Disney's Internet Adventure

The media giant will allow users to download popular TV shows from ABC.com. But there are still glitches to work out

Never underestimate the Walt Disney Co.'s willingness to venture into uncharted technological territory. Disney (DIS) took one big step in October by becoming the first in its industry to offer TV shows for Apple's (AAPL) video iPod (see BW Online, 10/15/05, "The New Guns in Apple's Arsenal"). Now, it's journeying even further into the world of offering TV shows over the Net. It promises to be, at the very least, a bumpy ride.


  On Apr. 10, Disney announced it will begin testing the market for letting people download from ABC.com the same shows that Disney provides to cable companies and ABC affiliates. The two-month test will include such hot programs as Lost and Desperate Housewives, as well as its less successful Geena Davis show, Commander in Chief.

The company is also said to be studying whether to roll out shows from its Disney Channel and Soapnet, and a full season of its now-cancelled show Alias. The shows, which Disney will offer in May and June, will be available the day after they air on ABC and may feature made-for-the-Net commercials from such sponsors as AT&T (T), Cingular, Ford (F), and Proctor and Gamble (PG), the company said in a press release.

It's a grand experiment, following such efforts by Time Warner (TWX), which is making old episodes of shows like Welcome Back Kotter and Growing Pains available on AOL, and CBS, which is making CSI and other shows available on demand through Comcast's (CMCSA) cable service. But unlike the others, Disney's ABC network is almost certain to rile its cable partners, broadcast affiliates, and TV advertisers.


  The reason is that Disney's Net strategy could effectively cut its existing partners out of the new online revenue stream. Cable companies, for example, typically pay a fee to distribute media companies' content. They probably pay Disney about 30 cents per subscriber each month to distribute Soapnet, the cable channel that runs older soap operas.

If those subscribers can now go to the Net to watch the same programs, they're less likely to watch the shows on cable. "If [Disney] is going to put cable network programs online, they shouldn't expect us to pay the same subscription fee," says Glenn Britt, chairman and chief executive of Time Warner Cable.

ABC affiliates could see a similar pinch. They give Disney the ability to sell ads on their networks in return for allowing Disney to air Desperate Housewives and other shows. The affiliates also sell ads around the Disney Shows to generate revenues.


  If fewer people watch ABC broadcasts and instead view shows on Web, the affiliates' ads will reach a smaller audience and, therefore, be worth less money.

Disney says that it is studying ways "to work with its local broadcast affiliates" as its online offerings "continue to evolve." But some affiliate executives have been sounding alarms since Disney first cut their video deal with Apple's iPod service.

An executive at one affiliate, who would speak only on the condition of anonymity, says the issue of making programs available for download is contentious for the whole media industry, not just Disney and ABC.


  "These are programs we helped pay for," the exec said even before Disney announced its latest online effort. "The idea that they could cut us out of the money stream for some of those shows is offensive. We need to change their thinking."

Anne Sweeney, co-chair, Disney Media Networks and president of its Disney-ABC Television Group, stressed to a cable TV convention the day of the announcement that the rollout was simply a test. "For us it is a learning experience," said Sweeney at the National Cable Telecommunications Show in Atlanta. "None of us can live in a world with one business model."

While Sweeney quickly said that Disney valued its various partners -- cable companies, TV affiliates, and advertisers -- the buzz among attendees later was that Disney would be getting an earful from some of them in coming weeks. "We're certainly not going to do it," says the president of a rival media company. "We have to worry about our affiliate agreements. They pay us a lot of money."


  ABC's affiliates have been chafing for some time, following the Disney agreement with Apple, and they're certain to be less than thrilled that Net surfers can download the same Lost or Desperate Housewives the next day, potentially cutting into the broadcasters’ audience. In CBS's deal with Comcast and its downloading of March Madness games, the Tiffany network took care to only allow the games to be seen in areas where it owned TV affiliates.

That would eliminate complaints from CBS affiliates. But unlike CBS, which owns 16 affiliates, ABC owns only 10, giving it less coverage for its online shows. Affiliates traditionally give up most of the commercial time for TV ads in return for the shows. The quid pro quo was that they would have exclusive rights to air the show, and usually one or more repeats, before the TV network or studio would sell reruns of the show in the syndication market.

Industry insiders have quietly been saying for months that CBS also considers its deal with Comcast a test of how video on demand airings on Comcast would affect both its relationship with affiliates and the value of its shows in the syndication market. ABC seems to be just as uneasy, but is taking on a far more expansive experiment. ABC did not return a phone call beyond Sweeney's Atlanta statement.

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