There’s still room for disruption for television on the Internet

Bill Gurley recently wrote an incredibly detailed piece on how the TV industry works, how the money flows through the stack, and why a niche channel I never heard of — AMC — is suddenly a must-have simply because they have one hit show, Mad Men.

So the cable/satellite game works like this: every channel gets paid an affiliate fee by the cable/satellite company for every subscriber it has. So if the Disney Channel has a million subscribers on DirecTV, and they’ve negotiated a $1 affiliate fee, DirecTV pays Disney a million bucks.

A channel like AMC has to produce only one hit show to make it a “must-have”. If the whole world is buzzing about the awesomeness of Mad Men, and you’re DirecTV and you don’t offer AMC, you have a problem. So what do you do? You get AMC on your roster pronto, and sit back and smile as your subscriber base adds it to their monthly plans overnight.

Gurley makes the point that a channel like AMC only needs one hit show, and they can broadcast pretty much any old crap the rest of the time. Why? Because AMC’s affiliate fees aren’t based on how much people are watching their shows, it’s based on how many people subscribe to their channel. Mad Men produces huge subscriber counts, and there are diminishing returns for additional investment in content.

Hulu recently started charging for the service because cable networks like Comcast complained. Why should Comcast pay affiliate fees when Hulu doesn’t? Fox/NBC/ABC, who own Hulu, acquiesced, and now Hulu pays affiliate fees. That obviously completely changed the economic reality of running the service, hence the pay wall that now exists.

So it seems that the dream of on-demand, free (but ad-supported), streaming television on the Internet is dead. And not because there isn’t a demand. Who doesn’t love on-demand, free television? Yes, there are PVRs, and yes, network sites are increasingly making content available. But it’s not the same.

The problem is that the content creators are addicted to those affiliate fees (and who can blame them?), and as a result they’re in bed with the distributors.

I’d love to see a new spin on the Hulu idea, where content creators bring new properties straight online and skip the TV distribution model altogether. Mad Men was originally created by a production company called Road Rebel. Road Rebel sold the rights to Mad Men to AMC. What if Road Rebel had sold the rights to “Hulu 2.0″ and instead of receiving lump sum payments, agreed to a revenue share based on the advertising revenues the show generated, in perpetuity? And what if “Hulu 2.0″ wasn’t country-specific, but a geo-unrestricted distribution platform? Mad Men had a million viewers for their Season 1 premiere. That’s just in the United States, and just on an obscure cable channel. If a show was truly “hot” and everyone was talking about it, isn’t it reasonable to think that a show with distribution into any Internet-connected home worldwide would generate not just a million, but tens of millions of viewers?