Putting a Price on Free Programs

Nov 14, 2005  •  Post A Comment

Call it the Great Consumer Experiment: How much will people shell out for broadcast programming they can get for free?

Whether it’s last month’s alliance between ABC and Apple Computer to make available episodes of “Desperate Housewives” on iTunes or the video-on-demand partnerships announced last week by CBS and NBC, broadcast networks are not only embracing alternative delivery platforms on which to distribute their content, they’re also testing just how far they can push consumers to pay for it.

It’s a totally new concept for consumers and the networks. Although the majority of television households pay to receive television content from either cable or satellite operators, the broadcast model is based on offering content for free and relying on advertising for revenue.

Now broadcasters are entering the business of charging consumers directly, whether it’s through the $1.99-per-episode deal that ABC has through iTunes or the 99-cent VOD deals that CBS and NBC have with Comcast and DirecTV, respectively.

In many respects, the networks have little choice. With television audiences becoming ever more fragmented and broadcasters facing new competition from Internet powerhouses such as Google and America Online, the networks have made it a priority to develop solutions that can deliver video content on a raft of platforms, including broadband, cellphones and VOD.

Brian Coyne, an analyst for Friedman Billings Ramsey, said deals such as the CBS-Comcast alliance “signal an important shift in the media landscape and … are a direct response to threats posed by Yahoo, Google and other Internet aggregators.”

Whether the networks’ strategy works or not remains to be seen. While iTunes sold 1 million videos, including episodes of “Desperate Housewives” and “Lost,” between Oct. 12 and Oct. 31, many network executives and analysts know the lion’s share of those sales went to so-called “early adopters,” people who embrace new technologies quickly. The jury is still out as to whether average consumers will be willing to watch video content on the 2.5-inch video screen of an Apple iPod, let alone pay $1.99 for the privilege.

With the VOD services, there are even more questions. Both cable and satellite operators are aggressively trying to deploy digital video recorders, which some people think obviates the need for a VOD service. What’s more, just as with the iTunes product, questions remain as to consumers’ willingness to pay for VOD content.

With so many unanswered questions, CBS and NBC are taking their own paths to learning what is the best strategy for VOD. And those differences are likely to grow as other networks enter the mix.

For example, both networks differ in how long they make VOD content available to consumers once that 99-cent purchase is made. CBS allows users 24 hours to view their purchase. NBC’s deal provides users with a viewing window of nearly a week-from the moment the show is available (a few hours after it originally airs) to just before the subsequent episode is broadcast.

Ad Strategies Differ

Another difference: CBS is including national advertising in the on-demand episodes available on Comcast’s VOD service, though consumers can fast-forward through spots if they choose. NBC, meanwhile, has chosen to make its content available commercial-free to DirecTV subscribers with a digital video recorder, based on the belief that consumers prefer their on-demand content that way.

“Historically, if you look at what consumers get when they pay for content, they get pure content,” said NBC Universal Cable President David Zaslav. But he does envision advertising being in the mix one day: “If people were willing to pay [for content with advertising], we would be in the front of that line.”

Josh Bernoff, a media analyst at Forrester Research, thinks that time is coming. “Just as advertising supports live TV, we also expect it to support on-demand programs-perhaps with a single-sponsor program, especially once consumers can click on ads to see more,” he said in recent research note.

That the networks have embraced VOD at all is significant. For years, cable operators have tried to cajole broadcasters into making available content from their prime-time lineup for free VOD services only to be rebuffed by network executives concerned about not being compensated if the content was available at no charge.

“We have been banging at the door of an on-demand model that has real economics against it for the last two years,” Mr. Zaslav said. “The deal [NBC reached with DirecTV] was a door opener.”