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The New Deal

How TV executives will find digital dollars in the coming year 12/30/2005 07:00:00 PM Eastern

Last year, the TV industry discoverd a variety of new ways to deliver their shows - on iPods, on video phones, even online. This year, they vow to figure out how to make money off of them. It was almost unthinkable only a year ago. Consumers can now pay to see TV's best shows in a variety of new ways. Starting this month, some Comcast subscribers can watch the previous night's CSI for just 99 cents on video-on-demand (VOD). Fans can also download an episode of Lost to an iPod, dial up ESMN's sports highlights on a cellphone or log on to wath Two and a Half Men via Yahoo!

Programmers thrive when new distribution pipes open, but some TV executives cutting the deals say they are making it up as they go along. While it is still unclear whether consumers will pay to watch TV on a small screen, execs are already struggling to construct the proper template to make big profits if they do. With each new announcement, many say privately they fear being left behind. When Apple and ABC set the market by announcing their $1.99-per-download deal last October, it set off a flurry of number crunching, as broadcast networks and studios tried to come up with the right set of rules to make money.

Now dealmakers are desperately trying to value everything from cellphone clips of 24 to old episodes of Adam 12. Some of these execs still quietly maintain that last year's announcements amount to little more than hype.

The short-term nature of the deals reflects many companies' experimentation. While NBC U's current deal with Apple is multiyear, CBS's VOD deal with Comcast, for instance, only goes through the end of next summer.

There is a reluctance inside CBS to enter into long-term agreements because things in the industry are moving so quickly that, what appears to be equitable today, might not be a year or two down the road.

As they try to pin down prices and values, TV executives acknowledge that, in the coming year, several business trends will emerge as guides for these new deals:

1. SMALL SCREENS=SMALL BUCKS (FOR NOW)

While network deals with companies such as Apple have attracted big media attention, big dollars have yet to follow.

NBC U, for example, says that it will only generate about $10 million from iTunes sales in 2006—or the rough equivalent of ad revenues for one typical Thursday night on NBC. And Apple says it has sold more than 3 million video downloads, so only about $6 million in revenues have come in altogether, with the majority of that number reportedly generated by music videos and not TV shows.

“If I were to categorize what happened this year, it's a bunch of announcements that don't mean anything,” says one studio chief, speaking anonymously because he is involved in a recent new-media deal. “No one has been able to show me that viewers are looking for this, and where's the money? Everyone is just trying to look smart. I still think the biggest game-changer is high-definition.”

Besides high-definition TV, no one is sure what the impact of VOD services over TV will be, given that sector's growing number of titles. After all, once you can call up any show on TV anytime, why watch it on a small screen?

One reason some analysts are optimistic is the plethora of consumers with devices capable of receiving video. “There are 30 million iPods, but there are 600 million cellphones out there, and over time all of those get upgraded,” says Nielsen Entertainment Senior Corporate Analyst Larry Gerbrandt. “So the potential of that is much larger than we are seeing right now. This is literally day one in this future.”

Just 1% of mobile subscribers accessed video in September, but 10% they're likely to do so in 2006, according to a study by research firm M:Metrics.

Given the potential, networks and studios are rushing to figure out how to capitalize if and when demand takes off. The worst-case scenario they envision is a repeat of what happened in the music business, when consumers wanted to download individual songs and the industry was not ready.

“Anyone who sticks their head in the sand on this is really short-sighted,” says Warner Bros. Television Group President Bruce Rosenblum.

2. DVD SALES COULD FALL; RATINGS COULD RISE

The ability for consumers to buy on-demand, download and own both new and classic television shows could signal a challenge ahead for the red-hot TV-on-DVD market.

Sales of TV shows on DVD have shot through the roof. Previously the only non-DVR means of digital ownership for a consumer, the TV-on-DVD market is projected to generate $3.3 billion in 2005, up from $2.3 billion in 2004 and more than eight times the $400,000 in sales in 2001, according to Home Media Retailing.

NBC U's Frederick Huntsberry, who was involved in the Apple deal as NBC Universal president of television distribution and Universal Pictures Group president of international operations, says he expects 90% of revenues from new-media applications in 2006 to be incremental, meaning $1 million of NBC U's $10 million in iTunes revenues this year would be poaching money from another TV-related business.

Many TV executives believe that if on-demand products—on TV or ipod—take off, the DVD market would take the biggest hit. Cable operators continue to expand the library of movies and TV-show titles to subscribers on-demand. Consumers can watch current shows through such sites as Yahoo! and Google—CBS recently struck a deal with Yahoo! to stream Two and Half Men and How I Met Your Mother. Some TV executives worry a consumer will pay to download and own every episode of a show when they want to rather than wait months for the DVD to come out.

In fact, TV-on-DVDs helped establish the retail price point for digital downloading of television shows. An analysis by Nielsen Entertainment's Gerbrandt shows that, when a show is bought for $1.99 on iTunes, the content provider receives $1.39 after Apple takes its 30% cut, roughly the same a studio gets per episode from a 22-episode DVD box set that commands $30 wholesale.

Ratings of original-run shows could actually benefit from quick downloading. Despite affiliate worries about shows being available just a day after airing, network execs are quick to point out they believe the downloading actually helps to build audience, especially in more-serialized shows.

For instance, an executive from a rival network said that ABC's deal to put Lost on iTunes turned him into a fan. He hadn't watched from the beginning, and when the show got hot, he felt it was too late to start watching first-run episodes due to its serialized nature.

“I downloaded all the old episodes, caught up, and am now hooked and I'll watch it on ABC when the next first-run comes out so I can be part of the social experience,” he says. “So that platform has created a viewer that would never have been.”

And those iPod-wrangled viewers may be part of the reason that, for new episodes since the ABC-Apple deal, viewership for Lost and Desperate Housewives is up 17% and 8%, respectively, from the year-ago episodes.

3. MORE HITS WILL BE AVAILABLE AS COPYRIGHT ISSUES ARE SETTLED

Look for more hit shows to download in 2006 as networks and non-aligned studios cut their first deals in this space.

Traditionally, a network licenses a TV show from a content supplier, and buys a bundle of rights, which once was as simple as a couple of airings over the network. Now, deals need to include new-media rights.

This past year, networks made in-house shows available for download, as dealing with corporate-cousin studios was essentially taking money from one pocket and putting it into the other. In 2006, a deal template will develop to allow all shows to find their way to the latest gadget.

Some studio executives believe the true template for such deals will be a part of a larger copyrights package. “If we were to make a deal with one of the Big Four networks, it would be a template deal that would cover a lot of other areas in the digital-distribution world including rental, VOD, SVOD, broadband, wireless and iPod. I don't think we'll do it as one-off deal.”

And studios may want more than just larger license fees for these rights, as compensation could also include bargaining chips such as moving up off-net syndication and DVD windows. NBC U's Huntsberry says such deals will come sooner than later. “In the next six months, the first deal will be struck, and once the precedent is set, then the domino effect will come after that,” he says.

4. TV COMPANIES WILL REALIGN OR GET LEFT BEHIND

As technology evolves ever more rapidly, one of the biggest challenges for TV programmers will be getting different divisions of the company on the same page.

“In a lot of companies, the digital piece of a business is in a separate place than network production, so it's going to rely on a lot of people getting along within their own companies,” says one studio chief. “It's going to be a mess figuring this out.”

CBS the week of Dec. 12 held an internal digital-media summit, in which the network brought together all of its new-media divisions from different business units to streamline strategy across the new CBS Corp.

NBC U also is among those setting an early example, implementing several organizational initiatives to position itself to adapt to the evolving marketplace. While the recent executive reshuffling that left GE CMO Beth Comstock overseeing digital got the headlines, some lower-level moves also demonstrate practical day-to-day strategies.

For instance, NBC U has a designated person just to manage the NBC U section on iTunes and supply all NBC U units with news on Apple's current businesses and innovations. The company has also hired an engineer trained in Six-Sigma, a quality-measurement and improvement program, whose job it is to redesign processes within the organization to deal with new-media opportunities.

“We are now investing in new media and beginning to affect the DNA structure of our organization,” says Huntsberry. “How do I license content to hundreds of on-demand customers around the globe who want to do business with me? I can walk away from them and only deal with the top 10 big ones, or change my processes whereby I can do business with the bulk of them, collect my money faster and be able to go into business with more people.”

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