Video On The Go
Media giants scramble to deliver entertainment wherever and whenever you want. Will it pay off?
A group of money-hungry contestants searches nationwide for clues that will lead one player to the ultimate treasure. Week after week, audiences tune in as the field of competitors narrows, the clues get more complicated, and the human drama unfolds. The show is Gold Rush! created by Mark Burnett, the reality-television ratings machine behind such sensations as Survivor and The Apprentice.
But when it makes its debut later this year, Gold Rush! won't get the usual Burnett treatment: a prime-time slot on a national TV network and a huge marketing push. Instead, it will be carried on aol.com. And contestants won't be the only ones trying to unearth clues in hopes of finding a pot of gold. America's big media companies will be right alongside them searching for secrets to programming and advertising that may help them cash in on the rapidly growing appetite for video on demand.
Touted as the next big thing for so long that its arrival has become an industry joke, video on demand, which covers everything from movies that can be ordered up on cable TV to downloads of Desperate Housewives on a video iPod, may finally be closing in on its economic promise. "It has been the year for video on demand for the last 20 years,"says media analyst Harold Vogel. "But this time it might actually be real. That doesn't mean that it's going to sweep the world, but things are finally falling into place."
More than one third of all homes now have high-speed Internet connections. Cable companies like Comcast and Time Warner have spent billions of dollars putting in the pipelines to deliver video to the home, and other giants such as Google, Yahoo! and AOL are investing heavily in creating video libraries, as well as original programming that can be downloaded. Finally, TV-enabled cellphones, iPods, and other devices are making visual entertainment as portable as a paperback, moving content providers like Disney, Viacom, and NBC-Universal to get their TV shows and other entertainment before the video-viewing public as fast as they can. "What we've had is a business of people watching TV at night and some at home during the day. Now we can connect 24 hours a day on computers, cellphones, iPods, and other devices," says Jason Hirschhorn, chief digital officer for MTV Networks, whose popular MTV Overdrive became one of the first broadband networks when it launched last year. "We don't know how the business models work yet or exactly who wants to watch what on what device and when. But we're experimenting with everything."
And consumers, determined to have what they want, where they want it, and when they want it, have already demonstrated that they are willing to switch among an array of devices--television, computer, iPod, and cellphone--and to pay to customize and control their media universe. Last summer, more than 5 million viewers watched the Live 8 concerts on AOL Music, which offered uninterrupted coverage of the benefit for tsunami victims. Meanwhile, MTV and VH1 drew 22.4 million viewers for their TV broadcasts, and ABC pulled in 16 million during its two-hour show. Ratings on MTV's top-rated Video Music Awards in 2005 were down 22 percent from the previous year, but MTV Overdrive logged 13 million downloads of the show. Last month, Apple announced that it has sold 8 million video downloads of 40 different TV series, including Lost, Laguna Beach, and CSI, since it began offering them in November.
Along for the ride. Media executives are clear that even if the take is low at the moment (many companies haven't even attempted to sell advertising with their downloads), the stakes are high. "The truth is, we don't know where we're headed. We know we are going for the ride," says Nina Tassler, president of CBS Entertainment, which recently sealed a deal with Comcast to make episodes of certain prime-time CBS shows available to subscribers.
The bet is that the new services will lead to advertising. The online ad market is growing by 40 percent a year and is expected to double its share of the overall ad market to 10 percent by 2010, according to Horizon Media. While Web video ads still account for less than $1 billion in revenue, a fraction of network TV's ad take, network ad dollars were up only 2.6 percent last year. And revenues are expected to fall off as audiences dwindle. But it is hardly the death of television. Overall TV viewership is growing steadily (the average household logged a record 57 hours a week last year, according to Nielsen Media Research), and purchases of ever bigger and more-expensive TV sets are climbing. Some downloads, such as those for NBC's The Office, have actually helped drive more viewers to prime-time shows. "The demise of the traditional media is badly overhyped," says Craig Moffett, an analyst with Sanford C. Bernstein in New York. "A la carte is only going to prevail if the economic model is better for the consumer, and at $1.99 a download, for 57 hours of TV a week, that would mean a $500 monthly cable bill."
But growth of video on demand, from movies to next-day downloads of TV episodes, threatens to render DVDs, the ATM of the entertainment industry, a minor profit player. A free cable movie, or one on cable pay-per-view for a few dollars, generates substantially less revenue than a DVD sale. Ditto for television. The six-disk boxed set of the first season of Desperate Housewives has sold more than 1 million units, with a list price of $59.99. But such sales could plummet if viewers decide to download episodes instead. Moreover, providers--in this case Disney--have to share a part of the download fee with the deliverer, Apple. With DVDs, the bulk of the profit goes straight to the studio.
One area where analysts say video on demand shows good potential is streaming video, which can range from episodic shows, such as Gold Rush! and Yahoo!'s upcoming The Runner, to news and sports. "There's a robust advertising market around streaming video, especially if it's actually tailored to the Web,"says Forrester Research analyst Josh Bernoff. Big national advertisers such as Ben Gay and Acura are paying significantly higher rates per thousand viewers for online ads than those charged in prime-time television to reach a much smaller but more targeted audience.
Winning hand. The cable companies are also well positioned to be big winners in this new era. Forrester Research estimates there were 23.9 million households with video-on-demand capability at the end of 2005, an increase of 27 percent from 2004. By 2010, virtually all of the 46.9 million digital cable homes will have video-on-demand capability. Comcast, which has been particularly aggressive, reported $100 million in ad revenue from the service last year, more than five times what it made in 2004. "If you ask consumers whether they would rather have video for free with ads or pay for a show and see it commercial free, they choose the advertising," says Brad Adgate, corporate research director for Horizon Media.
The same can be said for putting messages on cellphones, which seem likely to be the most ubiquitous portable content carriers. Consider: There were 20 million multimedia cellphones in the United States in January 2005. By September, there were 40 million. And by 2010, more than 25 percent of the 279 million digital TV devices are expected to be cellphones. As with much of the digital world, the business model of mobile TV isn't exactly there yet. Nonetheless, both broadcasters like Disney/ABC and cable giants such as Cox Communications have been signing partnerships with wireless providers to deliver content to phones. Later this year, Sprint Nextel will roll out a phone that allows customers to program their digital video recorders and then download the material to be played back whenever the mood strikes. Customers can even use the phone to do something as mundane as making a call.
This story appears in the February 20, 2006 print edition of U.S. News & World Report.