TV’S KICKBACK APP

You watch TV, right? Now you can tune in to your favorite shows, and earn free stuff just for sitting on your duff!

That’s the straight-up economic proposition from Viggle, a startup aggressively vying to become the default TV app in viewers’ hands as they engage in America’s favorite pastime.

Viggle is a public company spending millions of dollars on tangible rewards — like gift cards, music downloads and even iPods — to encourage users to tune in and keep watching. “Every point we give away is money, essentially,” Viggle vice president of marketing Jason Reindorp said. “We are the only ones in this space doing real rewards.”

But is a bribe enough?

Viggle’s struggle to survive reflects the intense competition in the ever-expanding world of second-screen apps these days — a nonexistent market just two years ago. More than anything, it underscores a steeper value perception by advertisers and programmers of synchronized viewing with second-screen devices.

Discovery Communications has tested offering Viggle points to viewers who watch Animal Planet shows, with inconclusive results, according to Guhan Selvaretnam, the programmer’s senior vice president of digital media across all TV properties.

“The jury is still out on Viggle because, in terms of them actually moving ratings, it’s early days,” he said.

A second-screen app must first and foremost provide an enhanced-TV experience, Selvaretnam said: “The points are the nice cherry on top. But if they don’t deliver a great user experience, nobody is going to use it.”

Viggle — whose name implies “vigorish,” a bookie’s cut of a bet — has been pedaling hard to prove the model works. Since launching in January, it has signed up more than 1 million users for the app, though only 660,341 were active as of July 26.

That’s come at a steep cost: Viggle, which is publicly traded, reported a net loss of $26.9 million for the first quarter of 2012 on revenue of just $556,000. (The company was scheduled to report Q2 earnings early last week, but at press time last Thursday (Sept. 13) it had not released them.)

As of the end of March, Viggle reported $4.3 million in cash and equivalents. To sustain the burn rate, on June 29, Viggle’s executive chairman and CEO, media entrepreneur Robert F.X. Sillerman, loaned the company $2.5 million as part of a $10 million line of credit.

GET BIG FASTER

Chris Stephenson, Viggle’s president and chief operating officer, acknowledged that the company has placed a big up-front bet to gain traction.

“You have to be ready to front-load this,” he said. “Your value proposition has to be real on Day One. You have to be confi dent you can bring advertisers in.”

Now, to boost its user base — and increase its attractiveness to advertisers and TV networks — Viggle is banking on deals with DirecTV, which is its exclusive pay TV partner, and Verizon Wireless, both of which are pitching the app to their subscribers.

The startup claims to have had early success with advertisers including PepsiCo, Gatorade, Unilever, Capital One, Wendy’s, Lowe’s and Bing. Users can also earn points by clicking on ads to watch videos or play games. TV networks that have run Viggle campaigns include USA Network, Fox, AMC, MTV and Spike.

But Viggle still needs more scale, and Stephenson estimated the company will have to hit around 5 million active users to really take off as a business. “If you have 300,000 to 400,000 actives per day, that is not the same as the reach of television,” he said. “So we’re realistic about that.”

Similar to other TV apps, Viggle’s app automatically identifies which shows users are watching, using proprietary audio-content recognition technology across more than 175 broadcast and cable networks.

Viggle gives “watchpoints” to users who check in to certain shows, which can then be redeemed for rewards, including gift cards and credits from Best Buy, Sephora, Starbucks, iTunes, Amazon.com and Hulu Plus. Users also can convert their points into charitable donations or redeem them to enter sweepstakes for prizes.

For DirecTV, the Viggle deal is primarily a customeracquisition tool, vice president of marketing Alex Kaplan said. Users who switch to DirecTV will earn 200,000 Viggle points — redeemable, for example, for up to $133 in credits for DirecTV pay-per-view movies. Subscribers also can earn bonus DirecTV tune-in watchpoints that aren’t available to regular Viggle users.

“It’s a sales channel,” Kaplan said. “We also see Viggle providing value to our customers today from a loyalty standpoint, to give them something above and beyond.”

That said, DirecTV sees Viggle as a low-risk venture in a fast-moving segment.

“The second-screen space is evolving, and we are certainly talking to other people,” Kaplan said. “I don’t think anyone can predict the future. From our perspective, there’s really no downside here. We are giving customers cool new technology, extra value and we hope they appreciate it.”

Viggle’s theory is that its economic incentives will help it stand out in the crowded second-screen playing field. Other companies developing special-purpose TV apps include Dijit, GetGlue, Miso, Peel, Shazam Entertainment, TV Guide Digital, Yahoo’s IntoNow and Zeebox.

APP GOLD RUSH

The opportunity to synchronize TV programming and advertising with content on mobile devices is potentially gigantic: About 70% of tablet owners and 68% of smartphone users use their devices while watching TV, according to a 2011 Nielsen study.

“What is clear is that we will have a breakout hit” in the TV companion-app category, according to Tracey Scheppach, executive vice president and innovations director at ad agency StarcomMediaVest. “This is an idea that consumers will flock to. The winner will be the one who figures out how to make this synergistic with traditional TV advertising.”

U.K.-based Shazam, for one, is stepping up its push into television — with a user base far larger than Viggle or any other second-screen app. The company has more than 250 million registered users worldwide, although it is better known for its musicrecognition features.

This fall, the company will expand its Shazam for TV service in the U.S. to support TV programming on more than 160 channels at any time of day. The enhanced service will let Shazam users access cast details and photos, music in the show, celebrity gossip, trivia and links to additional information, as well as share and comment on shows via Facebook and Twitter.

“In the second-screen world, viewers want to watch the TV show, so the challenge is how you bring additional experiences to them to complement that,” Shazam CEO Andrew Fisher said. “We don’t believe anybody owns that space right now.”

As for offering incentives to users for tuning in to TV, Fisher is skeptical.

“Just because you give someone a reward doesn’t mean they will stay engaged with a show,” he said. “They may just want the gift card.”

Viggle, however, claims the rewards program works — and works very effectively. The company cites its recent promotion for Fox’s primetime drama Touch. After Viggle began offering users 350 watchpoints to tune in to Touch, viewing among Viggle users tripled, even though the show’s Nielsen ratings declined over the same period.

“The cable networks are the ones that are going to specifically see a bigger lift,” Stephenson said, given that cable audiences typically are smaller than for broadcast TV.

The app’s users log 87 minutes per day, and click on ads between eight and 12 times per session, Stephenson said. “The conversion on these units is absolutely outside of anything the agencies have seen,” he said.

On the other hand, Viggle found that users were racking up a lot more points than it expected them to.

The company now has restrictions on points accumulation, limiting users to no more than 6,000 points in a day and no more than 12 hours of TV per day. Recent customer reviews on Viggle’s iTunes page complain that the company has cut back points awarded for show check-ins while it also increased the number of points needed for certain rewards.

“Our points costs were higher than we anticipated at the start,” Stephenson said. About 5% of Viggle’s users are hardcore TV fanatics who have millions of points, he added: “They clearly watch a lot of TV.”

‘IDOL’ ORIGINS

Viggle is the brainchild of media entrepreneur Sillerman, who previously founded and ran CKX, which, among other properties, acquired American Idol producer 19 Entertainment.

Sillerman said the concept of a loyalty program for TV occurred to him as he watched Idol audiences drop off week to week. If viewers were given incentives to come back to the show, he posited, the ratings would hold up much better.

“Every industry in the world has loyalty and continuity programs — except the entertainment industry,” he said. “I’ve never viewed myself as a visionary. I just try to perceive known human behaviors and see if there’s a predictable way to monetize them.”

The primary objective, according to Sillerman, is that if you get people loyal to a television show and deeply immersed in it, “in fact you can make television advertising almost like direct mail.”

Sillerman founded Viggle in mid-2010. Along with other investment partners, he formed the current corporate entity with a reverse merger in February 2011 of Gateway Industries Inc., a defunct database- marketing software firm, renaming the company Function(x). The company officially changed its name to Viggle Inc. in June, and its stock is traded over the counter under the symbol “VGGL.”

Because of its publicly traded status, Viggle has had to disclose financial results and other details of its business that private startups usually keep under wraps.

On Aug. 17, 2012, the company was served with a patent-infringement lawsuit by Blue Spike LLC, which claimed Viggle was misappropriating its audiorecognition technology. Viggle noted that Blue Spike has sued several other companies involving the same patents — including Shazam — and said in a filing that it “denies that it is infringing any valid, enforceable claims of the asserted patents and intends to vigorously defend itself against the lawsuit.”

Viggle is now focused on “aggressive acquisition marketing,” geared around the DirecTV relationship, Stephenson said, in part by developing better content discovery, recommendations and loyalty features. And it will expand Viggle Live, which syncs trivia, polls and mood-o-meters with live TV programming, technology it obtained through its acquisition of San Francisco-based Loyalize in December 2011.

“I’d define the first six months as getting the product right. The next six months is growth,” Stephenson said. “Hopefully, by the time we’re 12 months in, I do believe we’ll be in a place where we will have a clear sense of what’s working and what isn’t.”

AT A GLANCE: VIGGLE

Description: Apps let TV viewers earn points by “checking in” to shows, then redeem those points for gift cards and other rewards.

Employees: 90

Management Team: Executive Chairman and CEO Robert F.X. Sillerman; president and COO Chris Stephenson; chief revenue officer Kevin Arrix

Founded: June 2010; launched in January 2012

Headquarters: New York

Key Partners: DirecTV, Verizon Wireless

Sources: Company reports, Multichannel News research

BY THE NUMBERS: CASH FOR EYEBALLS

Viggle spent $9 on points per each active user it signed up in Q1 2012:

REVENUE
$556,000

NET LOSS
$26.9 MILLION