Media Cashing In on Internet Video, But At What Cost?

By Sam Schechner for the Wall Street Journal on August 15, 2011

Media companies are starting to cash in on Internet video. But that new money could be coming at a cost as fewer young people watch traditional television.

That battle between the old and new ways of watching TV is putting networks and studios in a tricky position—balancing a new, growing online market for shows with a traditional market that is facing new threats and still accounts for the lion’s share of revenues.

Declines among younger viewers accelerated this TV season—a shift in an industry that has registered growth for decades. At any given time of day, about 11.5 million people between 18 and 34 years old watched TV on traditional sets between last September and the end of last month, down 2% from a year earlier and 3.4% from two seasons ago, according to Nielsen Co. Networks are able to charge advertisers a premium for viewers in the age group, which also is a barometer for future viewing habits.

New digital-streaming deals with companies like Netflix Inc. meanwhile pumped hundreds of millions of dollars into big media companies this spring, and media executives say they are teeing up more such deals.

The changes come as a war brews over which companies will profit by piping video to consumers. Netflix, Amazon.com Inc. and Google Inc. and other technology companies are muscling into living rooms with new ways to watch video. Cable operators and other traditional distributors are fighting back, rushing to give their subscribers access to shows on such new devices as tablets and Internet-connected TV sets—and trying to restrict the amount of free TV available on the Web.

Whether that war is already taking a toll is subject to debate. The number of households that pay for TV service shrank by 458,000 households, to about 100.1 million in the second quarter, according to estimates released Friday by media researcher SNL Kagan. Cable and satellite companies blame the decline on the weak economy, not on Web video. But some people in the industry say that the growing availability of video from the Internet is having a small effect as well.

The outcome of the fight between old-line distributors and new online ones could determine whether a new generation will sign up for cable-TV service in the same numbers as their parents—and whether TV channels will continue to be supported by more than $30 billion a year from consumers’ monthly bills.

Web streaming from companies such as Netflix is starting to have a real impact on earnings at traditional media companies. Viacom Inc., whose networks include MTV and Comedy Central, and CBS Corp. each added at least $60 million in pretax profit from new digital-streaming deals in the quarter through June, while Comcast Corp.’s NBCUniversal added roughly $80 million, according to analysts’ estimates.

The new deals account for roughly 6% of Viacom’s reported operating income in the quarter, more than 8% at CBS and nearly 3% at Comcast—although those particular deals will account for less in future quarters because much of the revenue is booked when the deals begin.

“I think it’s a means of growing the business,” Chief Executive Robert Iger of Walt Disney Co., which owns ABC, told analysts last week.

But Mr. Iger and his counterparts also say they are being careful to protect their core businesses by selling mostly older shows to Netflix and other online distributors, not the new ones that the networks count on to bring in ad revenue. CBS, for instance, says it has licensed only 7% of the content in its library, and no current shows.

This is an excerpt from Sam Schechner’s article in the Wall Street Journal. Log in or subscribe for the full article here.