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Internet Video

Clout and Doubt

2/03/2006 7:04 PM Eastern

As consumers increase their usage of all kinds of video screens — cell phones, Apple Computer Inc.’s iPods, broadband PCs and TVs — for all kinds of content, fundamental changes to the relationship between content companies and service providers are beginning to emerge.

In the cable sphere, where operators have long had the upper hand over programmers due to channel constraints, the raft of end-run devices has caused leverage to shift back to the content side.

Viacom Inc. chairman Sumner Redstone liked to fondly pronounce content king, and maintained that line to financial analysts for nearly two decades, in good years and bad. At the time, the question was narrowly defined: Was it better to own content or conduit?

Endless arguments ensued on the topic. But it was a friendly debate because both camps made a lot of money.

With consumer viewing and listening habits changing based on the new devices offered by consumer electronics companies, the debate moves beyond content versus conduit.

It has become what type of content for what type of platform and with what business model.

The world is increasingly made up of multilevel business matrices. “The floodgates are now open,” J.B. Perrette, senior vice president of NBC Universal Cable, said during a panel session at the Consumer Electronics Show last month.

Prying the gates open, in large part, were The Walt Disney Co.’s agreements to make Lost and Desperate Housewives episodes available to be downloaded through Apple’s iTunes music store.

The major programmers — studios, broadcast and cable networks, even sports leagues — have a host of delivery options today beyond television.

For years, programmers fought for rate increases, and channel space, from operators to fund their programming dreams.

Now, programmers privately enjoy their newfound leverage with new platforms — a feel-good proposition that will likely last for some time.

But with leverage comes pitfalls, precisely because there are so many distribution choices today.

The floodgates Perrette talked about also threaten to drown programmers if they aren’t careful with their newfound leverage.

The truth is no one knows how new subscription, a la carte pricing and advertising business models will work with new devices.

There is a great me-too rush to place 99-cent and $1.99 and $2.99 content on iPods, Google, cable or satellite distribution platforms. No programmer wants to be seen as a Luddite.

But no one knows how much gold is at the end of any of those rainbows.

And little is known about how these new revenue streams will impact the old. If consumers buy TV shows on demand or on iTunes, will ratings fall in syndication? If ratings fall, will studios get lower prices for those shows? No one can tell what degradation might occur.

If cable network fare available online or on mobile devices hurts ratings, ad rates will go down and it might be tougher for networks to get rate increases in the next round of affiliate fee negotiations.

Cable distributors will be watching such trend lines very closely.

There is already an unspoken view inside operators, pondering a future of phone-only and data-only customers. If all programming goes to the Web, operators could lose $40 to $80 in revenue a month per home — but also lose a major cost base and still stand to add revenue for connectivity and guaranteed delivery of content on their networks.

The broadcast model is still an efficient way to send popular programming to tens of millions of homes simultaneously.

Lost doesn’t get made if Disney doesn’t have a broadcast network to generate ratings and ad revenue to lay off the initial cost of the show. No one in Hollywood would greenlight a $1-million-per-episode weekly show in the hope that a million people on the Internet would pay $2 a week to see a new show they don’t know anything about.

Certain events, like sports, happen in real time, not on a consumer’s on-demand whim. Likewise, Internet video proponents who love the community aspect of the Web forget there is that same shared community experience for fans of O.C. or CSI: Crime Scene Investigation or Desperate Housewives the night those shows air. Viewers watch at the same time, react to the show in real time, and even send cell-phone text messages to each other (or to the show) in real time. They talk about what they saw the next day at work.

Programmers have a balancing act, even as they enjoy newfound leverage. Certainly, they are on the front line with consumers, trying to understand how viewing and usage habits vary. Their experience will shape round two of content deals with new platforms and new devices.

But programmers also have to watch how deals on new platforms hit their existing revenue streams, and existing relationships, as they make their way through this new world.

That is the price paid for more leverage.

September