Killing the free episodes online may very well demonstrate that Internet TV cannibalizes over-the-air broadcasts. That would be a safe conclusion if "Gossip Girl" ratings climbed significantly in the next few weeks. I doubt that's going to happen, however. I think the Internet TV audience is separate from the group that turns on the set in the living room at night. It's people who don't have access to a TV when the show they want to watch is on the air, or who want to time-shift programming but don't have a DVR. In fact, there's some evidence that making shows available online boosts the a show's broadcast ratings by giving more people the opportunity to discover it or catch up on episodes they missed.
My guess is that the real problem here is that The CW hasn't figured out how to get the kind of advertising revenue per viewer online that it can on the air. Perhaps The CW's online ad-sales force needs to spend some time with its counterparts at Hulu and CBSSports.com. Downloadable versions of "Gossip Girl" episodes will still be available from Apple's iTunes for those inclined to pay for them, but the strongest demand online seems to be for free, advertiser supported content. And if The CW won't meet that demand, someone else certainly will.