No payoff yet

It seems like the Internet never had a chance to grow up. The billions of dollars invested in the financial markets based on wild speculation twisted any chance for normal growth and development. And broadcasters, particularly of the major-media variety, were hardly immune from the market mania.

The phenomenal cash influx seemed to confirm new-media hype that online ventures would crush existing media. Many online units were turned into separate divisions in the hope of catching up with the dotcoms through lucrative IPOs.

Now the bubble has burst. Many start-ups have crumbled from the crash landing. Consumer confidence-and with it, advertiser spending-has become shaky. With the dotcom downturn, the challenge for the TV/Internet business isn't growing up; it's growing down. This means getting grounded in the realities of maximizing revenues and reducing costs.

At Fox, CNN and CBS, independent Web units are being folded back into core business operations. Internet staffs have been trimmed. NBC spin-offs NBCi and MSNBC are seeking increased interdependence, not independence. Despite appearances, this may not be a retrenchment. Instead, it may mark the crucial turning point for the successful convergence between new and old.

"The point of view we had three years ago came from a fear of the unknown," confesses Jon Richmond, president of News Digital Media. "The Internet seemed a threat. This concern motivated the creation of a centralized organization for our Internet initiatives."

This fear was soon replaced with the hope of launching a successful IPO for the new division. "A year or more ago, given the market, it made sense to have a separate entity," he adds. "Now the reasons why we structured things have dissipated. So we've begun to shift the independent operations back into the main operating units." Although the change was announced in early January, Richmond expects that integrating, and into the television operations they support won't be completed until summer.

CNN followed suit, announcing a similar restructuring in mid-January. Jim Walton, president of Domestic Networks for the CNN News Group, has had this as a top priority since shifting from CNN/Sports Illustrated last August. "From day one over at CNN/SI, TV and the Web were reporting to the same place," he explains. "We were integrated. When I got here, we talked about how that worked. It made sense to replicate that structure."

For Richmond and Walton, a unified TV/Internet operation promises far more than cut costs. Coherent programming across the different platforms can spark viewer interest with online and on-air tie-ins. Also, the bottom-line motivation is helping the sales staff capitalize on crucial cross-selling opportunities (see box page 52).

Michael Goodman, senior analyst at The Yankee Group, a Boston-based business research firm, sees both as key. "That's the whole purpose of having a multimedia company," he says. "You put all of these elements together to take advantage of synergies. If the different elements don't mesh, then the whole isn't greater than the sum of its parts."

CBS, too, has opted to bring Internet operations in-house. While its announcement came after that of Fox and CNN, CBS may be farther along in realizing the potential power of integration. The reorganization gives David Katz, vice president, strategic planning and interactive ventures, daily management responsibilities for the entertainment elements of

Katz says that this change has been under way for some time. "It's really more of a formalization of how we've been operating over many months." The process began last summer with planning for the first Survivor Web-site operation. "We decided to build it on the West Coast, where the creative operations for the show are located," he notes. "Most of the Internet operations had been in the East. The idea of co-locating the Web and TV producers was a new concept." Because of secrecy issues, providing proper Web support for Survivor had special challenges.

"It took a few weeks to hone how and when we wanted to refresh the site," Katz continues. "We had to be nimble about turning over the right information at the right time to the viewers [on the Web site] without revealing any of the secrets. We had to closely mirror what the network publicity was doing."

Success with Survivor demonstrated the practical benefits of having on-air and online work together. "It was our first foray into having an integrated entertainment Web experience," says Katz. "We learned a lot, were extremely successful and realized this was the model we needed to follow for all of our shows."

Do pink slips at many of the Web units indicate that the TV/Internet space is on the ropes? Online operations are still so new that the cuts may be more about getting the right size. CBS MarketWatch CEO Larry Kramer maintains that running Internet organizations with a TV mindset leads to overstaffing. "Network TV and newspaper managers assume it takes more people than necessary," he asserts. "We run it tight." The total MarketWatch organization has a head count of 275, reaching an audience of 9 million daily.

At Turner's Cartoon Network Online, General Manager Jim Samples feels lean and limber. "We're being careful, building smartly," he says. "We never grew to such a size that we needed to scale back. We feel very good about the economics of having 68 people running a site delivering 3 million unique users daily."

How such online audiences translate into ad revenue remains nebulous. How much is a "unique user" worth? For ad execs, increased profitability will come only as the TV/Internet market expands beyond direct marketing.

"We're experiencing a very serious downturn in our industry," says Mike Warsinske, CEO of Cybereps, an online ad sales and marketing organization. "We're seeing the continued torturing of the new medium by direct marketers."

Part of the problem comes from overselling the Internet's potential for target marketing. "The technologists in our industry have slowed us down in some ways by pointing to robust profiling and targeting," he adds. "Yes, there's a great deal of promise for that in the long term. In the meantime, we need to get back to the basic principals of advertising: exposing a brand, creating a preference for it."

Warsinske calls for a re-education and reassessment of the new media. "We need to communicate that to national branding advertisers and fight the unfair direct-response-marketing restraints that have been put on the medium," he stresses. "Can you click on a radio ad? A TV ad? Click-through should be seen as a value-add, not the only value."

Kate Everett-Thorpe, CEO of Lot 21, a San Francisco-based interactive ad agency, claims that both the direct-marketing and branding models underrate the Internet's potential. Online exposure transcends the direct marketing/branding dichotomy of traditional media. "We're seeing some transition in the way banners are being used," she says. "It's shifting from cost-per-click to branding. Think about the 99% of people who see an ad but don't click on it. What about the knowledge the viewer takes away? It's very rare when people click on the ad and make the buy right away. Many more shop around and return."

The Walt Disney Internet Group is a prime example of a large media company's taking a fresh look at how it would approach the Internet. The decision to close in January to refocus on the individual sites followed a yearlong re-examination of the potential of the brand.

"Building a new brand in that environment is difficult. Besides, we already have great brands," says Steve Wadsworth, president, Walt Disney Internet Group. "We already have a great presence. We already have a consumer and advertiser top-of-mind recognition in all of those properties. Those businesses are much more obvious and logical for us."

Dick Glover, executive vice president, Walt Disney Internet Group, sees the move away from the portal concept as a validation of his focus, managing the ABC and ESPN Internet properties. "All of the changes are an affirmation of the strength of the vertical brands/properties. Rather than any kind of retrenchment, this is a rededication of our efforts on the sites."

Disney's experience in attempting to establish a portal is not unique. NBC faced a similar situation in the genesis of NBCi. The company came from the NBC/CNET acquisition of the Snap Internet portal. Rather than attempting to build awareness for the relatively unknown Snap brand, dubbing it NBCi achieved instant recognition for the new Internet division. Such name-brand recognition also allowed NBCi to ride the turbulent currents of an IPO and subsequent swings in stock valuation.

But being swept up in the dotcom boom stunted NBCi's proper partnership with NBC, according to Martin Yudkovitz, president, NBC Digital Media, and executive vice president, NBC. "When the mania was in full swing, NBCi was getting 95% of its business from other dotcoms," he recalls. "It was virtually sold out. There was so much business from the dotcoms that they didn't have to worry about going to NBC's traditional advertisers."

Today, the dotcom-advertiser base has all but evaporated. Yudkovitz sees this as bringing about the same fusion between NBC and NBCi that is happening elsewhere in the industry. "To me, this is one of the best things that's happened. Now the NBCi sales staff and NBC sales group are integrating. The advertiser interest in extending their message from on-air to online has increased."

Even so, The Yankee Group's Goodman expects that NBCi will have difficulty achieving the same level of integration possible

in rival media companies. "They are at a bit of a disadvantage now that they've had an IPO. As far as markets are concerned, it's a separate company. It's not just a company in a company."

Meanwhile at MSNBC, interdependence, not independence, defines the organization. The kind of assimilation seen elsewhere is out of the question. "It would be unlikely for us to refashion our structure in any way like that given the partnership that is MSNBC," says Merrill Brown, senior vice president and editor-in-chief at MSNBC. "There's a comfortable balance in the joint venture that makes it work for all involved. I say 'works' cautiously, though, because we're all awaiting the general national advertising economy to turn around. We'll all be vastly happier when that happens."

NBC's Yudkovitz agrees that this is what convergence is all about. "If you can combine interactive, targeted messaging with mass-market brand awareness, you're delivering the best value for the advertiser," he says, pointing out that a concerted TV/Internet campaign is uniquely suited to this.

Winning the ad community's appreciation for this may come as the focus shifts from buttons and banners to streaming media. Judy Carlough recently joined Arbitron Internet Services in the newly created role of vice president, advertiser services. Her mission is to educate advertisers on the power of audio and, soon, video, streams. "Advertisers used to have a Mount Rushmore of choices: TV, radio, print, outdoors," she says. "Add the Internet, and you get a proliferation that turns Mount Rushmore into a mosh pit."

The problem is that such proliferation has created confusion, not convergence. "At the agency side, convergence means getting the interactive campaign to work in sync with traditional media to make a unified, consistent message," she explains. "They want it finely tuned like a marching band with the full impact of all the different instruments playing together. What you have now is something less than that: The band's playing a few different tunes."

Of course, there are alternative business models beyond advertising. Sarah Cotsen, HBO's vice president, interactive ventures, operates under an entirely different set of criteria: "As a premium network, we're not ad supported. What we're really interested in is adding enhancements for our audience."

At the same time, is adding a direct-marketing aspect to the value- added/branding aspects of the site. Beyond keeping audiences for The Sopranos or Sex and the City interested between seasons (and between episodes during the season), a new initiative, HBO Express, will allow instant online sign-up for the premium service. For now, HBO Express is being tested in select markets. A national rollout is expected by the end of the year.

Licensing, too, can provide a steady, diversified revenue stream. According to MarketWatch's Kramer, this is a natural for media companies. After all, they are in the content-creation business. "The licensing business is supporting us right now. It's come to be as much as 50% of our revenue some months," he says. Was this in the business plan? "We knew licensing would be big, but we had more confidence in advertising. We still do. It's just that the advertising market is cyclical. Licensing is less so."

Despite the dotcom downturn, the Internet continues to weave itself into society, building an ever increasing audience. Larry Rosen, CEO, Edison Media Research, says that today's solid growth only seems disappointing given previous unrealistic expectations.

"You almost get the sense that the online market has shrunk," he says. "That is not the case. It just isn't growing at the same, unsustainable rate." In this context, the need for "growing down" in the TV/ Internet space may seem unduly negative. Hitting the ground may not be very pleasant to those accustomed to flying high. But those who appreciate the possibilities will be hitting the ground running.