I used to be the type of person who would get a full cable TV package and rent movies on VHS frequently, now I just download. I typically watch video downloads then delete some time later to free up space. Clearly someone is missing out on my business and I am not at all averse to paying for some content. When Netflix starts offering more streaming content in HD then I am there.
I think there needs to be a different model for current TV programs though. It's hard to sit through ads when one can simply download a tvrip with them all removed. Paying $2 per episode is not reasonable to me because, even in season packs, the costs can very quickly balloon to well over the cost of cable + a custom built DVR. There needs to be some flate rate service or some service with really cheap transactions for a single episode. I would stick ads in as a way cheapen the cost. Looking at superbowl ads as an extreme case, it costs advertisers 3 million bucks to reach a potential 100 million viewers, or 3cents per viewer, per ad. For a typical 1 hour TV program we get 18 minutes of ads, or 36 commercials. At superbowl prices this costs all the advertisers about1 dollar combined, for regular TV I am sure it is far less than that but it's a nice number to look at and gives a rough idea how broadcasters are actually making money. They are making a very small sum for each ad they are making you watch. Why not turn that around and keep the costs in the same ballpark? (Greed obviously, but let's pretend someone can see the benefit to not being so greedy)
There are many ways one could play around with this as all I am talking about is a video on demand service, but let's say it works like this. Subscriber pays some small monthly fee to sign up for streaming service, netflix or Hulu or what have you. This service allows you to purchase new premium content, ie new episodes of Lost, for a small, reasonable fee. Refund this cost if user agrees to watch ads. These ads can be targeted based on users demographics and there will be considerably less than 18 minutes per hour. Show monthly balance on some navigation bar that is always present except when watching content to influence viewer's decision. Display some sort of logo, or preview screen of all ads to be shown during program while viewer is deciding to watch for free or to pay for the ad free version. Charge advertisers for ads that are viewed, this can be done at a premium because they can be targeted and will have less competition. Charge them less for the logo in the preview screen, but do charge them. Pocket the money from those who pay for the ad free version. Yes it would take a long time to make something like this work, but with the right pricing I think it can work and it is a way that content providers can benefit from the internet rather than lose out.