Triple-play offers need to chase movers

“For certain segments – kids right out of college, very poor – there will be some erosion, but for mass market, they aren’t going to abandon [paid TV service],” Altman said. “We just invested $1000 in an HDTV. We want that clarity and picture quality. We won’t accept pixilation. We want a dominant experience in the home which is immersive. An HDTV can be had today at Costco or Walmart for $800 and far less if you accept a small one.”

Ironically, research shows that the feature which most improves the quality of the picture in consumers’ eyes is surround-sound, Altman said. “It’s the perfect example of something that is an unmet and unknown need.”

Paid-TV service providers are now scrambling to bring more features and long-tail content to their offerings “so there is no reason to get it through the Web” using consumer electronics gear that links the Internet and the TV, he said. “Service providers will, over time, build more into the set-top box – even access to Hulu – to do it through the TV and set-top box rather than over the Internet using a bunch of consumer electronics devices.”

Altman also challenged whether the broadband pipes – owned and operated by cable and telecom companies – would have the capacity to deliver high-quality video over the Internet to a TV set.

“I don’t know that they want to add that kind of capacity to their networks to download Internet video,” Altman said. “There is a lot that has to happen to engineer the network so that many people can download HD streams and watch them live – it’s not just bandwidth, it’s also latency and packet loss – a lot of things have to happen. There’s the number of hops and prioritization of traffic.”

By nature, consumers want to watch something immediately, Altman said, which is why efforts by companies such as Comcast to offer movies on-demand on the same day they are released in DVD form are compelling. By contrast, downloading high-quality video over the Internet is likely to remain a matter of delayed gratification.

“You can download it over 18 hours, store it on a hard drive and then watch it – you are going to get to do that,” Altman said. “But that’s not what people want to do. We only plan because we have to. We subscribe to three Netflix movies and think about what we watch in advance because we have to, but we’d rather just pick out a movie and watch it right away.”

If service providers can meet most of the demand through their paid TV offerings and set-top boxes, they can retain customers, even as some casual watching of Internet video increases, Altman said.

(Coming next: How wireless companies can compete with low-cost players such as MetroPCS and Leap)