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Copyright 2005 The McGraw-Hill Companies, Inc. http://www.mcgrawhill.com All Rights Reserved http://www.businessweek.com Business Week November 21, 2005 SECTION: News: Analysis & Commentary; Pg. 40 Vol. 3960 LENGTH: 2056 words HEADLINE: THE END OF TV (AS YOU KNOW IT); In an era of on-demand entertainment, Big Media is eager to give viewers the content they want. But who will pay for it? BYLINE: By David Kiley and Tom Lowry, with Ronald Grover in Los Angeles BODY: The string of groundbreaking deals struck on Nov. 7 has been heralded as the beginning of a media revolution. NBC Universal and CBS Broadcasting abandoned age-old policies and chose to make top shows available via video-on-demand services. Yahoo! Inc. announced that it will enable television fans who are away from home to program their TiVo digital-video recording devices remotely. ``The computer has crashed into the television set,'' declares Brian L. Roberts, CEO of Comcast Corp., the nation's largest cable operator, which will let customers order up CBS prime-time shows just hours after they air. But amidst all the hoopla over increasing consumer disdain for the daily TV schedule and enthusiasm for DVRs and iPods, one thing was missing: the business model. How will the producers of entertainment replace the profits they made from selling advertising aimed at a mass audience? It's going to be a painful transition, says Dennis Miller, a general partner of Spark Capital, a Cambridge (Mass.) venture-capital firm that invests in media and technology companies: ``Where we are now, there is no model that makes sense.'' So why the rush by media giants into the on-demand world? They're worried that audiences are fragmenting and that marketers won't keep paying for general audiences who are tuning out their messages. The Internet and handheld devices already provide access to all kinds of entertainment for a small fee. Internet ad revenue amounts to only a fraction of the $17.8 billion that network television ads generate, but the online take is growing by 40% a year. Network dollars are up only 2.6%, and that's the result of price increases that will be difficult to sustain with shrinking audiences. ``We have great content. What we need are new revenue streams,'' says CBS CEO Leslie Moonves. FLYING BLIND Even scarier for the networks is the growing competition from free content on the Internet. File-sharing Web sites like eDonkey, which don't charge anything, already account for half the volume of data -- TV shows, movies, and music -- sent via the Web in a given day. Some 3 million people are using eDonkey at any given time. ``There is no doubt that the merger of the living room TV set and the World Wide Web is coming soon,'' says Rishad Tobaccowala, chief innovation officer at global ad agency Publicis Groupe. So even though they don't yet have a clear profit plan -- and they risk cannibalizing some of their traditional TV fans by dangling 99 cents downloads -- the networks are plowing ahead. Certainly they have watched giants in other Old Economy industries stumble as they try to hang on to time-honored revenue streams while new rivals make inroads and consumer preferences shift. The networks, along with their counterparts in radio, movies, and professional sports, need only consider old-line companies such as Eastman Kodak, which was crippled by the digital photography revolution. Newspapers and magazines face stagnant or declining readerships and restless advertisers. So far publishers haven't figured out the formula for generating online revenue that's anything close to what they're making from their struggling paper-and-ink editions. And yet print-media executives concede that delivering their content electronically is critical to the long-term survival of their businesses. The video-on-demand (VOD) phenomenon isn't confined to cable-system menus and iTunes downloads. The entire Internet is, in a sense, media on demand, says Tobaccowala. ``That has changed how consumers feel toward all media, training them to feel puzzled and even cheated when they can't get what they want when they want it.'' Martin D. Franks, an executive vice-president at CBS who helped forge the Comcast deal, acknowledges that offering prime-time shows such as CSI at 99 cents a pop is very much an experiment, not a clear path to profits. But the network knows it must adapt to changing viewer and advertiser attitudes. ``We will look at how people respond, and we may adjust those prices,'' says Franks, who is optimistic about the foray. He offers the hypothetical case of a highly successful 8 p.m. show that snares 20% of the total viewing audience. ``That means that 80% of the households aren't watching'' that program, he notes. ``There is just so much audience available'' to whom an enterprising network can try to sell on-demand versions of the same show. Until now nearly every dollar the networks have raked in has come from commercials, with little effort being made to grab viewers beyond the living-room couch. That's why the networks are dipping their most profitable toes into unknown waters, making some of their top-rated shows available in new ways. A deal ABC struck last month to have episodes of its hit Desperate Housewives available for download on Apple Computer Inc. video iPods for $1.99 shows how the networks are cautiously experimenting. The series about the wacky women of Wisteria Lane generates $11.3 million in ad revenue per episode, according to Forrester Research Inc.. That translates to an estimated 45 cents per viewer per episode. By contrast, ABC is expected to earn $1.20 per download of an episode after Apple has taken its cut. Even if 20% of the show's audience shifts its viewing from traditional TV to iPod and ad revenue falls accordingly, ABC would still net $1.8 million more per episode than if Housewives weren't available on demand. But a hit like Desperate Housewives is the exception, not the rule. The networks have only a small number of highly rated shows, and it's unlikely that the duds would appeal to iPod users. It's all too obvious that many advertisers are turning away from less popular television fare. The networks have responded at times by twisting arms. To hawk their wares on Housewives, advertisers must comply with ABC's demand that they buy time on low-rated shows, too, as part of a package deal. It's an inefficiency that drives marketing executives nuts. Advertisers are also increasingly skeptical of the iffy science of broadcast-TV ratings, which aim to measure various slices of the viewing audience, such as the most sought- after demographic of 18- to-49-year-olds. Video delivered on demand -- whether via the Internet or cable -- allows for much more precise counting, not to mention the opportunity to gather detailed information from viewers asked to register online. As a result, ``the traditional prime-time TV placement of 30-second ads is dying a fast death,'' says Fred Suckow, marketing director at Nissan North America Inc.. The auto maker still spent $721 million on TV ads last year. But Suckow says he is more excited about the four-minute promotional films on the 350Z sports car and Titan pickup truck he has been running on DirectTV's program menu, which consumers have to click on to watch. In one of the splashy recent announcements, NBC said it would provide the DirectTV satellite network with programming. MOVING TOO FAST? As networks try to figure out a way to make VOD profitable, they can look to their advertisers for examples. Big marketers are already exploring what consumers will tolerate -- and even like -- in an online ad. General Motors Corp. is expanding a program that puts short promotional films on the on-demand menus of cable systems. This idea tested well in Philadelphia, where people identified as close to buying a car showed strong interest in watching the long-form ads. TiVo, for its part, places icons on 30- second ads that drive consumers to longer promotions if they are interested. The urgency of the networks' move online may wane in the short term before picking up again. Most baby boomers still aren't downloading free video from the Internet, and blue- chip companies are still shelling out big bucks for old-fashioned advertising on TV shows. But consumers under age 30 are tuning out, and audiences overall are splintering. Comcast carries several hundred channels of programming, but it will offer more than 4,000 on-demand features this year. And video entertainment is one of the Internet's fastest-growing draws. If network-TV audiences were futures, most investors would be selling. For that reason, Google Inc. is the company, more than any other, that frightens the media Establishment. The company's ad revenues were $6 billion last year and are expected to be $10 billion this year. What disturbs programmers and distributors at the big networks is that the company hasn't even scratched the surface of what its search technology might be able to do. It probably won't be too long before Google gets good at helping Web surfers find and organize all the available online video related to their hobbies. That pile of alternatives is likely to ``eat into traditional TV time,'' says Tim Hanlon, director of emerging contacts at Starcom MediaVest Group, a media-buying agency. TV networks that don't make their programming similarly available could find themselves the prime-time equivalent of Kodak's dying 35mm film business.