NEW YORK (TheStreet) -- Here's something we know to be true: The Internet has killed a lot of traditional businesses, from bookstores to music labels to newspapers. We've mostly accepted this collateral damage as the price of progress, the casualties of a transformative technology.
And, to be sure, the nimble accessibility of the web has enabled upstarts to fill some of those voids, for better or worse. Indie musicians have more access to fans and funding than ever before. At the same time, bloggers rehashing gossip of dubious origin can score more page views -- for far, far less money -- than trained journalists investigating corruption in Washington.
But there's something inherently wrong with the digital content model. The money -- and there is an awful lot of it to go around -- is not making it into the right hands.
I Need My MTVConsider the revolutionary rise of cable TV in the 1980s and '90s. There's no question that it hurt the big networks. But it didn't kill them. They were forced to adapt and, for the most part, they did. Meanwhile, everyone involved made fistfuls of money -- both the cable companies (the providers) and the cable networks (the content creators). That's because the business model looks like this: a company like Comcast (CMCSA), Charter (CHTR) or Time Warner Cable (TWC) invests in the infrastructure to wire your neighborhood. Then they charge your household about $50 for standard cable. And, of course, you pay it because they have managed to convince most Americans that cable TV is no longer a discretionary expense but a necessary one. The cable providers take their fair share of that $50 each month, to reap the rewards of their capital investment and then some. But nearly half of that money finds its way back to the content creators. For instance, cable and satellite TV providers pay Disney (DIS) about $5 per customer per month for the simple right to broadcast the ESPN family of channels. At 100 million subscribers, that's roughly $500 million a month. These affiliate fees account for $6.1 billion a year, a full two-thirds of ESPN's revenue. Likewise, a few bucks of your cable bill are paid to Time Warner (TWX) each month -- the entertainment company, not the cable provider -- for the rights to broadcast CNN, TBS, TNT and the like. And so on. Even the old-school major networks like CBS (CBS) get a piece of this pie: About 10% of their income comes from these affiliate fees, which the cable company happily passes on to you, the customer. So in addition to earning some advertising revenues, the content creators are getting a cut from the middle man -- and thriving as a result. The Wild West Web Now consider the Internet model. Broadband Internet access from your ISP will run you a similar $50/month. But none of that -- not a penny -- will find its way to online content creators such as NYTimes.com, CNN.com or Wikipedia.org. The cable company, a mere middleman in this relationship, keeps all $50 of it. What's more, it's almost entirely profit, because they already invested in the necessary infrastructure years ago when they wired your home for cable TV. According to the Wall Street Journal: "Cable executives and analysts say about 90% of the money cable operators charge for broadband goes straight to gross profits, since there are minimal operational costs for providing Internet service. In contrast, only about 35% to 40% of what they charge per TV customer goes to profits, largely because of the programming costs they pay to media companies for the right to carry hundreds of TV channels." Unlike in the cable TV model, the billions of dollars in new revenue are not being shared with the content creators. They are left to rely solely on advertising or, increasingly, paid subscriptions from their most devoted users. It's an unfair system that fails to reward companies who make the Internet valuable in the first place. And it is killing quality journalism in this country, among other things. Iconic newspapers continue to go bankrupt, unable to make enough money from their biggest asset -- painstakingly researched journalism -- when it's available for free online.
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