ADJUSTING THE SET

TV Faces a Technological Transformation as It Tries to Win Back Viewers

By Emily Nelson and Martin Peers
Staff Reporters of The Wall Street Journal

The slumping TV industry is fighting to win viewers back, using some of the same technologies that prompted audiences to tune out in the first place.

THIS MONTH'S COVER STORY Adjusting the Set TV Faces a Technological Transformation as It Tries to Win Back Viewers

Family Feud Affiliates Fight TV Networks Over Issues of Ownership and Control

Fuzzy Picture With Billions at Stake, TV Networks Question Ratings Measurements

Outside the Lines ESPN's New Strategy Irks the Sports Leagues That Helped It Thrive

For a few years now, many of the young-adult viewers most coveted by advertisers have been spurning live, scheduled TV. Instead, they're watching recorded shows on their own time, often skipping over the commercials-or not watching TV at all. The young prime-time TV audience has been declining for the past decade, typically by a percent or two a year. This fall, the erosion appears to be accelerating, with the number of male viewers age 18 to 34 falling 7% from a year ago, according to Nielsen Media Research. Though the networks dispute the extent of the fall-off, they admit that viewership is gradually shrinking.

Now the TV industry is finally confronting the fact that new technology is transforming its economic model. "It's pretty obvious that, in the long run, the network broadcast business cannot rely on the single stream of advertising revenue," says Sandy Grushow, chairman of Fox Television Entertainment Group. "Networks have got to figure out a way to open up another revenue stream."

The slide in viewership comes amid an explosion of gadgets that give viewers other ways to use their TVs. The number of U.S. homes with DVD players has doubled in the past two years to 48 million, almost half of all homes with TV sets. Devices such as TiVo that easily record shows are now in a few million homes. Sales of videogames played on the TV screen doubled between 1997 and 2002 to 131 million. The average age of gamers is 29. Young male fans of "Madden NFL 2004," which has sold 5 million copies so far this year, play it an average of 7.7 hours a week, according to Electronic Arts, more than they watch prime-time TV.

Being in Control

Another factor: Viewers are growing increasingly accustomed to controlling what they watch. Today's young adults are the first generation of TV watchers raised on videos and computers. They're not used to adjusting their lives around a net work's schedule. Prime time starts at 8 p.m. (7 p.m. in the Midwest), but NBC research has found that its younger, affluent viewers aren't settled down on the couch at home to watch TV that early.

"Consumers want more control over their viewing habits," says Anthony Zuiker, the creator and executive producer of CBS's "CSI," one of television's most-watched shows. "As I look at my own watching habits, personally, I find myself watching no more than four or five minutes at a time as I flip for hours. ... If I'm 34 and doing that, then if you're 18, 22, you must be doing that. Our attention span is not there right now."

Instead of standing by as their viewers defect to DVDs, TiVo and games, the networks are now trying to harness those very same technologies for their own advantage. The Fox television network is testing a video-on-demand service that lets viewers watch some hit shows such as "The Shield" whenever they like. The makers of "The West Wing" recently began selling the complete first season on DVD. And the second videogame version of "Law & Order" went on sale last fall.

Return of 'Family Guy'

The video-on-demand services the networks are testing work like a virtual VCR, allowing viewers to click their remote control to order a TV show and watch it for up to 24 hours, stopping or rewinding as they like. Though no one believes video on demand will replace regular scheduled broadcasts, the networks think it could be an appealing add-on.

Production studios are also beginning to put TV shows on DVDs, generating extra cash for the TV industry and often luring viewers to new episodes on the networks. Industry executives say Fox's release of the first season of "24" on DVD just before the start of the show's second season drove viewers to the network for new episodes. ABC's "Alias" also attracted more viewers to its broadcasts after a DVD version hit retail shelves.

DVDs can propel a show even after network executives think viewers don't want it. That's what happened with "Family Guy." Fox canceled the animated comedy two years ago because of poor ratings. But the DVD release has made the show more popular than when it was on the network. To coincide with and promote the DVD launch, the Cartoon Network broadcast past episodes. Now Fox is in talks with the show's creator about bringing back the show.

All these moves represent a retreat from the broadcast networks' long-held stance: that the best way to draw a big audience and sell advertising is to give viewers only one chance to see a show. They also rewrite the advertising-driven economic model of broadcast TV, which has been in place for half a century.

Any experimentation promises to be a wrenching experience for the networks, requiring them to win over executives internally and change how they work with TV studios, cable operators, advertisers and TV stations. "It's a jump ball right now," says David Zaslav, president of NBC's cable networks. The challenge for the industry, he says: "How do we deal with technology in a meaningful way?"

The networks may face pressure to change from advertisers, who last year spent $17 billion buying commercial time on television. Although rates hit a record high last year, some advertisers are becoming frustrated with audience declines. "I have to step back and question the absurdity of paying double-digit increases for a dwindling audience," says C.J. Fraleigh, executive director of advertising and marketing at General Motors, the country's biggest advertiser. Mr. Fraleigh adds that he has instructed his marketers and advertising agencies to find big advertising outlets beyond television.

'Going Slowly'

Video-on-demand services, which started only a couple of years ago, are now in roughly 10 million homes, estimates In Demand, a cable-industry-owned video-on-demand company. While the services offer hundreds of recently released movies for $3 to $4 an order, operators such as Comcast also provide some cable programs free of charge. In Philadelphia, Comcast has about 800,000 customers with the service and about half use it each month, says Steve Burke, president of Comcast's cable operations. Users tend to order on-demand programming eight to 10 times a month.

But before video on demand becomes viable, the industry needs to resolve a major issue: finding a way to include commercials. The networks don't know if people will use the service to skip ads, though they are experimenting with technology that would block ad-skipping, much as movie DVDs prevent viewers from fast-forwarding through the previews.

Another key issue is ensuring that Nielsen, the ratings agency, will be able to measure how many people watch these services, or whether they skip over the ads, says Fred Dressler, executive vice president of Time Warner Cable, which is involved in industry discussions on extending video on demand to TV shows. "We are going slowly and very carefully, trying to make sure you don't upset existing financial models," Mr. Dressler says.

The cable industry is already experimenting with new ways to advertise on video-on-demand services. Comcast, for instance, plans to launch a special "marketplace" section of its on-demand service that will run five- to 10-minute advertisements on subjects that require lengthy explanations. Consumers interested in buying a new car, for example, could click on a video showing a test drive of the car, says Charlie Thurston, Comcast's president of advertising sales.

Among big advertisers, "there is a pent-up demand for alternative approaches" to reach viewers, says Nick Brien, president of corporate business development at Starcom Mediavest Group, a company that buys TV advertising time for such clients as Procter & Gamble, Coca-Cola, and Kellogg. "We either face the onslaught of TiVo and DVD ... paralyzed with an inability to evolve. Or we learn it, we test it, we apply it, and we evolve."

What else can the TV industry do to cater to Americans' changing viewing habits? Write to us.