Vid-sharing craze fuels the digital-space race

Vid-sharing craze fuels the digital-space race

CHICAGO -- Broadcast networks and TV stations are at the dreaded "damned if you do, damned if you don't" place.

Theirs is the most difficult transition of all traditional media into the digital broadband space because they have built their business on strictly dictated one-way entertainment, news and advertising devised and placed their way. For the most part, NBC, CBS, ABC and Fox are attempting to transport their content and advertising as-is into the new-media space in the hope it will lift their new-media fortunes and those of their affiliated TV stations. But by the time these media giants jumped on the digital bandwagon, it was crowded by new players and radically changed consumer behavior.

That is a harsh reality of the new-media world to which branded broadcast and cable networks, film studios and production houses are struggling to adjust. There is no rule book on how to survive the stiff competition of ephemeral user-generated content from the very consumers who are needed to support commercial media.

While there always will be market demand for the most popular television programs and movies -- many of which are available as streaming video and on-demand downloads -- the law of numbers suggests there will be a diminishing value for most other commercial content as it goes toe-to-toe with grass-roots and nonmainstream creators, who now enjoy instant, comparable access to consumers seeking to satisfy their most eclectic interests and preferences. That is the hallmark of the interactive digital broadband marketplace, in its nascent stage of connecting consumers to special-interest content and mining that relationship with every kind of commerce and revenue-generating opportunity imaginable, from paid content downloads to drill-down electronic transactions with advertisers.

This new marketplace is moving so swiftly and without deference to even the new-media giants that the likes of Yahoo! and Google oddly are wrestling with some the same quandaries as their old-media rivals.

Google has aligned its masterful search apparatus with MySpace to get into the social networking game and with MTV to assure access to young consumers' favorite video. Yahoo! is exploring the acquisition of Facebook for an inflated $1 billion for essentially the same reasons.

Every new- and old-media player is scrambling to associate with or replicate the video-sharing craze so purely epitomized by YouTube. For instance, while NBC Universal has sought to establish working relations for legitimate video-sharing with YouTube, NBC Universal chairman and CEO Bob Wright is waging open warfare on the illegal video piracy that makes it work as he pursues a 2.0 Internet reorganization of his entire company.

Forrester analyst Josh Bernoff goes even further by comparing YouTube to Napster, asserting that massive illegal file sharing will likewise result in its demise. "YouTube will get sued. And it will lose," Bernoff writes in his blog. "YouTube is goin' down." That's the same rationale entrepreneur Mark Cuban gave for warning at last week's Advertising Week conference in New York that anyone buying YouTube is "moronic."

At the same time, RBC Capital Markets analyst Jordan Rohan is betting that MySpace could be worth more than $15 billion in three years, based on its high volume of personal and commercial, legal and unauthorized video sharing. In fact, News Corp. is effectively using its MySpace.com as online distribution of its Fox TV and films and is likely to take Web video into lucrative and creative new places under the consumer-savvy direction of Fox Interactive Media president Ross Levinsohn.

A study NBCU initiated last year found that major U.S. film and television studios lost more than $6 billion in annual revenue to piracy. That figure more than triples to $20 billion in lost annual global revenue when factoring in related businesses like ad agencies to caterers, according to a new Institute for Policy Innovation study.

The underlying irony is that so-called old- and new-media players must rely on each other, legitimately or not, to grow revenue. Even Wright concedes that NBCU will realize $400 million-$500 million in digital revenue this year.

So far, the least likely pirated content is conventional television stations' unique local programming and advertising, which inevitably will be key leverage in the frenetic, fast-moving video environment to give otherwise static broadcasters a seat at the digital table.

Such aggressive leveraging is broadcast TV stations' and networks' only sure counter to increasingly fractionalized audiences, escalating program costs, the high cost of digital conversion and a dangerous reliance on advertising revenue, according to Bear Stearns analyst Victor Miller. He points out that there is no clear return on the nearly $500 million investment in digital conversion, or 5.3% of the collective enterprise value, of the five leading network affiliated TV station groups -- Sinclair Broadcast Group, LIN Television, Hearst-Argyle Television, Nextel Broadcasting and Young Broadcasting -- only alarming debt-to-earnings ratios, Miller said.

However, an increase in retransmission fees from cable operator and other multichannel distributors, which eventually could contribute 5%-15% of local TV station revenue, can help replace discontinued network cash compensation and declining ad revenue. Kagan Research forecasts retransmission fees will grow from $227 million this year to more than $1 billion by 2010.

It all helps to protect the impressive 46% cash flow margins generally maintained by the big four broadcast networks' owned TV stations groups, which is higher profit from operations and net sales than most other media (including their own broadcast networks), except for the likes of Google, according to Kagan Research.

A trio of video clearinghouse efforts by NBC Universal -- including its established WeatherPlus and new, agnostic NBBC Web video service -- test the interest in and demand for wholesale station and network content (with and without the original broadcast commercials intact) by interactive platforms and consumers.

The BBC-inspired syndication model caters to the Web's voracious video appetite and its share of a $30 million digital advertising-supported video market in 2000 that is expected to grow to nearly $2 billion by 2010. Some video Web sites like MySpace already command $30-$50 CPMs for online spots, which is double many leading TV cost-per-thousand prices. NBBC plans to do the same, splitting the ad proceeds with participating willing content owners and distributors and selling its base of 8 million unique-users to such blue-chip advertisers as JPMorgan Chase and Proctor and Gamble.

Clearly, such efforts by TV networks and stations are an end-run around YouTube, MySpace, Google, Yahoo! and other Web hubs brokering their earnings and revenue growth with video.

But trying to essentially transfer the broadcast content, advertising and even promotional model to the Web may not be the answer on new-media platforms that are being created, shaped and driven by consumers.

Can local broadcasters survive what is expected to be their worst year yet in 2007 with no cyclical elections or Olympics Games to mask declining ad sales and viewing, just two years before they completely lose their analog channels to a complete digital switch? If you believe the forecast for all forms of interactive, digital-driven media by 2020 relayed in a Pew Internet & American Life survey of visionaries published last week, nothing about personal life, commerce or creativity will escape reinvention by the ongoing technological revolution; not even primetime Thursday night.
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