Webs know Internet is the future; question is how to monetize it

The major networks have their sights set on the 2010-11 television season at this week’s upfront presentations in Gotham, but there’s another behind-the-scenes frenzy taking place that’s all about the not-too-distant future.

The TV biz is engaged in a delicate balancing act of adjusting how and where to program their shows on the Internet, fearful of undercutting their traditional sources of revenue — the 30-second spot and cable subscriber and retransmission fees — but fully aware that they don’t want to miss out on consumers’ ever-increasing thirst for watching shows online.

The risks are obvious: Five years ago, in the wake of ABC’s groundbreaking pact to offer its shows on iTunes, networks rushed to post their shows and clips on their Websites, as well as elsewhere. But there’s been a big drawback to getting viewers in the habit of watching on their computer screens, as the ad dollars reaped are much lower online than they are on the TV set. And with mobile devices, the iPad, HD TV sets and Internet-enabled Blu-rays making it all the easier to access the Web, the threat has spread to cable operators: They fear consumers will pull the plug altogether for the lower-priced alternative.

Few are denying that this is where the business is headed — opponents of Comcast’s pact with NBC Universal focus on its impact on Internet video — but every new idea that shows promise seems to trigger a new set of challenges.

Hulu, the wildly successful Internet vidsite backed by NBC Universal, News Corp. and Disney, recently turned the corner on positive cash flow from advertising revenue, but the company is said to be prepping an experiment with a subscription fee for access to its program vault. (The company declined comment)

Numerous cable operators are adopting a concept called TV Everywhere, which is designed to make pay and basic cable programming available on-demand via a range of devices, so long as a user is a subscriber to a cable, satellite or telco-TV service. Just last week, Time Warner cut its deal with telco Verizon’s Fios service to offer HBO and Turner programming via broadband.

But initial adoption of TV Everywhere in test markets has hardly been stellar. Comcast execs admit that the company’s Fancast Xfinity streaming service has been clunky and cumbersome as the cabler figures how to streamline its password-verifying process (known as “authentication” in the Internet TV parlance).

Adding to the pressure on traditional distribs is the looming presence of numerous well-heeled players — including Apple, Microsoft, Google and Sony — who are angling to drive distribution of movies and TV shows via broadband. That movement has become known as “over the top TV” because it aims to bypass traditional cable, satellite and telco operators to deliver programming directly to consumers. The spread of HD Internet-ready TV sets and the new marketing push for 3D-enabled TV sets is seen as facilitating a shift to Internet-delivered programming services — served up by everyone from Amazon to Walmart — but only if Hollywood and the major nets play ball and license their movies and TV shows.

Apple is known to have been knocking on studio doors in an effort to assemble a monthly subscription service that would serve up an ever-changing menu of movies and TV series. But nets are wary of doing anything that might undercut the profitability of the mega distribs they rely on to carry their full panoply of cable channels and video-on-demand movie offerings.

The burning question is whether consumers will take to one format over the other — or will get in the habit of paying for certain types of online video even as so much of it is now offered for free. The solace is that the newspaper industry and music biz are grappling with the same questions.

“There is going to be tension between our business models and the immediacy and ubiquity consumers demand,” says Tom Rothman, chairman of Fox Filmed Entertainment. “We need to get paid.”

Indeed, “we need to get paid” was the mantra of top execs who spoke at the Cable Show confab in Los Angeles last week. TV Everywhere initiatives and the enhancement of on-demand services of all kinds were the dominant topic at the event, the annual conference and exhibition hosted by the National Cable and Telecommunications Assn.

“In the world around us, there’s an acknowledgement that page views don’t pay the bills,” Brian Roberts, chairman and CEO of Comcast, told the NCTA confab. “Whether it’s newspapers or (filmed) content, (the biz) has to find different business models” for digital distribution, he said. The CEO, who will soon be the ultimate steward of NBC Universal (assuming the feds approve the merger), also noted that “the eco-conversation is a lot different today than it was 12 or 24 months ago.”

For Comcast and other major operators, the potential threat on the horizon from Apple and the spread of viewing-friendly tablet computing devices like the iPad is a spur to innovate in ways that allow them to keep up with, if not stay a step ahead of, consumer demand.

“If you buy a package of programming from Comcast, you should be able to access it on any screen,” said Amy Banse, prexy of Comcast Interactive Media. “We want our packaging and our service to be as competitive as possible, and to be as multiplatform and as easy to use as anything offered by anyone else.”

But getting there hasn’t been easy. Roberts and Banse acknowledged that Fancast Xfinity has been cumbersome for users to access since it went live in December after a four-month trial last summer. Fewer than 1 million of Comcast’s 16 million-plus digital cable subscribers have accessed the service, partly because Comcast hasn’t done any marketing while it worked out the kinks. A new iteration of Fancast Xfinity should be out in time to coincide with the fall season launch, Banse said.

Despite the initial hiccups, Banse says it was important for Comcast to get something up and running, even if the architecture and interface wasn’t perfect, because of competitive issues, as well as to help persuade programmers to sign on. On-demand rights are increasingly part and parcel of the cable operator’s overall carriage negotiations with programmers, including the Big Four network affiliates, who are now squeezing cash fees out of major cablers in exchange for retransmission-consent rights.

The TV biz was motivated to move quickly to embrace legal outlets for online distribution of programming because execs were afraid of repeating the missteps of the music industry, especially as the volume of purloined content was piling up on YouTube (which led to the $1 billion lawsuit pending between Viacom and Google).

Apple’s iTunes store paved the way with its groundbreaking licensing pact with Disney in the fall of 2005. By the following year, each of the Big Four networks was offering Web streaming of selected programming on a 12- to 24-hour delay from the network premiere, and the year after that, Hulu was born — a showbiz-controlled antidote to YouTube.

But cable programmers in particular have been wary of giving too much away on the Internet, even with embedded advertising attached, lest viewers be encouraged to drop their monthly cable or sat-TV subscriptions.

“The jump to put longform programming on different platforms didn’t make business sense,” said David Zaslav, prexy and CEO of Discovery Communications, during the cable conclave. Discovery has been among the most cautious outlets in harnessing Web distribution, though it is now wading slowly into the TV Everywhere waters.

“Now we’re getting more sophisticated,” Zaslav said. “If you’re putting your longform content on all these platforms, you’re diminishing the value of your content on cable.” (That comment drew a round of applause from the NCTA crowd.)

For broadcasters in particular, the big obstacle to going all-in with broadband through trusted distribs is in reconciling the advertising problem. The standard for Internet plays of full-length TV episodes quickly was set at a much lighter advertising load than the same episode would carry on a regular TV telecast. (ABC experimented early on with having a single advertiser sponsor its streamed shows.)

Major networks have pushed the Nielsen Media Research ratings service to develop a system to track online viewing of shows in a way that would allow them to cume that viewing with the regular telecast to sell one round number to advertisers. But to do that, the online episodes would have to carry the exact same ad spots as the TV telecast. That means that nets are likely to gradually move to a system of selling time across TV and broadband telecasts, in contrast to the largely separate efforts that exist today.

Nielsen has said it will start delivering its so-called “three screen” ratings — encompassing TV, online and mobile viewing — starting early next year, though it will likely be some time before those numbers are accepted as currency by Madison Avenue.

For all the uncertainty and competitive concerns, Comcast’s Roberts remains optimistic that the Internet “is more friend than foe” to Hollywood. “As platforms proliferate, the value of top content goes up,” he says.

Time Warner’s Jeff Bewkes echoes that sentiment, noting that with the proliferation of viewing options, people are spending more time watching movies and TV shows, not less (as Nielsen’s studies consistently document). For all the attention paid to broadband distribution, Bewkes sees far greater potential in on-demand platforms provided through the traditional TV screen, particularly for movie titles released simultaneously on video-on-demand and homevid.

“The news is more good than bad,” Bewkes says. “The hits are more successful than they were before. If you look at it in the big sweep of history, it’s getting more efficient and cheaper to get this product to people and to be more flexible in how we offer it. This is all fundamentally good news.”

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