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By Carl Howe

SeekingAlpha's David Jackson noted that the San Jose Mercury News claims Google (GOOG) and Yahoo! (YHOO) are quietly agreeing to deals that compensate some of the country's top news organizations for their content and help drive more traffic to their Web sites. This follows an article earlier in the week in the Wall Street Journal noting that Walt Disney's (DIS) ESPN has been charging a few broadband Internet service providers, notably Verizon (VZ) and Charter, for the rights to carry its ESPN360 service.

What does this all mean? It means that a few businesses are dipping their toes into cable TV-style pay-for-content models on the Internet and seeing if the water is warm or too cold.

Now the Google/Yahoo model actually makes some sense and follows a model illustrated on cable TV by CNN and Reuters. Many people don't realize that much international video footage on CNN is actually shot by Reuters and sold to CNN. CNN adds editorial, marketing, production, and distribution to the cable networks, who pay CNN enough in subscription fees and advertising to compensate both Reuters and CNN nicely.

More alarming, though, is the recent deal by ESPN to restrict content to specific Internet providers under an exclusive pay-for-content deal. Should these deals become widespread, it ties the availability of content to the wire over which it travels. While this may sound innocuous at first glance, if it became widespread, it would lead to a balkanization of Internet content. Suddenly, it might be necessary to have a Verizon Internet connection to watch ESPN, but a Comcast (CMCSA) one to watch HBO. And because of the need to wall off exclusive content, suddenly one of the primary values of the Internet -- namely, the ability to access any service from anywhere and on any device -- would be destroyed. This deal is probably the best argument possible for network neutrality legislation to avoid fees like this being imposed on customers in bundles rather than being chosen a la cart.

So short story: the topic is complicated. The Google/Yahoo story feels reasonable; remember, they did a very deep deal with AOL too involving buying their stock and revenue sharing. The ESPN deal, though, I find rather alarming, because it promotes turning today's Internet innovation into a walled garden of gated content. Let's hope the marketers at ESPN realize that restricting their market to specific service providers is not the way to grow their business.

Source: Google, Yahoo Testing Cable-TV Model Online -- Where Will it Lead?