The short version is that unlike its broadcast peers, CBS (CBS) has been reluctant to make many of its shows available on the Web because it worries that doing so cuts into its core TV business.

So while GE’s (GE) NBC Universal and News Corp.’s (NWS) Fox put Hulu together, CBS stayed away. And when Disney (DIS) decided to join the joint venture earlier this year, CBS executives argued strenuously against the deal. Instead, CBS has been content to use the Web as a promotional tool for TV via outlets like Google’s (GOOG) YouTube.

The longer version is below, via the transcript of a brief chat I had with Smith this afternoon to discuss his plans and the network’s. This is stuff he’s talked about before–to reporters, in industry forums, and even via emails he wishes he hadn’t written–but I’m running it at length here.

Because 1) I think Smith does a good job of explaining the push-and-pull of Web viewership vs. Web economics that everyone in big media is grappling with, and 2) I want people to see just how difficult it is to keep up when Smith talks. He can get out a lot of words in a relatively short time.

I also had a quick chat with CBS CEO Les Moonves, who made many of the points Smith did, but with less verbiage: I’ll get you that transcript shortly, too.

Peter Kafka: Since you’re going to be advising CBS’s Web video strategy, why don’t you lay out, for the record, where things stand?

Quincy Smith:

We recognize that the Web is two things. It’s both a new medium…and there my example has always been, look at fantasy football: When you’re nice enough to watch the Jets just pound the snot out of the Raiders on Sunday, on a CBS channel…on fantasy football on CBSSports.com, you start on the Tuesday before and end the Wednesday after.

And what are you doing? You’re personalizing it, you’re becoming more of a fan of the game [Smith goes on to praise CBSSports.com's feature set]. All of those things are additive, so when Sunday comes in, you’re actually more of a fan, and you’ve even more convinced you’re going to watch that broadcast show.

Now, I realize that sports is reasonably bulletproof, and a good case study to begin with versus some of the other programming, but the fact is, the Web is a new medium. So what do I also mean? Tech reviews on CNET, Money Watch being watched on BNET. GameSpot videogame reviews.

Access to content that CBS didn’t already have, that are additive–both in their own right online, with the margins that the CNET business is used to, and where we’re getting just stronger and stronger from a margin perspective–and potential content that can also be applied to our [local TV stations owned by CBS], our affiliates, our broadcast news, as well as the radio. So that’s the side of our business that is $600 million revenue and $50 million-plus profit on the bottom line.

The other side of the Web, the side that is most thought of by many journalists, is the threat of an IP-deliverer of video. And how you turn that threat into an opportunity.

And so, from that perspective, as  you know, we didn’t go ahead and say, “Okay, we’re going to lock down and stream, with all of our other peers in broadcast, and come up with the same rules, and embed and right-click this and go away.” I’ve never had a beef with Hulu. Hulu’s always worked as a great service. That’s part of the problem.

As a network, we need to make sure that our content is being seen where the dollars matter. And right now that’s on air. Opportunities like TV Everywhere–we’re not putting all of our eggs in that basket, though we are big advocates of it–are ones where you can actually take and expand and extend the television market online, so it doesn’t matter what screen you watch “CSI” on; what matters is that you watched it, it counts and you saw the ads.

But until that happens, it’s crazy to just stream the shows for zero economics. When in fact you can make a lot more money doing things that are additive and complementary to the rest of the CBS line. That’s where CBS interactive comes in now.

Kafka: But TV viewers are showing an increasing interest in watching their programs on the Web, whether from legal services like the Web or illegal torrents and pirate sites. Don’t you need to reach them where they are?

Smith:

Now, if you really look at those numbers, what they’ll say is [online and offline video are] both growing, right? We’re having the best year ever as America’s largest broadcast network, and I think that 99.9 percent of that–this is the quote I’ve never been able to get in there–is that’s [because] of the great content that we have. There’s some infinitesimal basis point that’s relevant [to CBS ratings because] we are making sure that when people watch it, they’re more inclined to watch it on television. For now.

Once that solution moves, once those economics move–whether that’s more ads, [higher] CPMs, more ad buyers….You and I can say all day long, “We’re sold out on Web video. That’s going really well. It’s sold out.” Well, no kidding, it’s sold out. It’s a $700 million market. The television market is $120 billion. And of that, $700 million, half of those [ad buyers] are spending  90 percent of their time doing Google keywords, not buying online video.

The key is, how do you turn television buyers into video buyers? And that’s where a solution like TV Everywhere comes into play.

And by the way, looking at [Hulu CEO Jason] Kilar’s comments the other day, in Colorado [at an industry convention], he sees that too. He’s more sophisticated on this stuff than most anybody. From the perspective of, he understands that’s where the big dollars are. And so he probably went at it as, “I’m going to aggregate all the people first, so hopefully things like TV everywhere come to us.” From our perspective at CBS, we’ve got to go to them.

I don’t hate Hulu. Hulu’s world-class video viewing. What I don’t understand is, why license all that content to something that works that well, that seamlessly, yet–without the economic model around it?

CBS paid $1.8 billion for CNET last summer, and today it is dealing with the consequences: A re-org and layoffs.

CBS execs won’t release specifics on the firings and won’t say how many people were let go altogether. So news will be coming out in piecemeal fashion for some time.

The best that I can tell, though, the cuts came throughout the company’s interactive group, from its London-based last.fm radio service through CBS (CBS) headquarters in New York to CNET’s homebase in San Francisco.

Based on the fact that CBS Interactive boss Quincy Smith flew to the west coast to quarterback the re-org this morning–and the fact that CNET was much, much bigger than the CBS Interactive group–I’m assuming that more CNET employees were let go than anyone else.

Quincy, if I’m wrong, please let me know. And CBS Interactive/CNET employees can reach me directly at peter@allthingsd.com.

In the meantime, here’s the new structure of Smith’s group, via an internal memo that comes from him and Neil Ashe, his CNET counterpart:

Team,

As we come to the end of 2008, we have a lot to be proud of. CBS Interactive is the best online content network for information and entertainment. Our properties are expanding, advertisers are capitalizing on our properties and their scale, and we are positioned well to continue to grow. As we prepare for 2009 and beyond, we’d like to update you on this progress, announce some organizational changes and comment on the broader market environment and how it impacts CBS Interactive.

Progress

CBS Interactive is the 8th largest Internet network in the world. Our combined traffic is up nearly 30% since we closed the merger this summer. CNET, CBSSports.com, BNET, GameSpot, TV.com, CBS.com, last.fm, and CHOW have each had record traffic within the past three months. Our commitment to our users is paying off.

Advertisers have noticed. We have recently signed and announced deals across several of our properties with Microsoft, AT&T, Intel, Bertolli, EA, and GM. In these challenging economic times, marketers are consolidating their efforts with their best partners. Our properties, our audiences, our ideas and our insights will continue to differentiate us in the marketplace.

Finally, we have contributed to and benefited from the TV and Radio divisions of CBS. We’ve done nearly 1,500 purpose-driven promotions to our properties on Broadcast TV, Radio and local TV Stations; CHOW and GameSpot content is running on the CBS Outernet; and CNET ran a major consumer campaign in markets like New York and San Francisco through CBS Outdoor. CBS Interactive is also a key partner to CBS Television Network for major broadcast events. In just the last week, we featured complementary content for events including The Victoria’s Secret Fashion Show, the Grammy Nominations and the SEC Championship.

Moving forward, we have a lot to look forward to. Events like CES, The Grammys, and March Madness on Demand are all just around the corner. Each represent huge cross-platform opportunities where CBS Interactive will again help complete the experience with coverage on air, online, and on mobile for our audiences.

Organizational Promotions and Changes

As we enter 2009, we are making some changes to our organizational structure to capitalize on audience and advertiser overlaps. We are also making some changes to key functions so that we can realize the benefits of our position in the marketplace. These changes mark another significant milestone in our integration, as we fine-tune our organization to best take advantage of the power of our entire network.

Sports, Games and Music

We are combining our Sports, Games and Music properties into a single group led by Steve Snyder. Steve has tremendous product and leadership experience and an enthusiasm for each of these categories. In addition, Tom Jones will be moving over from CNET to head-up the sales efforts for this group. Within the group, our talented senior leaders including Jason Kint, Rich Calacci, Jaci Hays, Kevin Menard, Felix Miller, Doug Schmidt and others will report to Steve and to Tom.

Entertainment & Lifestyle

We are also moving our Lifestyle properties, CHOW and UrbanBaby, to the Entertainment group (TV.com, CBS.com, The CBS Audience Network and TheInsider.com) to capitalize on the similarities in audience and advertisers. This group will continue to be led by Anthony Soohoo with sales led by Ken Lagana. We’re excited to see the innovation that will come from this group in 2009.

Technology & News

Under the continued leadership of Joe Gillespie, our Technology & News division will bring CBSNews.com and CNET News.com into a single CBS Interactive News Group. Each site will maintain its own brand identity, while benefiting from shared resources in design, product and engineering to deliver deeper and more comprehensive coverage of major stories and events. Led by Mark Larkin, with Dan Farber as Editor-in-Chief, CBS News.com and CNET News.com will also have the opportunity to share content and collaborate on stories for the benefit of their unique audiences.

CBS Interactive Marketing

We are bringing together our key marketing functions into a new group called CBS Interactive Marketing led by Mickey Wilson. The group brings together expertise from across the organization so that we can capitalize on our biggest opportunities, and elevate the company to be a strategic marketing partner whose products, consumer insights, and ad innovations are critical to our clients’ long-term success. They will establish the company as the standard for premium content online, and define and evolve brand strategies to capture the biggest opportunities for audience and revenue growth through market planning, insights and execution.

CBS Interactive Business Development

We are also bringing together all of our business development activities. This group will be led by Mike Marquez. Mike and his team will be responsible for the development of all new partnerships, investments, and acquisitions. They will be charged with taking advantage of knowledge sharing across the whole company to ensure that we are the strategic partner of choice for the industry.

Market Conditions

As you know the general economic environment continues to be a challenge. We have always been very aggressive about managing our costs, and that requirement is even more critical now than it has ever been. We believe this new, more efficient organizational structure will produce better results for CBS Interactive, and also result in lower operating costs. It is always very difficult to make these kinds of reductions, but they come after a thorough review of how we are organized and how we operate, and what best serves our many users, advertisers and employees.

CBS Interactive is a special place because of you, and we thank each of you for what you have done, are doing, and will do to exceed the expectations of the tens of millions of people who come to our properties every day.

Today, we sit in a great position. People seek out our brands because we provide them with the information and entertainment they want and need, and marketers seek us out because of the powerful audiences we attract. We are positioned to grow in 2009 and beyond.

Best,
-q, NA