Brave New TV Land

By JEANNE McDOWELL, Jeffrey Ressner

Dick Wolf looked skeptically at the shiny new video iPod he had given his 12-year-old son for Christmas, and prepared to watch a downloaded version of 24 for the first time. "Who's going to see anything on this screen?" shrugged the 59-year-old TV producer, whose Law & Order dramas favor gritty, realistic street scenes over high-tech gadgetry and geekspeak. But when Wolf inserted the white earbuds and started watching the 2.5-in. LCD, he had an epiphany. "The screen size became meaningless. I was in the moment. After 30 seconds, I knew it would change the game."

The game is the $60 billion television industry. When the savvy producer pitched a new crime show called Power to NBC, he made sure to play up its download-ready qualities. In Wolf's words: "I drank the Kool-Aid." As Wolf and other producers sell their wares in the annual TV-industry ritual known as development season, new technologies are changing the way they do business. With high-quality video available on 200 million PCs via broadband, 200 million 3-GB mobile phones, an estimated 4 million iPods and other devices, the Big Four networks (ABC, NBC, CBS and Fox) are scrambling for ways to deliver content over a panoply of platforms. They are also scrambling to figure out a business model that can predictably deliver profits in this variegated market.

It used to be that hit shows aired once or twice on a TV network, then had an afterlife in seemingly endless reruns on local stations or down-the-dial cable outfits. Today, however, series such as Lost, Battlestar Galactica and The Office are treated to multiformat distribution: they are sold as downloads or video-on- demand, cut and clipped for cell phones and marketed via online video blogs or audio podcasts, sometimes hours after they air on television. Or sometimes before. Late last month, NBC debuted another new Wolf drama, Conviction, on Apple's iTunes weeks before its network premiere, to generate buzz for the series.

Those new distribution channels are reconfiguring the programming process. "You can't look at a program anymore in terms of just airing on TV," says Larry Gerbrandt, a senior analyst for Nielsen Media Research. "The network has become the first of multiple windows and screens that get exploited. They're now beginning to view themselves as more than broadcasters." An IBM Institute for Business Value study in January was even more blunt: "This is the beginning of the 'end of television as we know it.'"

The so-called end-time began last October, after ABC agreed to put Lost and Desperate Housewives on Apple's iTunes store as $1.99 downloads, giving viewers their first taste of (legal) Internet access to hit shows. "Every new-technology company had been courting us," recalls Disney-ABC TV president Anne Sweeney. "It's one thing to discuss possibilities, but when we saw the video iPod and iTunes store, the consumer experience was so vibrant, it convinced us that this was the right technology." Within a month, CBS and NBC made plans to offer some of their top shows as 99-c- video-on-demand selections through cable company Comcast and satcaster DirecTV, and soon Google, AOL (owned, like TIME, by Time Warner) and others joined the party.

Since then, the networks' arrival on the digital frontier has become less of a carefully strategized business plan and more like a crushing stampede, with almost daily pronouncements and a flurry of press releases. CBS boasts it broke new ground by selling Survivor on its website; NBC Sports trumpets that it will make $6 million from its online Olympics coverage (take that, Simon Cowell!); Disney-ABC says it will stream many of its series for free; Fox boss Rupert Murdoch remarks that his Internet services will generate $350 million in revenues this year.

Revenues? That's nice, but for all the dealmaking and dollars bandied about, no one is able to say with certainty when this distribution cafeteria will turn into a viable business with real profits. In traditional broadcasting, networks make money by charging advertisers for commercial space--an effective and time-tested financial model. With the $1.99 downloads, nets stand to make about $1.39--compared with 44-c- per household typically earned from ads on an hour-long drama. But new-media ventures are still in their nascent stages. NBC estimates it will make $10 million from iTunes downloads in 2006--an amount equal to ad sales from one Thursday prime-time lineup.

"We don't know what the right business models are," admits Fox Digital Media president Peter Levinsohn. "There's a $1.99 sell-through model, subscription models we would like to explore and rental models that probably make sense. On some levels, an ad-supported model can be most effective. Hopefully, a single model will settle in over the next months." But for Beth Comstock, president of digital media and market development at NBC Universal, flexibility is essential. "The imperative is speed," she says. "You have to be nimble. Every network has to be ready to move where the technology goes."

Besides downloads, profits may come from online video ads, which Web tracker eMarketer projects will soar to $640 million by 2007, nearly tripling last year's take. America Online this month launches In2TV, an ad-supported lineup of six streaming-video channels featuring 300 episodes of such vintage series as Kung Fu, Growing Pains and Falcon Crest. "It's not material everyone wants to own," says AOL vice president Erik Flannigan in a bit of an understatement. "But certainly shows like Wonder Woman can be entertaining from the kitsch factor alone." AOL executive vice president Kevin Conroy says he's "at or near the point" of selling out a full year's worth of ads before the service even launches. In2TV will juice up some shows with byte-size featurettes, quizzes and interactive segments.

Repurposing older content is just one way networks and portals are retooling television with a new digital mind-set. Newer shows are another matter. "We call it 360 development," says Jeff Gaspin, president of cable entertainment and digital content for NBC Universal. "We now look at every show's potential for wireless, online and other new media." The Tonight Show with Jay Leno, for instance, has an "embedded" writer-producer whose job is to focus on the best bits for nonbroadcast platforms. In dramas, Law & Order producer Wolf envisions shooting more close-ups to accommodate smaller screens, as well as edgier scenes that might help sell downloads but wouldn't get past the networks' censors.

The strategic game is changing too, as networks leapfrog directly to new media with original shows. NBC could never compete on the air with Fox's American Idol, but this summer on its website, NBC is trying a talent search called StarTomorrow, produced by record exec Tommy Mottola (a.k.a. Mariah Carey's ex). Also this summer, Fox's animated hit Family Guy--resurrected on TV after huge DVD sales--will find its third (but probably not its last) life online with new episodes.

Fox pioneered "mobisodes," customized cell-phone mini-programs meant to promote existing TV series and provide new income streams. This year cell-phone entertainment and information revenue is expected to top $34.6 billion worldwide, up from 2005's $27 billion, according to the Yankee Group research firm. CBS and Fox are marketing mobile-phone content directly to consumers, bypassing tie-ins with wireless-phone companies. CBS is selling news and Entertainment Tonight video "alerts" for mobile phones, while Fox Corp. has opened a new "mobile storefront" called Mobizzo to sell clips.

It could take half a decade before the winners and losers of this battle emerge. One prevailing paradigm, from analyst Josh Bernoff of Forrester Research, forecasts cable firms and Web portals as most "promising" because consumers look to them for both onscreen and online content. His studies indicate that cell-phone content may become way too pricey for most consumers. The right mix of advertising with video on demand, he contends, stands a good chance of breaking out as the biggest earner.

Traditional television will see a painful 10% drop in revenues from advertising over the next two years, says Bernoff, so "like a dying patient accepting a terminal condition, the networks have had to accept a change in how they do business. Audiences are shrinking, but rather than just sit around and suffer, TV networks decided to diversify." All the talk about how teenagers and kids are turning away from television may be true, he says, but "young people will get jobs, get married, buy houses, buy big expensive TV sets and turn into the same people who are watching TV now." In other words, the couch potato is not an endangered species. The difference is merely that the next crop will consume television in different ways. "The Internet generation won't leave their computers behind, but they'll have just as much affinity for TV shows as the current generation," he says.

NBC's Comstock concurs with the additive analogy. "Think of a day in the life of a consumer," she says. "TV viewing hasn't gone down, but other forms of interaction with different media have gone up. So people aren't necessarily watching less TV. They're just doing other things at different times."

Doing other things occasionally forces people to miss a key episode of a favorite show that has a narrative arc. Need to know who was booted off Survivor? Doze through a part of Lost when a plot twist was revealed? That's how networks are hoping to cash in on downloads and video on demand while helping consumers catch up. "Unless you're one of the 10 million households who have devices like TiVo, the only other catch-up mechanism so far has been buying full seasons of a show on DVD," says AOL's Flannigan.

In sheer buzz alone, new media are showing some promising results. After ABC's hits Lost and Desperate Housewives were downloaded on iTunes, their Nielsen ratings went up 17% and 18%, respectively. And although hard figures aren't available, NBC executives credit iTunes with helping The Office become a bona fide hit. (Switching it from Tuesday to Thursday night might have helped too.)

The challenge facing these new-media endeavors is for networks to expand their audiences and capture new viewers without damaging their core business. After all, the average American from 18 to 49 years old still watches 41/2 hr. of television daily, says Morgan Stanley managing director Richard Bilotti, while the same demographic stays online each day for only 57 min. Larry Kramer, digital president for CBS--among the most active networks in the new-media space--finds it's "a real balancing act" to experiment aggressively without jeopardizing the Eye's stately brand. "A lot of this activity is meant to support the mother ship," he says.

But the mother ship could soon find itself under attack on several fronts. Network affiliates, the regional business partners that carry and promote the shows to local viewers, want a piece of the new action. "This fight will get very real very quickly, and there'll be a court case within six months over this," predicts Rafat Ali, owner of the industry-news site paidContent.org One struggle brewing pits CBS against its affiliate in Raleigh, N.C., WRAL, which wants to stream prime-time shows live, then sell downloads on its own website, limiting access geographically to Raleigh viewers. Production companies and studios that provide shows to networks pose another potentially thorny family feud. Networks haven't figured out yet how to split the pie, which is why the Big Four have so far placed only their wholly owned shows on off-network platforms.

"Nobody has a deal yet," admits Wolf, explaining that he and other major producers must take a leap of faith to cross TV's digital divide. "I have no idea what this will be worth, but I suspect it's the next big thing." Or in the case of his son's pocket Christmas present, the next big small thing.