Briefing: Internet TV comes into focus

Hollywood scriptwriters are striking for a share of the money that Internet TV will generate in the future. How soon will that future of TV arrive—and what will it look like?

How much television is available on the Internet?

Right now, Internet television occupies just a small corner of the TV universe. Digital downloads of TV programs onto personal computers, iPods, and cell phones generated only $279 million in revenue in 2006, primarily through $2 fees paid by viewers. Contrast that to the $71 billion in advertising revenues collected the same year by broadcast and cable TV. But nearly everyone in the computer, telephone, and television industries expects Internet TV to take off in a big way. When it does, the way people watch TV will fundamentally change. You’ll download your favorite shows and watch them at your convenience, instead of waiting for them to be broadcast or sent across the cable at a certain time. “In 10 years, there will be a monitor on the wall in the family room. It will be connected to a box, and I’m going to watch programs on demand over the Internet,” says Internet strategist and investor Richard Wolpert. That’s why striking television writers are so adamant about demanding a cut of the revenue that Internet TV will generate.

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Who’s going to make this magic box?

That’s up in the air right now, but the race is on. Computer and consumer-electronics powerhouses such as Microsoft, Sony, and Apple, as well as a flock of start-ups, are investing heavily in devices that merge the capabilities of TVs and computers. Phone companies such as Verizon and SBC, meanwhile, are exploring how to transmit data-heavy, high-quality video signals through their DSL networks. And the networks and cable channels are experimenting with the new medium, running clips of their shows on sites such as YouTube, offering streaming video of programs on their own Web sites, and buying up producers of Internet-only programming. “The only way to figure this out is to put the content out there and test the consumer experience,” says Bill Stratton of Turner Broadcasting.

What can Internet TV do that current TV can’t?

The Internet, unlike conventional broadcast or cable TV, is a two-way medium. In practical terms that means that producers of programming will be able to let viewers choose alternate endings, vote for a favorite performer, or drill down to DVD-like extra features with the click of a button. A company called Brightcove is readying a device that allows viewers to watch Internet downloads on their full-screen TV sets and upload their own homemade programs to share with other viewers. On the other side of the screen, the Internet enables advertisers to bypass the Nielsen ratings and get detailed, real-time information about viewing habits. Advertisers can use this data to deliver commercials custom-tailored to viewers’ interests. “With the information we collect, the ability to target advertising is immense,” says Jon Cody, who directs Fox’s digital media efforts.

Does that mean the networks become obsolete?

No. Networks are still the most efficient way to create and distribute high-budget programs to mass audiences. But the Internet makes it possible to profitably reach smaller audiences with niche programming. Thanks to Apple’s iTunes Music Store and a few similar services, TV producers are already offering their programs directly to paying customers for download. That’s great news for canceled shows with small but rabidly loyal fan bases, such as Arrested Development or the sci-fi series Farscape. If enough fans pay to download their favorite shows, producers will be able to use the revenue to finance new episodes.

Will that eliminate the need for ad revenue?

Probably not. It’s not easy to replace tens of billions of dollars. But the TV industry is coming to realize that its old business model, which is wholly dependent on traditional advertising, may need to be dramatically altered. The growing popularity of Digital Video Recorders, or DVRs, is enabling many viewers to skip over commercials, which upsets advertisers and scares the heck out of the networks. That’s why the networks are experimenting with new ideas, such as product placements in shows and software that inserts ads in specific contexts, such as razor commercials that appear after an unshaven character enters the scene. The Internet “give advertisers more places to reach the customer,” says Jo Ann Ross, CBS’ president of ad sales. TV production companies also see a chance to wring money from their archives. Some are contemplating offering subscription services that would give viewers access to thousands of hours of old programming, ranging from the bizarre 1960s sitcom My Mother the Car to cult favorites like Mystery Science Theater 3000.

What else will change?

Eventually, say some TV executives, the prime-time scheduling grid will be a thing of the past. You won’t have to wait until Wednesday night to see Lost. The networks will simply post their weekly programming lineups online and let viewers download them in whatever format they want, be it traditional TV, an iPod, or a BlackBerry. “Consumers would rather watch on their own schedules,” says Wolpert, the Internet investor. In the future, ad-sponsored versions of popular shows will probably be free, while for a fee of $2 or so, viewers will be able to opt for a commercial-free version. But none of this will happen overnight, says Josh Bernoff of market researcher Forrester Inc. “What’s happening is an evolution, not a revolution,” he says. “There are still going to be people watching prime-time TV for quite a while.”

Will quality shows disappear?

When TV does migrate to the Internet, some programmers say, ad revenue may drop dramatically. Advertisers like TV because each show can reach a vast audience. But by giving viewers more choice and freedom, Internet TV tends to cut audiences into smaller—and thus, less desirable—slices. Beth Comstock, who is in charge of NBC Universal’s Internet-TV efforts, doesn’t think advertising will pay the bills for all shows streamed across the Web. “It’s just not possible,” she says. “There are not going to be enough advertising dollars in the marketplace.” If she’s right, the shortfall in dollars won’t pose a problem just to the television industry. It will also be a problem for viewers. As Advertising Age columnist Bob Garfield puts it, “Absent vast reservoirs of ad revenue, the risk of program development may well be prohibitive.” Rather than sink huge sums into shows that may or may not hit it big, producers may opt for lower-cost alternatives such as game shows and reality series. If that happens, Internet TV could mean hundreds of new channels but still nothing on.