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In Search of TV

Hold on—maybe the Internet giants won’t take over television 11/11/2005 07:00:00 PM Eastern

CNN host Anderson Cooper is everywhere. He’s in an expanded time slot on CNN, he’s on media blogs, he’s in the gossip pages of the newspapers. But finding footage of Cooper on Google Video, which has a partnership with CNN, is a different story: A search returns no results.

The same outcome is likely for anyone searching for big profits in the TV business these days, especially Internet companies, which face a host of technical, logistical and legal issues in their quest for television omnipotence.

From the splashy news stories over the past week, the large Internet companies—Microsoft, Yahoo!, AOL and, of course, Google, whose stock hit a high of $397 days ago—seem to be on the cusp of changing forever the TV medium as we know it.

With their all-powerful search might, the thinking goes, the Internet companies will do to television what they did to newspapers: package others’ content and sell lucrative targeted ads against it. Like cable operators two decades ago, they’ll become a vital content gatekeeper in a world where the viewer watches any show, any time. The once powerful networks—broadcast and cable—will watch their ad base erode.

Several pacts between TV and Internet firms have fueled this fire. Last week, Associated Press and Microsoft unveiled plans to launch a streaming-video network that will deliver daily news to members. Google aired an episode of UPN’s Everybody Hates Chris online. CBS began offering free episodes of Threshold on its Web site. Time Warner is making dozens of Warner Bros. programs available for streaming on AOL.com.

But the fanfare is just that, say network executives, cable operators and Wall Street analysts. What you won’t find on the Internet is a wide selection of television’s top product, the popular shows that command 60 million viewers nightly.

While broadcast and cable networks are pushing product onto the Internet, they’re hesitating at giving up video beyond short-term promotions.

What gives the networks such sway in the $60 billion TV advertising market is a single powerful issue that will become increasingly difficult for companies to unwind: copyrights. Ownership of content has its rewards.

Indeed, while the rush to air TV programs online has promotional value, it’s merely an elaborate experiment for now: Will people watch shows on their computer? Every veteran TV executive knows that any large-scale migration of a network’s best content would upset the delicate supply chain of station groups, syndicators and advertisers.

“I don’t think we’re in favor of any tool that decides to record our content, no matter what functionality,” says Albert Cheng, executive VP of digital media at Disney/ABC. “There needs to be acknowledgement of copyright laws.”

Also, networks worry about handing bullets to the enemy. They risk building Yahoo!, Google or Apple’s iTunes into online gatekeepers—the same sort they face in cable and DBS companies—and diluting networks’ leverage.

Google and Yahoo! operate under a different financial model from television’s, one built in part on aggregating content that they do not own. (The profit margins in these companies are conservatively five times that of broadcast networks’.) Until those rights and other issues are resolved, large content owners will stick with the traditional pipelines.

Says NBC Chairman Bob Wright, an outspoken defender of TV copyrights, “One of the reasons why we like cable television, satellite and the iPod: While they’re not foolproof by any means, they at least have done a reasonable job of trying to protect [copyrights].”

TV executives live in a world where producers collect a license fee from the distributor in each “window,” whether it’s video-on-demand (VOD), broadcast, cable, DVD or syndication. “If you want to get added to the windowing scheme, you have to pay your way in,” says the head of distribution for one network group. “There’s no benefit to any of us doing business with those guys on a microtransactional basis.”

The content owners have a giant head start over the Internet newcomers. Says CNN.com Senior VP/General Manager David Payne, “We spent 20 years developing relationships with all our domestic and international affiliates and building a massive organization that brings in digital content from around the world. ... Technology is nothing without content. I like where we’re sitting.”

In many cases, networks have simply bypassed the Web firms, plunging into the Internet waters on their own. Viacom’s Comedy Central touts its Motherload, a five-channel broadband sampling of its TV shows and original online fare; MTV’s Overdrive offers programs and performances; and ESPN has 360, a broadband channel that shows games and programs not seen on ESPN television.

These Internet sites, offering streaming content, give the TV networks a strong position on the Web. “It’s not just [the Internet companies] coming into our space; we’re going into their space,” says Payne of CNN’s Pipeline, a broadband channel that will launch online this fall. “Pipeline has an excellent video search. You don’t need to go through Google or Yahoo! to find video of the killer tornado.”

No one doubts that TV shows will be watched on a variety of platforms: computers, plasma-screen TVs, iPods. But while many of the big agencies on Madison Avenue are shifting their resources from traditional television to new-media platforms, and several big-name ad execs have recently jumped to new-media companies, no one has figured out how best to make money from them. The main question is how Nielsen or another firm will track audiences for Web video.

For the time being, companies are only starting to look at ways to measure Web viewership of video. “As long as there’s measurement, this is a good thing,” says Brian Wieser, director of industry analysis for ad buyer Magna Global. “If you’re tracking impressions and your call to action is being measured, advertisers will only benefit.”

Commercials, the linchpin of the TV advertising business, are powerful ways to drive traffic into stores, fast-food joints and movie theaters. But it will probably be years before Web TV has enough strong product and users to cannibalize conventional TV, say analysts.

Perhaps most important, critics say, consumers simply aren’t ready for Internet TV—or even iPod TV—and may never be. Disney and Apple Computer recently struck a deal to sell episodes of Desperate Housewives and other Disney shows over iPod devices, which some say will challenge the traditional model of broadcast television, allowing consumers to view TV, films and other content whenever, wherever they choose. While the deal is ground-breaking, many wonder how much of the population wants to watch Lost on their iPod—or a football game on their PC—for more than a few minutes or so.

Steve Baker, director of industry analysis for consumer-research firm NPD Group, says the majority of viewers who come home after a day of work want to watch programs on a TV—not on a computer. “Watching TV on the computer is enhancement, but it’s not a replacement,” he says. “A lot of people are still on dial-up, and those on broadband might not want to wait for a movie to download. I can get in my car and go to Best Buy to buy the DVD before it’s done downloading. It requires people to be patient and tech-savvy, and most just aren’t ready for that yet.”

Media-research firm Points North Group found that, among 1,000 Internet users, only 12% watch an entire TV program online at least three to four times a week. Furthermore, it seems a lack of interest, not a lack of technology, will keep Internet TV from hitting the mainstream: Just 28% of Internet users expressed “strong interest” in watching regular TV shows on their computer. “For every consumer who showed strong interest in getting TV everywhere, there are two or three who currently have little or no interest at all,” states the report. “The challenge is to grow this beyond a niche business.”

Indeed, while the recent Yahoo!/TiVo partnership hints at the possibilities of a two-way, fully interactive set-top box, many believe that Internet TV will remain the domain of the tech elite. “The technology needs to get easier for the consumer to implement,” says ABC’s Cheng. “Until there’s a more ubiquitous adoption of Internet-through-TV devices, it’s going to remain a pretty much niche clientele.”

A Banc of America report subtitled “Assessing the Viability of IPTV [Internet Protocol television] as a Cable/DBS Competitor” reinforces this notion. “[IPTV] is less technologically and economically elegant than it sounds and probably couldn’t rival the cost of a traditional subscription-TV package for a decade,” it declares.

In the meantime, content owners—confident that the new platforms don’t erode their core viewing base—consider them almost found money. The cost of transferring the programs to new windows is next to nothing, meaning profit margins aren’t far from 100%.

The Internet giants are characteristically tight-lipped about their strategy. In addition to search capabilities, Yahoo! presents itself as a showcase for programmers—independents or networks—offering a place to push their sitcoms and dramas to the widest possible online audience. That plays to the strengths of Yahoo! CEO Terry Semel, former president of studio Warner Bros., and his video chief, Lloyd Braun, previously president of ABC. Yahoo! declined several requests for an interview.

When Google Video launched earlier this year, users viewed video that was copyrighted by big media companies, drawing the ire of major content owners. “We got a little bit careless, and some things that were copyrighted snuck in, and there was some bad press around it,” CFO George Reyes acknowledged at a recent investor conference.

But he contends that Google Video’s content will improve dramatically. “We’re in the very early stages of this. It’s not just George Reyes and his kids’ family videos,” he says. “It’s trying to get some people that own real content to keep their right to that content and make it available for broader viewing.”

Anderson Cooper may not pop up today, but Google is intent on bringing more video online. Says Google Senior Product Manager Peter Chane, “We’re working with content providers and rights holders to bring information that’s offline onto the Internet and make it accessible. Our role is very similar to what we do as a search engine: connect users with information.”

Few can predict which player along the path from producer to consumer will profit most, says Larry Jacobson, former president of RealNetworks Inc., which tried to get major TV networks on board for its RealOne subscription service. The service is stalled for now. “The winner,” he says, “will be whoever has the best one-on-one relationship with the customer.”

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