Local TV's Clear Shot At The Net

Demand for video ads could be the stations' salvation

Owners of TV stations once had to try to mess up the business. Even by media standards, they posted truly ridiculous profit margins. (Try 40% and up.) Oh, sure, there was competition from cable, endless wrangling with the networks you did business with, and costly local news wars, fought with expensive gimmicks like news choppers. But still: While other media writhed from the changes wreaked by new entrants, local TV was a relatively undisturbed patch of the sandbox.

Then Apple (AAPL ) unveiled the video iPod. And ABC (DIS ) started selling programs as $1.99 downloads before subsequently announcing that it would stream shows over the Web, sell ads around them, and -- oh, yeah -- not share those revenues with local station affiliates. Other big networks have signaled a willingness to cut the local stations in on such revenues, as evidenced by NBC's late-April deal to jointly sell its 213 affiliate stations' video programming. Which is nice, but it doesn't stop local station guys' nightmares from now coming true. Take, for instance, the media executive who told me he got hooked on Lost via iTunes, tried to watch it on television one Wednesday night, realized he didn't know what network it was on, started fumfering around with TV listings, and then decided it was just easier stick to downloads.

But sometimes the Web can give back some of what it takes away, and there's untapped upside for local TV guys online. Ad agency folks will tell you that there's more demand for Web video ads -- for a local station's site, the ad snippet preceding, say, sports highlights -- than there is inventory. Although cost estimates vary wildly, analysts reckon that Web sites notch significantly more revenue for video ads than for other online ads.

It's also an online ad form that's immediately recognizable to the most tradition-wedded advertiser, since it's basically a TV ad; for the same reason, it makes intuitive sense even to the dimmest TV ad sales reps. The big three in local media are radio, TV, and newspapers. Which has the most video programming to sell ads around? (Think hard now.)

NO ONE IS GOING TO CONFUSE the market for broadband video ads with broadcast TV's ad market. But at an April industry gathering, executives of broadband video companies estimated that up to $1 billion would be spent on the nascent form in the next 12 months; halve this for hyperbole, and it's still real money. In 2003, the size of this market was $30 million. Within this growth lurks opportunity for local TV, but it's only poised for so much growth because it has done such a poor job online thus far.

Think back to the formative days of the Web: the snail's-pace connections that limited the medium to transmitting text and still pictures. In that environment, it was clear that newspapers had the most to fear, and also the most to gain. That local TV didn't have to play aggressively on the Web back in 1996 meant...well, that it didn't play aggressively on the Web. To this day many local TV sites have hardly any "there" there.

So newspapers took a massive lead in editorial and commerce in the local Web space, which they have yet to relinquish, even as broadband and Web video have become commonplace. Newspapers netted 41% of local online revenue last year, vs. 6% for local TV sites, figures Borrell Associates, a research firm that tracks local online efforts. This, it turns out, is major progress for local TV: In 2004 it had 3%. "Whatever we have picked up to date [online] is not enough," concedes Paul Karpowicz, who oversees 12 local stations as president of Meredith Corp.'s (MDP ) Broadcast Group.

The dollars flowing to online video advertising have not gone unnoticed, and print media entities such as The New York Times (and BusinessWeek) now scramble to broaden efforts in this space. The growth of these ads may not make up all the money local TV players would lose should many viewers forsake their local station for streamed or downloaded shows. But given the high prices online video ads command, they might get close, or at least closer than newspapers would get if their consumers and advertisers defected to online. All local TV needs is to pick up, fast, on some of the online lessons newspapers learned a decade ago.

For Jon Fine's blog on media and advertising, go to www.businessweek.com/innovate/FineOnMedia

By Jon Fine

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