Changing Channels 1

Changing Channels By Rana Foroohar Newsweek InternationaJune 6 issue

The death of television has been predicted almost since its birth . Back in 1946, Hollywood producer Darryl F. Zanuck famously announced that TV wouldn't last more than six months because "people will get tired of staring at a plywood box every night." Changing Channels

A decade later, when the remote control was invented, industry types worried that this miracle device would destroy their businesses by turning viewers into ad-avoiding serial clickers Changing Channels

It did, but the advertisers kept paying—where else could they hope to capture tens of millions of eyeballs at once? Changing Channels

Later, the rise of cable and satellite fragmented that audience, and the big broadcasters were forced to share viewers and ad dollars in a growing multichannel universe. Changing Channels

But in America they fought back, starting their own cable channels and becoming part of media giants like Viacom (a CBS spinoff that later bought its own parent), Disney and General Electric. Changing Channels

Even today, with 600-plus channels on tap, most people spend most of their TV time as they always did—viewing the major networks, on a box, in their living rooms. Through it all, broadcast television remained king . All that is about to change. The growth of digital communication is shifting the TV paradigm in a fundamental way for the first time in its history.

The resulting industry shake-up is changing the way TV is produced, distributed and consumed. Now that video is just another form of digital data, television can be delivered not only by traditional broadcasters, cable or satellite operators, but also by telecoms via their copper wire or fiber-optic networks, or by ISPs and portals over the Internet. Changing Channels

Sending television over the Web—so-called Internet protocol television, or IPTV—is already big in Japan, and gaining steam in the rest of the world. Britain's largest telecom firm, BT, recently launched its own entertainment division with an eye to sending video content over its phone lines. Changing Channels

Internet companies like Google and Yahoo are developing video search engines, which might one day allow you to find your favorite TV shows on the Web as easily as you search for a customized cat collar. Changing Channels

Major U.S. networks are experimenting with streaming video, delivering soap operas and sports highlights over the Web. Changing Channels

Just as the delivery systems are changing, so is the way in which you watch TV. Sure, most viewing will still be done on the couch in the living room. But the extra bandwidth created by digital spectrum allows for all sorts of new bells and whistles that will transform the experience. Changing Channels

With interactive television, viewers can press a button to watch two or three programs at once, take part in quizzes or buy products displayed on-screen. High-definition TV provides movie-style picture quality. Changing Channels

And, most important, digital video recorders—TiVo-like devices that sit in set-top boxes—allow viewers to record their favorite shows and watch them whenever they want, skipping commercials along the way. Changing Channels

These devices are much easier to use than their Precambrian predecessor, the VCR, and they've given rise to so-called time shifting—a concept that is threatening the entire notion of advertiser-funded television.

The metamorphosis won't stop there. In the digital, wireless world, television becomes something you can consume in any number of places—on your PC, your mobile phone or via screens embedded in the back seat of a car.

This creates new opportunities, and new risks. Broadcasters have a chance to fight back against the DVR phenomenon by reaching out to new captive audiences—in the workplace, airports, trains and buses.

Already, Fox has developed "mobisodes," one-minute clips based on its hit show "24," to be sent over mobile phones.

Britain's ITV is planning to launch mobile clips of the perennial soap favorite "Coronation Street" this summer.

Meanwhile, NBC's Telemundo, a Spanish-language channel, is streaming telenovelas online, and Major League Baseball is selling games directly to viewers via its Web site, mlb.com.

The idea of television any time, anywhere sounds great to a lot of consumers. But there's a terrifying downside for content owners. Now, there's nothing to stop someone from recording an episode of "24" on TiVo, bumping it to a DVD, then zapping it into the memory of a 3G phone.

"That original show can now be shared with family and friends across a variety of devices, without commercials," says Tom Wolzien, senior media analyst for the investment bank Sanford C. Bernstein & Co.

"Instead of calling up a neighbor to borrow a cup of sugar, you might ask to zap into their server to get the latest Spider-Man movie." With estimates of $160 billion in lost media-company equity from piracy and ad skipping by 2010, it's no wonder that companies from Microsoft to Disney are racing to develop new digital rights-management systems.

The big question now is whether the horses have already left the stable. Television has been the dominant form of mass consumer media for so long that many executives simply didn't see the revolution coming.

They should have—after all, the damage done to the music industry by the likes of Napster is a case study in what can happen when you don't rise to the challenge of a new technology. Still, when it came to digital convergence, they (and we) had heard it all before. During the late 1990s, the idea of surfing the Net over your television flamed out alongside the dot-com stocks.

Back then, broadband penetration was low, computer storage space was costly and streaming video wasn't yet up to the task of delivering big files in a timely way (it still takes several hours to download a feature film, versus seconds or minutes for a music clip).

But storing and streaming large packets of data is getting easier by the day. Sanford C. Bernstein & Co. estimates that within the next three years, a consumer will be able to store an entire season of network television, plus 1,500 movies, for about $130.

Meanwhile, television is losing its audience to the Web, especially when it comes to things like breaking news. A number of recent studies have shown that consumers under the age of 34 are using the Internet as their first port of call for news, eschewing both newspapers and television.

During recent big news events like the Olympics, and the U.S. and U.K. national elections, Web-site visits often matched or outpaced television viewing. Not surprisingly, advertisers are following the eyeballs.

Morgan Stanley estimates that television advertising in the United States will rise less than 4 percent this year, compared with a 21 percent leap in online advertising.

What's more, there's a growing perception that online ads offer more for your money. As American department-store retailer John Wanamaker famously said at the beginning of the 20th century: "I know that half my ads are wasted—I just don't know which half."

Television ad metrics are notoriously flawed, never providing more than the most generous indication of audience and impact. But on the Internet, an advertiser can follow a customer from his first click to the purchase of an item.

The result is a slow but steady move away from traditional TV advertising. According to Nielsen Media Research, the number of commercials on U.S. broadcast TV has been decreasing since 2003.

Producers are desperate to rekindle advertiser enthusiasm for TV, and that's already having an effect on what you watch. Product placement, and sponsorship of entire shows, is on the rise.

Broadcasters are increasingly choosing genres that make it tougher to skip over ads—expect to see more live sports, entertainment events and reality shows.

Programming—and advertising—will also be multimedia from the get-go. Producers are thinking more about how their shows will play on different types of screens.

Mobisodes will become de rigueur. Digital- television viewers will likely use their interactive set-top box to control their favorite characters.

Already, CBS has plans to post two or three separate endings for its popular "CSI" series on the Web, and the broadcaster is also looking into video-on-demand over the Internet. "Mobile phones and Web sites will also encourage new TV formats—you might see the rise of 15-minute shows," says Larry Kramer, president of Digital Media for CBS.

As digital media transforms the look and feel of TV, it will also present new business opportunities. Britain's ITV made £30 million last year (up from £9 million in 2003) by charging viewers to vote on reality shows like "Survivor" via their mobile phones.

In Korea and Japan, broadcasters are charging hundreds of thousands of users to download their favorite soap operas over the Internet (many save and watch them via tiny laptops or mobile phones on the way to work).

The popular Scandinavian music-video channel the Voice garners nearly half its revenue from mobile clips and text voting. Meanwhile, services like Britain's Sky are selling the digital set-top box as a customized advertising tool that allows companies to tailor their commercials by neighborhood, or even household.

"The advertising you get is something you are likely to be really interested in, and that improves its effectiveness," says Sky Media's commercial director Mark Wood, who adds that some 700 advertisers have tested the technology.

The BBC is developing a new digital-rights management system called IMP, through which it aims to offer video-on-demand over the Internet. "We want it to be the iTunes of the broadcast world," says Ashley Highfield, director of new media and technology for the BBC.

Just as nobody could have predicted the success of the iPod, nobody really knows yet which companies will control television's digital future. The "battle of the bundle" is well underway, as more and more firms offer all-in-one packages of online access, television and telephone services.

The inability of satellite companies to offer this triple play in a seamless way is one reason that Bill Gates has predicted they'll be "toast." But in Europe and Asia, where cable penetration is low, companies like Sky will undoubtedly continue to do well, at least in the near term.

Clearly, there will be a place for Internet companies such as Google and Yahoo, which will capitalize on their understanding of targeting online advertising and video search. Asian portals like Daum, Tom Online or Chinadotcom may do well, too, since Asian youth are even more Internet savvy than Americans.

Microsoft is betting strongly on IPTV, which it hopes will one day deliver content across devices, like the Xbox. Sony, the maker of PlayStation, wants a piece of that action, too, as do many other device makers, like Nokia, Samsung and Philips, all of whom are developing devices that will accommodate the new anywhere, any time TV model.

And what about the big broadcasters? The best will survive. "But they may become simply marketing platforms," says Wolzien, building audiences for shows that will make their money elsewhere—on the Web, on the PC or over the phone. "Think of the movie business. Only about 25 percent of its revenues come from the box office. The rest comes from DVDs, international rights, theme parks, whatever."

Of course, this underscores a very important idea. In the new digital world, the people who actually make television programs have a chance to make a mint—that is, if they can figure out a way to protect their creations.

All of the new distribution channels will need shows for people to watch, and the rise of the Internet will challenge the role of the cable and satellite gatekeepers, who have had the upper hand in recent years. "It's all about content right now," says Brandon Burgess, executive vice president of NBC Universal.

"You want to own as much of it as you can." Analysts like Sanford Bernstein's Wolzien believe that content makers have a "once in a generation" opportunity right now to start distributing their products directly to consumers via the Internet.

By cutting out the middleman, he believes companies like Disney, Viacom and Liberty could increase their revenues by as much as 50 percent over the next few years. Broadcasters who also own their own product, like News Corp., major commercial networks, public broadcasters like the BBC and other content makers, would also stand to gain.

Of course, all this hinges on their ability to make consumers pay for the content, or to insist that they watch commercials. Macrovision, a U.S. company, has come up with software to interfere with the making of quality digital copies between devices like DVDs, PCs, phones and so forth.

SBC, the U.S. cable provider, is working on a secure system for IPTV transmission. Disney's ESPN Motion has come up with a program that requires commercials to play before users can watch previously taped programs.

The BBC is working with Google on its IMP system and Microsoft is, of course, camped on the doorway of Hollywood studios, pushing its own digital-rights software.

Whether or not the TV industry will suffer the fate of the music industry remains to be seen. Professional producers clearly won't be the only ones making the shows.

In the new digital age, viewers themselves will become creators and distributors of their own video content. Mom and Dad could film Junior playing ball in the backyard, then send the clip over the Internet to Grandma, who'll watch it on a high-definition, interactive TV alongside her evening news.

Viewer-created content might even go mass market. During the recent tsunami in Asia, news organizations often ran pictures ordinary people had posted on Web sites.

In a recent speech to media executives in New York, News Corp. and Fox News founder Rupert Murdoch predicted that bloggers using not only text, but sound and video, would eventually take the place of at least some of the reporters working for him. The next generation, he said, "wants control over their media, instead of being controlled by it."

The growth of digital media will give us that control—we'll be able to watch whatever we want, whenever we want, screening out anything that's not of interest, and even creating our own private channels.

Will it make us better informed and entertained? Or simply more isolated? If you want to know what happens next, stay tuned. With Michael Hastings in New York

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