Lutts, is the current publisher). Enjoy!

Last month, Conan O’Brien hosted his last ever “Tonight Show,” only seven months after inheriting the franchise from Jay Leno. NBC’s decision to move Leno back to his late-night spot, with the side effect of getting rid of Conan, was mostly about ratings. Neither Leno nor Conan had high enough viewership to justify giving them the airtime they were getting.

In the Sunday New York Times published two days after that last show, an article headlined “O’Brien Undone by His Media-Hopping Fans” picked apart some of the reasons “The Tonight Show with Conan O’Brien” didn’t garner more viewers. The article posited that some of Conan’s biggest “problems” were the unconventional media-consumption habits of his most enthusiastic demographic: younger viewers. Though he was popular with 18-34 year olds, the article said,  “regularly assembling those young adult viewers in significant numbers in the late-night hours has become a daunting, if not impossible, task.”

The primary reason, as set forth in the Times article, is the number of alternative entertainment options available to those “media-hopping” viewers. Those include other TV shows; at 11:35 pm, when “The Tonight Show” aired, 18-34 year olds were as likely to be watching “The Colbert Report” on Comedy Central, Adult Swim cartoons on the Cartoon Network or sports programming on ESPN. In Conan’s first six months on “The Tonight Show,” he averaged 719,000 viewers under 35, versus 746,000 for the satirical news show “The Colbert Report.”

A newer source of “competition” was also mentioned in the article though: “Add to all the other issues the fact that Mr. O’Brien’s young fans did not really have to watch television to see him. His shows were made available later on Web sites like Hulu. And his best comedy bits would frequently be posted on other sites–and passed around by fans–shortly after they appeared.”

That four-line paragraph was the article’s only mention of watching TV online, but if we’re discussing the viewing habits of young media hoppers, I think it deserves much more attention. That may be because, six months ago, I canceled my TV subscription and had a Time Warner Cable representative disconnect my cable box and take it away. I still pay Time Warner Cable for Internet, but my bill is now about $40 less every month.

This step may seem extreme to some, but it was a logical decision after months of under-watching my $40 worth of TV channels. The reason wasn’t, by any means, a lack of interest in television. I enjoy a number of TV shows, including “fake news” shows “The Daily Show” and “The Colbert Report,” the fabulous period drama “Mad Men” and sitcoms including “The Office,” “Parks and Recreation” and “30 Rock.” I also watched “The Tonight Show” occasionally while Conan was on it (but will likely never watch Leno). However, because I never watched “The Tonight Show” at 11:35 on NBC, I wasn’t one of the 700,000 or so viewers counted by NBC. In fact, until three weeks ago, I thought “The Tonight Show” was on at 11.

As the Times article reported, we now live in a world of near-infinite entertainment options. In my mind, the days of sitting down in front of the television when my favorite shows are on (or worse, sitting down and flipping channels to see what’s on) are over. Instead, I sit on my couch when I’m ready to relax, whether that’s 6:10 p.m. or 1 a.m., and decide what I want to watch. And my options are, if not infinite, far greater than the number of TV shows on cable at that moment.

If I want to watch Jon Stewart skewer hypocritical politicians on the previous night’s “Daily Show,” I turn on my flat-screen TV and switch the input to a computer running the free operating system Linux. What might be called an entertainment PC, this computer is dedicated solely to delivering content to my TV. It cost about $500 to build, the price of about a year of cable.

From there, I can choose one of three different ways to watch “The Daily Show.” The first is to launch the computer’s browser and navigate to Comedy Central’s Web site, where I can watch clips from any show from the “Daily Show” archives. I can watch the last few weeks of shows from start to finish in HD. These shows are completely free and interrupted by only a few short advertisements. (Also on Comedy Central’s Web site, completely free, are full episodes of “The Colbert Report” and “South Park” and clips of many other shows, as well as Web-exclusive stand-up shows and shorts.)

My second option is to go to Hulu, a Web site that officially launched in 2008, and a joint venture of NBC, Fox and ABC. Currently, the site provides completely free access to shows from the three owner-networks as well as Comedy Central, USA Network, Bravo, Syfy, A&E and more. All the videos are free (for now) and are interrupted by a minimal amount of advertising, usually no more than two minutes of ads per half-hour show.

And because Hulu is engineered to run on a computer, some of the ads are interactive, allowing viewers to choose ads that most interest them or follow links to advertisers’ Web sites. By some accounts, this increased potential for user engagement means Hulu can charge more for ads than TV networks can. However, rumors about ad rates vary widely.

The third way I can watch “The Daily Show” is similar to both the first and second, but involves an additional step. Instead of going directly to Comedy Central’s Web site or Hulu, I can launch an application on my entertainment PC called Boxee. Boxee is a completely free application that anyone can download at It is designed to run on entertainment PCs just like mine, where it makes watching content over the Internet as easy as watching TV.

To watch “The Daily Show” on Boxee, I go to the TV Shows page and search for it or select it from my personalized list of favorite shows. Boxee then offers me the option to stream the show from Hulu or from Comedy Central’s Web site. Both are instant, and contain the same ads, or lack thereof, that are on the site the show is coming from.

Boxee’s real advantage though, is the diversity of content it finds and allows me to play on my TV. The TV Shows page includes streaming content from dozens of Web sites, including Hulu, Comedy Central, NBC and Fox. It also includes TV shows I’ve downloaded from the iTunes store or elsewhere. I can search for a specific show I want to watch, or browse the page to see what shows have recently added new episodes. I can also watch movies from my personal collection, Hulu or other online sources.

After watching TV shows, I use Boxee second most often for playing music. Through Boxee, I can listen to so-called “Internet radio” from Pandora or, Web sites that create personalized playlists based on your music preferences. I can also listen to music I’ve copied to the PC.

Finally, dozens of applications expand Boxee’s functionality beyond TV and music, by providing access to third party content. Some of my favorites include The Onion News Network application (or app), which streams the satirical “news” clips available only on the Onion Web site; The BBC News app, which includes hundreds of up-to-date BBC News podcasts; and The Big Picture app, which is a smooth interface for viewing the Boston Globe’s daily photo essay feature, The Big Picture, full screen on my HD TV (it’s even better than on their Web site!). There are dozens more apps with functions I’m not even aware of.

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Boxee’s one drawback is its newness. The application is now in its Beta version, which is significantly more reliable than the Alpha version, but still has bugs (most obnoxious are relatively frequent crashes). I don’t expect the application to gain a wide following until it’s out of Beta.

Boxee also has no obvious business plan yet, though the company has announced it will introduce a payments plan soon to allow it to offer more content. In the blog entry announcing the news, Boxee management wrote: “The move towards the Internet as a main source of entertainment does not mean everything will be free. … The iTunes store has already shown us that people are willing to pay for content when it’s affordable and easy to access. Our goal is to equip the content providers that we’ve spoken with over the past year, both big and small, with a way to monetize their content above and beyond the advertising-only model.”

TV online is still a very new market, and content creators are still trying to figure out how to monetize it without driving users away (to illegal downloading sites, for example.) It’s still too early to predict the winners of the shift to TV online (other than media-hopping consumers.) But when they do emerge, they’ll be the innovators who can make money by delivering the content consumers want to watch when they want to watch it.

I wouldn’t be surprised if Boxee develops a sound business plan and becomes a leader in this market, but I also look forward to other contestants emerging as the market grows. There’s plenty of demand for good online TV sources, and I think there’s also plenty of money to be made.

As the iTunes store showed us, even the media-hopping under-35 demographic is willing to pay for content when they think it’s worth it. I’m a part of that demographic, and I recently willingly increased my monthly entertainment expenditures from $0 to $8.99 in exchange for a subscription to Netflix (NFLX). For that $8.99 a month, I gained unlimited access to thousands of movies and TV shows (that have been released on DVD), many of which aren’t available online.

The defining factor in my decision was the ongoing expansion of Netflix’s streaming library. Through the streaming library, Netflix subscribers can now watch movies and TV shows instantly on their TV, using an internet-enabled device such as a DVR, computer or a video game console (I use an Xbox 360, which works great.)

The streaming library is currently pretty limited, but Netflix is working hard to expand it, partially because it eliminates mailing costs. Earlier this month the company added hundreds of Warner Brothers titles to the instant library in exchange for delaying the rental availability of Warner Brothers’ new releases by 28 days, which the studio hopes will encourage more consumers to buy the DVDs.

I can’t claim to know exactly where the growth of TV-on-the-Internet will take us, but I am sure it’s going to grow. I wouldn’t be surprised if Boxee does well (though it does have competition) and I’m fairly certain Netflix (NFLX) will continue to expand.

Unfortunately, Boxee isn’t a public company. But Netflix (NFLX) is! Last week, the stock broke out to new highs on big volume, following an excellent fourth quarter earnings report. The gap up on earnings may be a sign of renewed strength. Cabot Market Letter Editor Mike Cintolo wrote about post-earnings gap ups in a Cabot Wealth Advisory last week, and said “A big, 20% or more upmove on earnings from a company with a good story and some sponsorship is usually a good buy right away.” NFLX’s gap up was just about 20%.
There are other contenders in the race to put TV online. Comcast (CMCSA) and Time Warner (TWX) introduced a service called TV Everywhere last summer. So far, the service lets users who are already paying cable subscription fees watch TV shows from the cable networks online. It’s interesting, but its reliance on the conventional TV business model could become a liability.

An alternative investment idea is the much-loved Apple (AAPL), which recently reported record quarter profits (thanks in part to a change in iPhone profit accounting.) Thus far, Apple’s only forays into the world of TV online have been the addition of videos to the iTunes store and the introduction of the Apple TV in March 2007.

The Apple TV’s primary function is to play content from your computer’s iTunes Library on your television. It can also play content from YouTube and stream Internet radio, among a few other features. The Apple TV (modified with a warranty-voiding larger hard drive) was actually my first step away from reliance on cable TV, and I think it’s still a good “gateway device.”

However, its capabilities are somewhat limited, compared to those of an entertainment PC. I’m sure Apple, expansionary visionary that it is, is already thinking about its next, more serious foray into the world of TV online. (The company recently began pressuring networks to halve the cost of TV shows sold in the iTunes store.)

I can’t say when Internet-based TV technologies will begin to surpass traditional cable. It probably won’t be tomorrow. But when it does happen, you can expect some legacy businesses will be left in the dust, while new innovators you’ve never heard of will grow with the market.

Wishing you success in your investments and beyond,

Chloe Lutts
Editor of Dick Davis Digest
For Cabot Wealth Advisory

Editor’s Note: Chloe Lutts is the editor of Dick Davis Digest, which brings you the cream of the crop from Wall Street’s top analysts and advisors in every issue. The advice covers stocks, gold, ETFs, mutual funds and more. There are small-cap stocks, large-cap stocks, foreign stocks, Green stocks, utilities and technology stocks. And there’s no better way to build a broad-based, high-performance portfolio. Click below to learn more!


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