Computers crash into TV sets

With their audiences fragmenting and advertisers decamping to the internet, the US TV giants had no option

A string of groundbreaking deals struck on Monday has been heralded as the beginning of a media revolution. NBC and CBS abandoned age-old policies and chose to make top shows available via video-on-demand services. Yahoo! announced that it will enable television fans who are away from home to programme their TiVo digital-video recording devices remotely. "The computer has crashed into the TV set," declares Brian Roberts, chief executive of Comcast, the country's largest cable operator, which will let customers order up CBS prime-time shows just hours after they are on air.

But amid all the hue and cry about the growing 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?

So why the rush by media giants into the on-demand world? They're worried that audiences are fragmenting and that advertisers won't keep paying for general audiences, who are turning away from their messages. The internet and hand-held devices provide access to all kinds of entertainment for a small fee. Internet ad revenue amounts to only a fraction of the $17.8bn (£10.4bn) that network television ads generate, but the online take is growing by 40 per cent a year. Network dollars are up only 2.6 per cent, and that's the result of price increases that will be difficult to sustain.

"We have great content. What we need are new revenue streams," says Leslie Moonves, chief executive of CBS.

Even scarier for the networks is the growing competition from free content on the internet. File-sharing websites 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 three 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 ad agency Publicis Groupe.

So even though they don't yet have a clear profit plan - and they risk cannibalising some of their traditional TV fans by dangling 99 cent downloads - the networks are ploughing ahead. Certainly, they have watched giants in other old-economy industries stumble as they try to hang on to time-honoured 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.

Martin 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 time is very much an experiment, not a clear path to profits. But the network knows it must adapt to changing 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 8pm show that snares 20 per cent of the total viewing audience. "That means that 80 per cent of the households aren't watching" that programme, 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.

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's video iPods for $1.99 shows how the networks are cautiously experimenting. The series about the wacky women of Wisteria Lane generates $11.3m in ad revenue per episode, according to Forrester Research. That translates into 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 per cent of the show's audience shifts its viewing from traditional TV to iPod and ad revenue falls accordingly, ABC would still net $1.8m more per episode than if Desperate 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 Desperate Housewives, advertisers must comply with ABC's demand that they buy time on low-rated shows, too, as part of a deal.

Advertisers are increas- ingly sceptical of the iffy science of broadcast-TV ratings, which aim to measure 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. The car maker still spent $721m on TV ads in the US last year. But Suckow says he is more excited about the four-minute promotional films on the 350Z sports car and Titan pick-up truck he has been running on DirectTV's programme menu, which consumers have to click on to watch. In one of the recent announcements, NBC said it would provide the DirectTV satellite network with programming.

As networks try to figure out a way to make on-demand 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 is expanding a programme 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 shelling out big bucks for old-fashioned advertising on TV shows. But consumers under 30 are turning off, and audiences are splintering.

For that reason, Google is the company, more than any other, that frightens the media establishment. The company's ad revenues were $6bn last year and are expected to be $10bn this year. What disturbs programmers and distributors is that the company hasn't even scratched the surface of what its search technology might be able to do.

Soon it won't be just the viewers deserting prime-time TV. Big-name celebrities may flee, too. The radio personality Howard Stern is quitting Infinity Broadcasting for Sirius Satellite Radio on 1 January, but he's also taking his audience to an on-demand format, charging $9.95 per month for 35 hours of shows.

That service, in demand, is expected to have about $750m in revenues this year, which includes some early Stern subscriptions. If he succeeds, others may follow. Top talents such as Aaron Sorkin, Mark Burnett and Larry David could cut out the middle man and develop programmes that go straight to broadband. They'd avoid all the annoying memos from network executives - and get to collect the ad dollars themselves.