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I installed XBOX Live with Netflix about 2 weeks ago and it’s changed everything in the living room. After having cancelled Comcast’s television and lowering my media bill by more than 50%, I’d never go back.

The big benefits are the obvious ones: being able to watch TV shows and movies on demand without commercials, streamed in High Def for about $70/month (NetFlix, XBox and internet subscriptions included). There are some drawbacks. No live TV, no local content or sports, but I can live without those. Another one is discovery is harder – I need a new recommendation engine either through friends or through some automated service.

The shift in television consumption habits is analogous to the one we’ve seen in music: I used to purchase a larger collection of music than I do today, in the form of an album, generally to acquire the one or two gems that aired on the radio. After the birth of the mp3, my music collection habits are reflected in my iTunes library. Music from my youth consists of 12-15 song albums and music of late is punctuated by one or two great songs from many, many more artists. The same for television. I used to purchase all of NBC (and hundreds of other stations) from midday to midnight. Now I watch 30 Rock and the Office and hundreds more movies (international, vintage, etc).

In both music and television, wide adoption of this form of content purchasing has dramatic impacts for the economics of content production. Immediately total revenues drop. On TV, there are fewer ad slots to sell (if at all on NetFlix) and in music fans are purchasing fewer songs, both leading to lower revenues. This trimming of the fat around content sales implies that in order to maintain profitability one of several things must happen:

1. Revenues must be generated in some other way
2. Content production costs/quality must fall in aggregate
3. Total high quality content production must decline, accompanied by a rise in lower quality/higher volume content

All of these shifts are in full swing. Sites like Pandora, iMeem, Lala among others tried to complete new forms of audio sharing and discovery with novel business models. Shows and networks with smaller production budgets like Revision3, NextNewNetworks and the YouTube stars are bridging the gap between the multimillion dollar epics on primetime and America’s Funniest Home videos.

We haven’t seen the decline in content production on TV or in music yet. On the contrary, we’ve seen an explosion in user generated content as production costs for the average consumer plummet with the advent of video publishing sites, inexpensive cameras and social networking to drive audiences. But we’ve seen this decline in newspapers, with staff journalists receiving pink slips as newspapers shutter print offices around the country. The high quality, higher cost content production is seeing declines in output and citizen journalism coupled with blogging is ascending.

All in all, we’re giving rise to a middle class of content, a category that exists between the seven or eight figure TV shows, newspapers and bands, but above the desert of most user generated content. Where highly talented users are empowered to produce content, distribute it to millions, based on its merits. Taking a note from thoughts about the shift Gutenberg initiated with the printing press, instead of translating Bibles from Latin to English for the proleteriat and dramatically increasing literacy, this shift is bringing content and music production to the masses and increasing our technical literacy.

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