Out Of The Box

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By Johnnie L. Roberts

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The top executives at ABC had flown out to Aspen to meet with their boss, Disney CEO Michael Eisner. A key item on the agenda: reviewing their plans for the network in the world of new media. They told Eisner about how ABCnews.com had grown, and about how ESPN, ABC's cable-sports empire, had become a hot cyberspace destination. They talked about synchronizing the upcoming Oscars broadcast with Oscars activities on the Web. But while they didn't know it then, the most telling demonstration of the network's leap into cyberspace was taking place as they were eating dinner at Eisner's mountainside vacation home on March 3. As the participants plowed through a buffet, they watched Barbara Walters's interview with Monica Lewinsky, along with the 70 million other viewers who tuned in at one time or another. And of those viewers, 1.5 million also logged on to the ABC.com Web site to fish for more dish on the scandal, vote in a poll or demand to know the shade of Monica's lipstick. It all buoyed Eisner, leaving him encouraged about ABC's future. "This is fun," says Eisner. "This is more fun than I've had in 10 years."

If Eisner hasn't found television much fun in the past few years, who can blame him? As at all the other television networks, ABC's audience is shrinking, competitors are multiplying and programming costs are soaring. The upshot: in the four years since Disney acquired ABC, the network's annual results have plunged from an almost $400 million profit to a loss of $100 million or so. And the news is hardly encouraging at the other nets. Fox may lose $15 million this fiscal year. Profits at NBC, the No. 1 network, could by some estimates sink by at least one third. CBS expects a small profit--$15 million to $25 million--thanks to deep cost cuts.

Peter Jennings, the ABC News anchor, recently called television "the most transforming machine of the 20th century." But as that century draws to a close, it's television that's being transformed. The economics that undergirded the industry have been permanently altered. At the same time, the shift from Old to New Media is accelerating as the Internet spreads and "broad-band pipelines" offer warp-speed access to cyberspace. The networks--those Old Media titans that once loomed so large in American business, politics and culture--have been humbled, and now their very survival may be in doubt. "It's perfectly plausible that Yahoo, AOL and NBC will be the top three TV networks as the term will evolve," says Reed Hundt, former chief of the Federal Communications Commission.

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Hyperbole? Don't bet on it. Not long ago, NBC chief Robert Wright suggested that the network might leave the air and become a pay-cable service. The media and online worlds buzz with the rumor that America Online will acquire CBS. And in the last two weeks simmering financial tensions between both ABC and Fox and their affiliates--the local stations that actually transmit the networks' signals to your TV set--have erupted into open warfare. Fox unilaterally moved to grab a reported $50 million to $100 million by taking away advertising time that had belonged to the local stations. And ABC is seeking to turn decades of broadcast economics upside down by, among other things, pressing affiliates to help pay for expensive programming. Early this month ABC abruptly ended months of talks with the affiliates. What's potentially at stake, Eisner says, is the survival of broadcast TV. "The world has changed," he says. "We can't continue losing all this money."

If the network business is to be reinvented for survival in the next century, ABC is arguably in the best position to do it. I t is part of one of the most vertically integrated media companies. The Magic Kingdom has vast resources along every step of the process of creating and distributing televised entertainment. The question is whether Eisner and Robert Iger, ABC's chairman and Walt Disney International president , will succeed in making all the parts come together in new ways. Disney's empire includes its R<&>D wizards, the Imagineers, who are busy envisioning what TV might be like in the future; production studios like Touchstone, which makes shows like ABC's "Sports Night" and "Home Improvement"; cable channels like ESPN (75 million subscribers) and Lifetime (73 million), and Internet properties like its GO Network portal and Infoseek, a search engine in which it has a 43 percent stake.

For a glimpse of what Disney has in mind for the future of TV, come to the headquarters of Imagineering, Disney's R<&>D department in Burbank. To an extent little known beyond Disney, this is where ABC television is being reinvented. "Our mission: what comes next," says Brad Ferren, Imagineering's president. "It's enhanced TV--what news, sports, children's TV are if you have no technology limits." Under the code name Tele-fusion, Imagineers are simulating this future in research labs rarely opened to outsiders. Here, a prototype living room is packed with an array of electronic gadgets for viewing (or, more aptly, experiencing) Tele-fused TV. What is it? Anything you want it to be. You can print from the TV screen everything from an ad to an invitation to a soap-opera wedding, call up a segment from "20/20" archives, purchase the script of a TV movie, be linked to relevant Web sites--all seamlessly. You can silence a sports announcer but keep the stadium noise, or tune in a single coach. And if you really don't have a life, try the buddy cam: from miles away, a buddy watching the same show as you appears live in your video window--as you do in his--so you can chat and watch TV together. "A revolution has started," says Iger. "It's as clear as day to me. And revolutions usually begin with technology."

The network business certainly didn't look as if it needed a revolution in 1996, when Disney plopped down $19 billion for ABC. The industry's economic model was still operating fairly well, as it had for decades: A studio supplied a TV series. The network licensed it, paying a fee that only partly covered production costs. The network renewed the hits for several seasons, garnering a fortune in ad revenues . (The studio made its windfall from syndication, selling reruns.) In the mid-1990s ABC looked to Eisner like Disney's perfect match. For several years it had been the top-rated network, with hit shows like "Roseanne," and its profits had swelled to more than $375 million annually.

Yet, even as the takeover was pending, ABC's fortunes began to reverse. Before long it had plunged to No. 3 in the ratings. In fact, all of the networks were showing the ravages of an insidious long-term phenomenon: the fragmentation and decline of their audiences. After nibbling away since the 1980s, cable began biting off large chunks of network viewership in the 1990s. Some 70 million of the nation's 100 million homes with television have cable now-- far more than half of those with at least 50 channels. Last summer cable periodically grabbed more viewers weekly than the Big Four and captured more TV homes than the nets for the entire month of August. The networks' combined ratings and share of viewership are off almost 7 percent in the current television season, while cable's are up almost 12 percent. And even as network viewers are fleeing, programming costs are soaring--witness the $13 million per episode that NBC must now pay Warner Bros. for "ER." What's more, under 10-year contracts with their affiliates, each network pays local stations $180 million to $200 million annually to carry its programming. "The network economic model is obsolete," says Iger. Adds Eisner: "I can't live with the status quo; we're going to survive one way or another."

ABC's strategy for survival is two-pronged. In the short term, it's trying to shift the industry's existing economic order more to its advantage. Thanks to regulatory changes, all the networks can now own more of the shows they air, so ABC is looking to Disney's studios to produce a bigger chunk of the programming it broadcasts --goodbye, $13 million episodes. The network's battle with affiliates represents another front in its struggle to improve profits. Last year, for example, ABC began asking the stations to pick up a chunk of the annual $550 million fee for the rights to air NFL games. Eisner and Iger are also aggressively lobbying Washington to lift the regulation that says the networks themselves can't own stations that collectively reach more than 35 percent of the national audience. And in a quest for new revenues, ABC is rerunning programming and distributing it in ways that bypass the affiliates altogether: get ready for the all-soaps cable channel next year.

But all that is really just tinkering with the status quo. Increasingly, the network sees its real future in the proliferating forms of New Media--digital TV, the Internet and broad-band cable systems--where it can use its powerful brands to lure audiences to the converging worlds of TV and PC and keep them watching, interacting, seeing ads and even buying merchandise. The Imagineers' Tele-fusion isn't just tele-pie in sky. On Oscar night the technology, or elements of it, leapt from the lab and onto the world stage at the Dorothy Chandler Pavilion. The goal was to volley viewers to and fro between the TV set, where the ceremony was aired live, and the PC, where they could "interact" with it through a game (called "... And the envelope, please!") at Oscar.com, the official Web site. ABC activated the site several weeks before the ceremony, offering up data, Oscar trivia and photos of past Oscars. On Feb. 9, it officially kicked off the site with "live coverage" of the nomination announcements, including videostreaming (full-motion clips) and reams of data. Some 400,000 visitors checked in. On the big night, while the network broadcast the pre-Oscar show hosted by Geena Davis, Oscar.com carried a live videostream of the red-carpet arrivals. When the ceremonies began, Oscar.com ended its live feed, lest it siphon off TV viewers and hurt ABC's ratings. But in the interim, it supplemented the network, posting transcripts of the acceptance speeches and allowing preregistered visitors to play an interactive game, competing against one another in guessing the next Oscar winner . After the telecast, it carried video of the backstage interviews, which ABC didn't have. "This is a convergence product" aimed at the 30 million homes with TVs and computers in the same room, says Iger.

Convergence is also the key to "Zoog Disney," on the Disney Channel. Zoog features animated characters who live in a space, called the Zeether, between the TV and the computer. From there, they host "Zoog Disney," a block of three shows for kids on Sunday evenings. At the end, the Zoogs "invite" the kids to a Web site for activities: games, chats and questions based on the TV episode. On the following Saturday the episode is repeated fully "Zooged" with the game winners, comments and other results. "It's TV you do," says Iger.

But the big win, says Eisner, could come in e-commerce. On Feb. 5, Barbara Walters, Starr Jones and the other women of "The View," ABC's popular daytime chat show, talked up their hot gift picks for Valentine's Day. Viewers could then buy the books and CDs (Barbara Walters's picks: "Memoirs of a Geisha" and a Sinatra compilation) at ABC.com.

As Eisner himself has learned, however, life in the Zeether can be a little stormy. Last January ABC synchronized its telecast of the Fiesta Bowl with several Web sites, including ABC.com and ESPN.com, allowing viewers to interact with the game in cyberspace--for example, by looking up data on the Web site about the player who just made a tackle on the screen. Eisner was eager to check the site out, but it was overloaded with traffic--and he couldn't get on . Memo to the Imagineers: that's something you might want to imagine fixing pretty quick. Bad enough that the boss couldn't make the thing work. Worse if the customers get frustrated. Disney may imagine a world in which the TV and the PC become one, where audiences move effortlessly from broadcast to cyberspace, communicating, ordering programming, downloading information and buying stuff. But as Disney and everybody else experimenting with New Media is acutely aware, that vision will work only if the system combines the power and interactivity of the PC with the user-friendliness and reliability of the TV. Not the other way round.

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