A New Era for TV: AOL, Warner Bros. Set Major Program Deal

Nov 14, 2005  •  Post A Comment

In a groundbreaking deal, America Online is expected to announce today that it has bought 30 TV series from the Warner Bros. library to launch a free ad-supported broadband TV network, to be dubbed In2TV.

The AOL-Warner Bros. deal marks the first time traditional TV programming has been made available over the Internet on such a large scale, and it promises new opportunities and threats for advertisers, syndicators and competitors.The news comes on the heels of other industry-changing deals: Last month The Walt Disney Co. announced plans to sell ABC’s hit shows to iPod owners via Apple Computer’s iTunes. And last week CBS and NBC made deals to put some of their programming on-demand via Comcast and DirecTV, respectively.

This new gold rush to a video-on-demand, highly personalized universe, available to consumers via cable, satellite, computer and even mobile phone, has dramatic implications for a TV industry that for decades thrived as a mass-audience provider.

At first blush, the AOL deal appears to be a big winner for content owners such as Warner Bros., which suddenly has a new platform from which to generate license fees. It also gives a boost to AOL, which may now have ammunition to get back into the game against Google and Yahoo. (Time Warner is in talks to sell some or all of AOL, with Google, Microsoft and Comcast among the possible buyers.)

But it’s unclear whether the big media companies will benefit from the evolving on-demand television landscape.

“We don’t know yet what the revenue and margins will look like across the full media value chain, said Leland Westerfield, managing director at Harris Nesbitt. Nevertheless, he said, change is happening in a rush, “So adapting to change is something that media companies are forced to do without being able to control the outcome.”

Executives of AOL and Warner Bros. said they have been working on the project for two years as more homes and businesses have added broadband access.

Eric Frankel, president of Warner Bros. Domestic Cable Distribution, said he saw viewers watching video, news and sports online and knew, “One of these days they’re going to want to do the same thing with television programming, and I want Warner Bros. to be there first.”

Warner Bros. has cleared the broadband rights to 14,000 episodes of 300 series and talked to the “logical players”-beyond AOL-about putting shows on the Internet, Mr. Frankel said.

“There are a lot of people who think they can do this on their own. We weren’t sure that we could get 100 million people to a site if we invented it, so we thought the best thing to do was collaborate with a very popular, highly trafficked area,” he said. “AOL, coincidentally our cousin, seemed to get it much better than anyone.”

AOL’s business model for the new In2TV network is actually fairly traditional: Sell advertising against however many users come to view the network’s shows. There will also be interactive media opportunities around the shows.

But AOL may not need to reach a huge number of viewers to start making money.

“I couldn’t tell you what the audience size would be, but if a portal was to make one of those shows available it could get an ROI on that show’s distribution at a much lower audience size than it would take in the standard TV world,” said Will Richmond, president of Broadband Directions. “I think they can do that because their cost of delivery is lower, and their ability to monetize is so much greater because they’ve already got so many advertisers that want to get behind broadband video.”

Media buyers say they’re interested in spots on the new network, even though some buyers do indeed question whether AOL will be able to attract a big online audience to the shows.

“When was the last time you felt like watching ‘Welcome Back, Kotter?'” asked Mitch Oscar, executive VP of Carat Digital. “Is broadband getting more television product? Yes. Is it getting the ‘A’ product? No. I don’t even know if it’s getting the ‘B’ product yet.”

Nevertheless, Carat is considering a multiplatform deal with In2TV, Mr. Oscar said.

Tracey Scheppach, VP and video innovation director at Starcom USA, said AOL is projecting 4 million advertising impressions a month for advertisers-as much as a small cable channel. “That sounds a bit aggressive to me,” Ms. Scheppach said.

But Mr. Richmond said those who wonder who wants to watch “F Troop” miss the larger point. “Every journey starts with a first few steps. You can’t expect to see ‘The West Wing’ on AOL [on] day one,” he said.

“What I think you would see is some of the lesser-valued properties go over there so people can see what the opportunity is without burning themselves too badly in the process. But I think it sheds a light on where the market is clearly going.”

Eventually, more attractive programming will be needed to make this kind of broadband network a big deal. “The cable networks became more popular and more exciting when they started creating original programming, or when they got the first window for off-net rights,” Mr. Oscar said. AOL currently handles hundreds of millions of video streams monthly and has aired concerts and its own reality show, “The Biz.”

“This is an entirely new kind of broadband network,” said Kevin Conroy, executive VP of AOL Media Networks. “It will provide Web users with an entirely new way to both experience and interact with terrific television programming, as well as create a new platform for distribution of TV content.”

AOL has signed license agreements to stream the shows, but will not offer them for downloading. There will also be revenue sharing “around our ability to monetize the whole range of experiences,” Mr. Conroy said.

The executives declined to estimate how many viewers the shows would attract.

“Having licensed these programs to many outlets over my long history at Warner Bros., this stuff has worked time and time again, whether it’s been on TV Land or Nick at Nite or TBS or TNT or USA,” Mr. Frankel said. “A lot of these programs as recently as a year ago were top-rated in their particular daypart, and we expect to have that same level of success. Plus with all these bells and whistles, it’s a new way to look at these shows.”

More current shows could be added to the service, he said, as well as programs from other studios. “If this works and the advertising community responds the way we think they will, this may be a place where we’ll be putting other programs,” he said.

The services will be promoted with online media, including search ads, as well as offline. But unlike the broadband sites recently launched by MTV, VH1, Nickelodeon, CNN and ESPN, AOL will not benefit from having a dedicated TV outlet. It also won’t be able to package online advertising with on-air spots.

But Peter Sedlarcik, VP and research director for MPG, said the old water cooler has been replaced by blogs and chat rooms when it comes to building buzz. “Nontraditional channels are becoming increasingly important,” he said. “The buzz about larger entities, like a ‘Desperate Housewives’ or a ‘Lost,’ it’s all happening in these viral environments.”

Advertisers will be able to buy pre- and post-roll spots, plus one commercial in each of a show’s natural commercial breaks, Mr. Conroy said. (Viewers will be able to fast-forward through shows but not through commercials.) Marketers will also be able to sponsor banner ads and the interactive elements that accompany the show, or provide prizes for viewers who successfully answer questions in a quiz or win other online games.

Ad sources said AOL is looking for full-year, $1 million advertising packages, but some buyers said they would prefer shorter-term commitments.

“It has its place in the marketing mix. It’s targeted, relevant, and it’s measurable,” said Ms. Scheppach. In2TV’s programming stunts and interactive elements, such as TV karaoke, might also be valuable. “I could see myself doing that, with the door closed,” she said.

She added
that in terms of generating an audience the agency would be paying for performance, so “It’s important for them to be in the ballpark” in terms of its audience.

At this point, some observers see In2TV as a version of TV Land online.

“We’ve seen this on the horizon for some time and one of the reasons why we’ve been investing so aggressively in original programming on TV Land and Nick at Nite is to build that bond even stronger with our viewers,” said Larry Jones, president of TV Land and Nick at Nite. “We make it really easy for people to watch great classic TV. We program it for them. They don’t have to think about it and program it for themselves.”

Mr. Westerfield said potential winners include producers of animation or sports sanctioning bodies such as the NFL and the NBA, whose video content can be sliced and diced for different platforms.

Other likely winners are branded programming networks such as ESPN and Fox News, and thematic networks like Food Network and HGTV.

“Where it gets muddy is what happens to the vertical model and the companies that rely on capital-intensive content production and predictable control over distribution on their own stations and cable outlets,” Mr. Westerfield said. “That’s less predictable.”

Mr. Westerfield said that for the cable operators, broadband video is a net win because customers will pay higher fees for cable modem service over lower-priced DSL service from phone companies that is sometimes slower.

But Mr. Richmond said, “Cable bypass is the single biggest strategic threat to cable operators today and also another example of why Web aggregators such as Yahoo, Google and AOL are the competitors that cable MSOs need to be most concerned with.”

For now, cable VOD has advantages in picture quality and convenience. But Mr. Richmond said those advantages will shrink while broadband’s advantages of navigation, choice and interactivity will become more important.

A Comcast spokesperson noted that the cable company offered more than 3,000 programs via VOD and that the vast majority of them are free. “At the end of the day, the best way to experience that content is on your television,” the spokesperson said.

In2TV Offerings

At launch In2TV will feature 30 series licensed from Warner Bros., including a never-aired pilot of “Falcon Crest.” The shows will be arranged in six channels: LOL TV, Dramarama TV, Toontopia TV, Heroes and Horror TV, Rush TV and Vintage TV. AOL plans to add channels for reality shows and for shows that were great but canceled.

Here is the list of In2TV series available at launch:

  • The Adventures of Brisco County Jr.

  • Alice

  • Babylon 5

  • Beetlejuice

  • Chico and the Man

  • Dark Justice

  • Eight Is Enough

  • F Troop

  • The F.B.I.

  • Falcon Crest

  • Freakazoid

  • Freddy’s Nightmares

  • The Fugitive

  • Growing Pains

  • Hangin’ With Mr. Cooper

  • Head of the Class

  • Histeria!

  • Kung Fu

  • La Femme Nikita

  • Lois & Clark: The New Adventures of Superman

  • Maverick

  • The New Adventures of Batman

  • Perfect Strangers

  • Pinky and the Brain

  • Scarecrow and Mrs. King

  • Sisters

  • Spenser: For Hire

  • V

  • Welcome Back, Kotter

  • Wonder Woman