Networks Get the Net
TV's online surprise: Shows on the Web build audiences and lure advertisers
Later this month, NBC's hit series Heroes returns to the air after a six-week hiatus that has nearly driven its hard-core fans to antidepressants. In the interim, they have kept up their hero worship on the Web, reviewing past episodes of the show about ordinary people with superhuman powers, chatting incessantly about plot twists to come, dissecting the animated graphic novel that accompanies each show for clues, and generally offering one another electronic solace during this difficult time.
The uninitiated, too, have come online, using the break as a chance to sample Heroes for the first time or bring themselves up to speed on the complicated story line. All told, there have been 10 million full episodes streamed and 21 million visits to the Heroes site since the show took temporary leave, according to NBC. As a result, when Heroes reclaims its Monday-night post April 23, it may well be greeted by even more fans and higher ratings than it left behind—thanks in large part to the Internet.
But wait. Wasn't the Internet supposed to have brought television to its knees by now, stealing viewers, cannibalizing ratings, reducing advertising rates, and leaving the industry's time-honored revenue model a shambles? Wasn't it supposed to make network broadcasting the next music industry, drained of life by legal battles, copyright problems, and piracy?
That was the fear. Here's the reality: In the 18 months since ABC reconfigured the broadcasting world order by making downloads of Desperate Housewives and Lost available on iTunes, the networks have learned to love the Web and its potential to increase viewership and attract advertising. Since the fall, when all the networks joined the online party, more than 200 million episodes of mostly prime-time shows have been streamed and downloaded.
And the numbers keep climbing. "Two years ago, a lot of the networks wouldn't even talk about putting their precious content online, especially for free. It was blasphemy," says Hilmi Ozguc, CEO of Maven Networks, an online TV technology firm. "Now they've got religion about it."
YouTube rival. Late last month, NBC Universal and News Corp. said they would launch a vast, advertising-supported online video network this summer, offering thousands of hours of free TV shows, movies, and video clips. The content, from at least 12 networks and two major movie studios, will include such shows as The Simpsons, Heroes, Are You Smarter Than a Fifth Grader? and Saturday Night Live, as well as movies like Borat and The Devil Wears Prada. It will be distributed at a new website (still unnamed) and by AOL, MySpace, MSN, and Yahoo!, which together service 96 percent of Internet users.
The alliance is being viewed, at least in part, as an answer to video-sharing giant YouTube. It's intended to give the big media companies more control over their own content (and its advertising potential) and protect them from copyright breaches. Viacom, parent of MTV, Comedy Central, and Nickelodeon, is suing YouTube and parent company Google for $1 billion on the grounds that YouTube has not acted aggressively enough to remove Viacom's content from its site.
"This new network is very much in the category of things that are easier said than done," says James McQuivey, who analyzes television and media technology for Forrester Research. "To announce a website for which you have no name, and to say in four or five months that it will be fully operational, is very ambitious."
The site, like others, is expected to help drive viewers back to their TV sets by creating additional communities on the Web around shows like Heroes and Grey's Anatomy that keep fans connected, reel in new ones, and offer the networks a forum to cross-promote their other entertainment content. While it's still too early to determine exactly how much the Web is contributing to primetime ratings, research shows that when the online audience grows for a show like Ugly Betty or 24, the TV audience tends to grow along with it. "These are not just typical Internet users who happen to be catching a video stream," says Jeff Gaspin, president of cable and digital content for NBC Universal. "This is a TV viewer who is using the Internet to stay up to date on what's happening in TV."
Early birds. At NBC, 78 percent of online users have watched an episode they had missed on broadcast television, 26 percent have watched an episode after originally watching it on TV, and 34 percent have gone online to watch a show they had never seen before. The Web also is helping snag viewers before a show debuts, by making episodes available early.
Last fall, for instance, CBS made season openers of nuclear-apocalypse mystery Jericho and other shows available online and to some TiVo users before their fall broadcast dates. Of those who said they had screened a version of a new program early, more than half said they went on to watch the show during the regular season, according to CBS research.
And where viewers go, advertisers are happy to follow. Online video advertising jumped to $410 million last year, an increase of 82 percent over 2005, making it the fastest-growing segment of the Internet ad market, according to eMarketer, an online advertising research firm. Although it is expected to explode to $6 billion by 2010, it will still be just a fraction of today's $65 billion TV-advertising market. Nonetheless, much of the online revenue could be pure profit for content providers since they would be simply making shows already created for television or the big screen available online.
"While it's still early, it's clear that there is a demand for online video," says Albert Cheng, executive vice president of digital media for Disney-ABC Television Group. "There is an audience for our shows, and it is an effective vehicle for advertisers to reach our customers."
And not a moment too soon. With network audiences continuing to shrink and digital video recorders allowing viewers to fast-forward through commercials, advertisers have grown increasingly frustrated with network television. At next month's "upfront," the annual ritual where advertisers buy commercial time for the upcoming fall season, there won't be a single new show without a highly developed online component.
Connections. If eyeballs are the currency of the broadcast world, engagement is rapidly becoming the currency of the online one. "This is a very passionate community," says Erin Dailey, who covers Heroes for the online site TelevisionWithoutPity.com. "Even things that have no meaning have meaning to them. [Fans] can't go a day without knowing what's going on." That connection sometimes spills over to the show's advertising. When Nissan used Heroes to introduce its new Versa, discussions about the car showed up on TWOP's chat boards.
"The networks believe that they can charge a premium for people who are coming to the Web, because they have sought out the content actively and they are engaged mentally," says McQuivey. "They believe that those people will have a more profound relationship with advertisers."
Apparently, so do advertisers. At the moment, demand for commercial time on the Internet is much greater than the supply, and the time is selling for CPMs (cost per thousand viewers) equal to or sometimes higher than those for prime time, where CPM for a top-rated show can hit $25. Although online audiences are smaller, they are easier to target and reach, and they are more likely to drill down into an ad that interests them. In addition, there are fewer online ads overall, and they cannot be zapped.
Online audiences also tend to be younger, more affluent, and more male than TV viewers, giving advertisers access to the increasingly elusive and desirable 18-to-34-year-old crowd. For networks like CBS, which tends to attract older viewers, the Internet is especially appealing. And perhaps most important, after years of putting up with television's less-than-ideal measurement methods, online advertisers can turn to the Web for accurate and immediate numbers. They know down to the click how many people are seeing their ads, along with their demographics, how many are seeking more information, and how long they are spending in the ad bubble.
"The big question now is what do you charge for online ads and how much money can you make from them?" says David Poltrack, chief research officer for CBS Corp. "There is a lot of research being done to gauge the impact of a TV commercial presented on the Internet, as opposed to one on TV, but we're not there yet."
The potential for profits becomes even greater as the networks create more short-form content, which is the most popular type of Internet material and could become an online ATM. Rather than sell a "pre roll," a "post roll," and a few shorter ads around an entire episode of Late Show With David Letterman, for instance, CBS can sell the show a la carte. That way, the monologue, top 10 list, and musical guest can all be presented as separate clips with their own advertising. Breaking shows into bite-size pieces also makes sampling more attractive and creates more opportunities to direct traffic back to the network, where a viewer who saw an ad attached to an online clip from House can see the same ad again during the full broadcast on television.
With all this change, one thing that will remain the same is the power of good content. "There's a huge demand for high-quality content," says Sasa Zorovic, an analyst with Oppenheimer & Co. "Yes, people want to watch Sasa Zorovic's little video, but they are a lot more interested in professionally produced content." And as clichéd as it is, if content is king, the networks remain in control of the kingdom. "Eighty percent of the advertising money will flow to the 10 or 20 percent of the best online content," says Ozguc. "The hit shows, the things that draw repeat audiences and create loyal followings, will win out, just like they do on TV. "
This story appears in the April 9, 2007 print edition of U.S. News & World Report.