Will Internet TV Really Be Better for Consumers Than Cable?

After a lot of fits and starts, Internet TV is on the verge of breaking out from its niche status.

And while online TV holds the promise of giving consumers more options than they've had in the past, it won't be a panacea.

Internet TVWhat's happening is that Americans who are fed up with their cable companies - the steep fees, lousy customer service, and restrictive "bundles" - have turned to Internet-based, video-streaming alternatives.

There's Netflix Inc. (Nasdaq: NFLX), Sling TV, Hulu, PlayStation Vue, and Amazon.com (Nasdaq: AMZN), just to name some of the most prominent.

Last month research firm MoffettNathanson reported that the total number of U.S. cable customers shrank by 0.5% from the previous year.

That may not sound like much, but it shows the industry is at a tipping point. The portion of Americans that pay for cable was 80% in 2012, a figure expected to drop to 76.9% by next year.

Companies in the cable industry and beyond know that Internet TV is the future - and no one wants to get left behind. The changes we're seeing now will touch just about every U.S. consumer of video content in some way.

Think about what's been happening:

  • We've seen huge mergers like the Charter Communications Inc. (NYSE: CHTR) deal to buy Time Warner Cable Inc. (NYSE: TWC) for $78.7 billion and AT&T Inc.'s (NYSE: T) $48 billion acquisition of DirecTV (Nasdaq: DTV).
  • Apple Inc. (Nasdaq: AAPL) is prepping an Internet TV service of its own, which is expected to debut next year.
  • Both HBO and Showtime started to offer their programming over the Internet outside of cable TV packages this year.

Moving beyond the era of cable TV companies sounds like a dream come true to most Americans. But Internet TV comes with its own share of frustrations...

The Good, the Bad, and the Ugly of Internet TV

To be sure, some things will get better. One TV trend consumers will like is much more choice.

Not only is Internet TV generating multiple service providers, but in most cases the consumer can view that content anywhere they like.

That means subscribers to a service will be able to watch their favorite shows on their big-screen HDTV, their tablet, their smartphone, or even their PC at work (on their lunch break, of course.)

The cable companies have started to move in this direction themselves. But many channels still aren't available on mobile devices unless they're on the customer's home network. That's partly because the contracts with the different cable channels often don't allow it.

As these contracts get renewed over the next few years, the rising pressure to make all the channels you've paid for available on all your devices should make this a standard.

And Internet TV will give consumers much more control over the mix of those channels. The days of being forced to buy a 500-channel package just to get the 20 you actually watch are numbered.

But just because consumers will have more flexibility in choosing only the video content they want doesn't mean they'll reap big savings. That's because most Internet TV services today have a lot of holes.

You can get movies and some TV shows from Netflix, but what if you want HBO? How about live sports or your local TV stations? Now it gets complicated.

Netflix, for instance, is $8.99 a month. HBO Now is $14.99. Sling TV, which has Disney, ESPN, and cable channels like AMC, TNT, and the Food Network, is $20 a month.

To get local channels, you'll need to buy an HDTV antenna to capture digital over-the-air (OTA) broadcasts. The cheapest ones run about $10 to $15 and can get a signal within 10 to 20 miles. More expensive antennas can get signals from 30 to 40 miles away, and the best, which can cost up to $100, can get a signal from 50 to 60 miles away.

The good news here is that an HDTV antenna is a one-time expense. But you'll have to switch between the two sources to access all your channels.

And don't forget, subscribing to video services is only half the cost. You still need to buy broadband Internet access from the cable provider. So you can only cut half the cord.

Why Internet TV Could Turn Out to Be More Expensive

Broadband costs vary widely by city and download speed, but for Internet TV to be practical, most people will need to spend about $60 a month.

Now add that to the cost of your other monthly subscriptions, and many people will end up with a bill close to - or even higher than - what they were paying under the bundle system.

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For example, you could pair the $50 PlayStation Vue "Access" package of more than 50 popular channels - including CBS, TBS, Fox Sports, and USA - with a typical broadband service and end up with a monthly bill of $110. And have far fewer channels than you had before.

Plus, many cable companies penalize customers that unbundle their services by charging more for the standalone service. And as more people cancel traditional cable, the big providers like Comcast Corp. (Nasdaq: CMCSA) might start to meter your bandwidth - and charge overage fees like telecom companies do with mobile phone data plans.

Comcast is already experimenting with a data cap of 300 gigabytes per month in several locations. Going over the cap triggers a fee of $10 for each additional 50 GB of bandwidth. Internet TV consumes about 1.6 GB per hour. But Netflix HD consumes as much as 3 GB per hour.

As more customers switch to Internet TV, the cable companies may well decide to go down this path to protect their profits. And customer costs - particular for families - could actually soar beyond what they paid under the old system. So we might never totally lose the bundles.

What consumers need is a video provider that offers reasonably priced choices from among all the categories of content (entertainment, live sports, local).

It's possible Apple's service will offer something like that, but we won't know until we see it next year. Let's hope so, because the smorgasbord of solutions we're looking at now will leave a lot of consumers unsatisfied.

The Bottom Line: The cable industry is undergoing a major transition right now. New Internet TV services are just starting to lure some customers away from the ubiquitous bundles of the cable companies. But while customers will have more choices, they might not save much money. The cable companies still control most of the Internet access in the United States and will use that power to protect their profits.

More Deals Among Telecoms: Right on the heels of the Charter-Time Warner merger announcement comes the news that DISH and T-Mobile are talking about hooking up. The crazy thing is that the merger madness in this industry still has a long way to go. Here are some possibilities investors need to watch for...

About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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