Despite high ratings, Web ads not paying off

It’s become a Sunday ritual for NBC to blanket blogs, Websites and its own Hulu with clips of skits from the previous eve’s “Saturday Night Live.” Later in the day, the same holds true for CBS, where segments of “60 Minutes” pop up on its Website. And before long ABC.com has episodes of “Desperate Housewives” and Hulu boasts Fox’s “Family Guy.”

No one can accuse the networks of ignoring the Internet revolution. But now there are worries that perhaps they have done too much.

Viewers, particularly tech-savvy younger viewers, are flocking to the 24/7 access offered by Web streaming, but, like newspapers and magazines struggling to survive, the broadcast networks have yet to make much money from this change in habits. In fact, networks may actually be undercutting themselves in their quest to avoid the fate of the music business.

While more and more viewers are watching TV programming online, the networks aren’t getting anywhere near the amount that they would earn from commercials that run the old-fashioned way. The problem is exacerbated by the recession, as big-ticket advertisers go for the safety of the tried and true (see separate story).

As a means of siphoning away traditional TV viewers, the Internet could soon make cable’s threat to the Big Four nets seem like a cakewalk. In fact, the competition posed by online distribution is equally menacing to broadcast and ad-supporting cable channels, which could make the Internet the common enemy that finally unifies the smallscreen’s rival factions.

The TV-Internet balance is vexing folks worldwide, in varying ways.

In Japan, the common practice is to access the Internet via cellphones, and though the broadcast networks there offer sports and other programming to users, the service poses little threat to their main business.

All of the U.K.’s commercial networks run services online, but none are making money or are nearly as popular as the BBC iPlayer, which is a non-commercial service. Italy is testing ground for Fox’s Internet TV service FlopTV, but the ventures so far are fledgling, as the country’s low birth rate makes it one of the older audiences on the planet.

In Spain, all broadcasters are offering free content on the Web, but one analyst there says that the risk is just as in the U.S.: Once accustomed to the instant online universe, users won’t return to traditional TV.

Overseas TV execs are watching the numbers emerging in the States. In the space of a few short years, the behavioral shift by the emerging digerati demographic has shaken the network TV business model to its core. These digitally empowered viewers demand free and immediate access to content, unfettered by the archaic concept that a network’s primetime schedule determines when a show should be viewed.

Take Scott Gillies, a 30-year-old videogame developer. If everyone watched TV as Gillies does, Hollywood might go out of business. He isn’t engaging in any piracy. He’s watching more TV, legally, than ever before. He simply canceled his cable service and hooked his TV set directly to his Internet connection, which allows him to watch shows via Internet web streaming not on his computer but in comfort on his larger TV screen.

“It’s cheaper, there are fewer ads, and I can watch when I want,” Gillies says, giving a checklist of reasons that could easily convince millions more consumers, especially during a recession.

When Gillies and his girlfriend watch their favorite programs like “The Daily Show,” “Lost” and “How I Met Your Mother” via the Internet, they’re generating a small percentage of the revenue they used to when they paid for cable service and were exposed to the commercial breaks in those shows.

What’s more, Gillies has been encouraged to make this shift by traditional media companies that have invested tens of millions of dollars in developing Internet video outlets such as Hulu, Joost and AdultSwim.com.

New habits like his are enough of a concern that NBC and Fox, the joint owners of Hulu, have been engaged in a recent battle to limit its programming on the new service Boxee, which makes it much easier to watch Internet video on a TV screen.

The networks were only too eager to avoid the devastating mistakes of the music biz by providing viewers with legal options for accessing their programming online. Certainly, there are plenty of unauthorized services ready to meet that appetite.

ABC was the first to take the plunge in May 2006 with its experiment in offering a handful of its hit shows for streaming via its ABC.com website. The response from viewers was so overwhelming that by the fall of that year the bulk of the net’s sked was available online 12 hours after the episode’s premiere airing on the mothership (a lag that remains a concession to the exclusivity concerns of the net’s affils). ABC’s model became the industry standard for broadcasters virtually overnight, just as the other studios followed Disney’s lead in 2005 in cutting licensing deals with Apple’s iTunes for paid downloads of TV shows and now movies.

But the swell of free ad-supported web streaming sources — from the nets’ proprietary websites to Yahoo and AOL to providers — has undoubtedly put a crimp in the growth of iTunes. Why pay $1.99 and wait for a download when you can point and click for instant gratification?

NBC Universal and News Corp. were so concerned about the competitive threat posed by the rise of YouTube that in early 2007 they pooled their considerable resources to launch the advertising-supported Hulu.com.

Time Warner CEO Jeffrey Bewkes has been tubthumping an industry-wide plan this month to make more cable programming available online to viewers who will be allowed password-protected access to web streamed shows, so long as they are a subscriber to cable, satellite or telco channel service. Cable and satellite operators have frowned on free web streaming of programs from HBO, Showtime and other top cable players, for fear of losing their paying customers.

Hulu has grown from nothing to serving up 308 million video streams last month in less than a year. But it’s still not turning a profit from advertising for its partners.

Part of the problem is that advertisers have balked at networks’ attempts to combine Internet viewing with the ratings for traditional telecasts of shows. The networks would love to combine the viewership of programming on air, through DVR playbacks and from their legal online distribution sources. But Madison Avenue has refused, citing value to advertisers knowing that millions of consumers are being exposed to a TV spot on the same night, not two or three or nights or even two weeks later.

Another part of the problem is that the template etched by ABC three years ago for web streaming has online viewers accustomed to fewer commercial interruptions and shorter blurb running times. The commercial load for most traditional telecasts is 15-16 minutes in an hourlong series, or 6-8 minutes in a half-hour show. Most full-length episodes streamed online have 2-3 minutes of commercial time tops. Some of the breaks on Hulu are 15 seconds rather than the traditional 30 seconds.

Online auds simply have a shorter attention span, and because every action by every Web surfer can be measured, advertisers know when their spots aren’t working and buy accordingly.

While advertising rates per viewer are higher on the Internet than on broadcast TV, the lower volume of ads and the overall smaller aud (for now) makes it nearly impossible for online ad revenues to catch up.

In the past few months since the ad market took its dive, anecdotal evidence shows that a good number of spots running in shows offered on Hulu, ABC.com and its ilk are promos for other network programs and public service announcements.

The total number of videos watched online in December was over 14 billion, up 41% from a year ago, according to Internet measurement firm ComScore. And though shortform video — whether user-generated or clips from “The Daily Show” or “Saturday Night Live” — still rule, a growing percentage of that 14 billion is full-length TV shows and even movies.

While networks are loath to give program-specific figures, some of the most popular like “South Park” have seen online streaming surge more than 1000% on a year-over-year basis. A report issued last month from Nielsen found that episodes of ABC’s “Lost” generated some 1.4 million video streams in the month of December — before the show even started its fifth season in January. (Nielsen’s efforts to measure online viewing are challenged because Hulu and other key Internet vid providers will not break out their numbers.)

And because Web video spreads virally, it’s difficult to bring advertisers a predictably sized audience.

Today it’s only a fraction of a fraction of the population that’s tech savvy enough to connect their TV to the Net and patient enough to put up with the inevitable glitches. Some in the TV biz argue that they’re the most likely to engage in piracy, so they’re generating incremental revenue, rather than shrinking it.

But as demonstrated by the dozens of televisions on display at the Consumer Electronic Show that connect directly to the Internet, watching Web video in the living room is becoming a much simpler process. Sometime in the next five to 10 years, it will likely become common, if not ubiquitous.

So why are the networks investing in sites like Hulu and allowing widespread online distribution of their costly exclusive programs? Because they saw what happened to record labels, which avoided the Internet for years when they couldn’t figure out how to protect their old business model. In the process, they lost millions of consumers to piracy and other digital-friendly alternatives. Thanks to faster connection speeds and cheaper storage, accessing video is about as easy now as music was a nearly decade ago when Napster began making headlines.

“My audience is consuming more and more online with me or without me and at a certain point I need to choose whether I’m going to be where they are or not,” observes Erik Flanagan, exec veep of digital media for MTV Networks.

Which leaves Hollywood in a Catch-22: If it doesn’t follow increasingly wired consumers online, it could lose future generations to piracy, amateur YouTube clips and videogames. But if too many people switch to services like Hulu too fast, the business model of television could collapse.

The networks’ best hope, for now, is to start thinking differently online. At the recent NATPE conference, for instance, Disney-ABC digital media topper Albert Cheng said new research shows consumers might be willing to sit through up to twice as many ads as they’re currently getting to watch their favorite shows online.

“We’re testing all sorts of different advertising mediums,” says Anthony Soohoo, senior VP of entertainment for CBS Interactive. “Pre-rolls, post-rolls, mid-rolls, companion ads, branding next to video assets. The trick is to find packages that tie everything together in an immersive experience.”

The same measurability that forces networks to run short commercial breaks online could also help them design better campaigns with advertisers and earn more money off the spots that do work.

“Buyers can actually see what percentage of their ads viewers watch and optimize accordingly,” notes Shiva Rajaraman, senior product manager at YouTube.

Hollywood will have lots of opportunities to experiment as new technology makes it even easier for Web surfers to digest online video. Google and YouTube are investing heavily in video search, for instance, making it easy for viewers to find the exact show they want, or browse the results for their favorite genre or star.

Similarly, networks report that video hubs like Hulu are bringing them entire new audiences as network restrictions disappear and someone watching a funny “Saturday Night Live” skit about Barack Obama can seamlessly segue into his most recent interview on “The Daily Show.”

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