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Andy Brock

To Blunt the Web's Impact,
TV Tries Building Online Fences

Stations Are Using Technology
To Restrict Who Watches;
Seeking Aid From Congress
Undermined by a 'Slingbox'
By AMY SCHATZ and BROOKS BARNES
March 16, 2006; Page A1
Wall Street Journal

To understand how the TV industry is scrambling to respond to the Web's disruption of its business model, take a look at Major League Baseball.

MLB sells local and regional TV stations the right to show baseball games exclusively in their regions for about $250 million a year. It also broadcasts 2,400 games a season online, a business that last year brought in revenue of $265 million from 1.3 million subscribers. To protect TV stations' ratings, MLB.com1 blocks subscribers from watching local games online in their home towns. For instance, Cubs fans who pay $79.95 for MLB.com All-Access can't watch local games from an apartment in Chicago.

Baseball is just one example of how the TV business depends upon a network of invisible fences and geographic limitations. Now the Web is obliterating them. As broadcasters start to fear the consequences, some are trying new technical and legal tricks to fight back. In some cases, they are even re-creating online the same kinds of geographic boundaries that supported their business before the digital age.

The TV industry has long been alarmed about the problem of digital piracy, on the rise now that more viewers watch shows via the Web, iPods and cellphones. The concerns about the industry's geographic structure are a newer and more complex issue.


"Geographic lines that have held certain parts of the TV business together are being eradicated and it's a big concern," says Brad Adgate, senior vice president at Horizon Media, a New York consulting firm.

TV studios, for example, make most of their profits through syndication, or selling reruns to local stations in the U.S. and abroad. The business model is based on simple geographic boundaries, and although there is some overlap, stations generally limit their reach to the local market. That gives syndicators 210 different markets in the U.S. alone. International stations add hundreds more.

Midway through the 10-year run of "Friends," Warner Bros. sold new episodes of the hit comedy to General Electric Co.'s NBC for about $4 million an episode. Warner Bros., a unit of Time Warner Inc., then sold reruns of the same episodes to hundreds of local stations for another $4 million an episode. Such geographic boundaries, along with sales to cable networks, helped generate more than $1 billion in syndication fees, Warner Bros. says.

If viewers don't need a local station to watch "Friends" reruns, the show might not fetch as much in syndication. "Nobody is going to pay a very high price for a show that is all over cyberspace," says Don Lundy, general manager of McGraw-Hill Cos.' WRTV station in Indianapolis, an ABC affiliate.

Mr. Lundy says ad sales could also take a hit. "At some point, [advertisers] can say that what we offer as a local station isn't as valuable as what we have offered in the past," he says.

Similarly, TV stations overseas would be unlikely to pay top prices for reruns if viewers can use the Web and gadgets to pick up the same shows. It's no small worry: The export of TV shows to international stations is about an $8 billion annual business.

Jeffrey Schlesinger, Warner Bros.' president of international television distribution, says foreign broadcasters have begun to express "grave concerns" about the implications of new entertainment technology, although he says none are yet trying to push down prices. Says Matt Baker, a spokesman for the United Kingdom's Channel 4: "We obviously pay a good price for American product and the value would be reduced if residents of the U.K. could see those shows on the Internet."

A particularly disruptive new technology is a device called the Slingbox. Once connected to a TV and a high-speed Internet connection, it allows users to control their TV set and watch programming from any computer connected to the Web. In the industry, this trick is known as "place-shifting." (The term echoes another technology that is rocking the TV industry: digital recording devices such as TiVo that allow "time-shifting.")

San Francisco brothers Blake and Jason Krikorian invented the Slingbox with a friend after becoming frustrated at being unable to watch Giants baseball games while traveling on business during the 2002 season. Their first effort was the size of a small refrigerator. Two years later, they started Sling Media Inc. to market the gadget, carefully building in restrictions, including preventing more than one consumer from using the device at a time. The idea was to fend off potential lawsuits.

Retired banker William R. Falzone uses a Slingbox to watch Tampa Bay Buccaneers football games, his local newscast and other shows when he's away from his home in Seminole, Fla. One recent use was during a vacation in Daytona Beach. The Slingbox essentially transfers everything from his living-room TV to his laptop computer.

Layers of Complexity

Watching TV on a Slingbox creates an additional layer of complexity for TV executives. If those users could be counted, they could be added to a station's ratings -- after all, they're still watching the local programming. But at the same time, the stations where the Slingbox user happens to be situated might be losing out, and it's not clear how they could be compensated.

So far, networks have offered shows online in a haphazard fashion. News Corp.'s Fox has streamed comedies on MySpace.com, a social networking site the company bought last year. CBS Corp. offers episodes of "Survivor" on CBS.com and episodes of "CSI: Crime Scene Investigation" on Google Inc.'s Web site. It's also offering free coverage online of the early stages of the NCAA basketball tournament, blocking only games shown by a viewer's local affiliate.

Others, including Walt Disney Co.'s ABC and Viacom Inc.'s Comedy Central and Nickelodeon, sell shows through Apple Computer Inc.'s iTunes service. Apple won't say how many TV shows it sells on iTunes. In one indication, executives at NBC Universal say consumers have downloaded about 1.5 million episodes of the sitcom "The Office" since it became available on iTunes in December; episodes cost $1.99 each.

TV giants are now working to build electronic fences to protect this new way of conducting business. The television business has even coined a term for restricting video content to certain geographic areas: "geofiltering."

Like other networks, CBS allows only U.S. Internet users to view online entertainment videos, so as not to cannibalize international sales. It does this by conducting behind-the-scenes checks when users log on. To verify the person is in the U.S., CBS looks up the computer's numerical Internet address, which is assigned every time a user logs on and pinpoints their location. NBC used a similar technology for content it offered online during the Winter Olympics in Turin, Italy.

Major League Baseball blocks viewers from watching local games online in much the same way. Quova Inc., a Mountain View, Calif., software company that specializes in "geolocation" services, determines where an Internet user is based by looking up the computer's IP address, as it is called.

Previously, networks required users to enter a credit-card number when logging on as a way of getting their billing address and verifying their locations. Some sites still do that for an extra level of security.

Decisionmark Corp., a closely held Cedar Rapids, Iowa, firm, is marketing a service called TitanCast that allows TV stations to limit the geographic reach of programming available on their Web sites. Users logging on to a local station's Web site have to enter their home address, allowing Decisionmark's technology to determine what TV signal the house would receive with an ordinary antenna. Capitol Broadcasting Co.'s WRAL in Raleigh, N.C., a CBS affiliate, is testing the service. Decisionmark says it's in discussions with all the major networks.

Broadcasters are already complaining that devices such as the Slingbox violate their ownership rights. The Slingbox is also now compatible with some cellphones as well as computers.

TV executives are mulling over a variety of ways to address the nascent threat posed by place-shifting. Options include litigation and revenue-sharing models that would, for example, compensate Los Angeles stations when viewers there are watching New York programming.

"The whole business model in the broadcast industry is based on geographic exclusivity. ... The potential use of the Slingbox fractures that," says Jerald Fritz, senior vice president for legal and strategic affairs at Allbritton Communications Co., which owns local stations in six states and Washington, D.C.

One Solution

Mr. Fritz says one solution would be for the device maker and the program-rights owner to share any resulting profits, even if it takes a lawsuit to reach that point. "We're trying to figure out how that would work," he says.

Blake Krikorian, the chief executive officer of Sling Media, says he hasn't discussed sharing revenue with broadcasters and adds that consumers are legally allowed to watch TV wherever they want. The company's research suggests many people use the device to watch television at work. Sling Media won't say how many customers it has.

These new technologies are fueling efforts this year by the entertainment industry to persuade Congress to pass legislation that gives studios and networks new legal tools to fight piracy.

In 2003, the Federal Communications Commission required consumer-electronics makers to add technology to digital devices that would stop consumers from copying TV shows or movies in a way that allowed them to be put online. A coalition of technology firms and interest groups, including the American Library Association and Electronic Frontier Foundation, challenged the FCC's authority over the matter. Last year the U.S. Court of Appeals for the District of Columbia circuit overruled the agency.

Congress is considering giving the FCC the requisite authority, although no formal legislation has yet been introduced yet in either the House or Senate. Gordon Smith, a Republican Senator from Oregon, recently introduced draft legislation to address the issue.

Meanwhile, lawmakers are also considering tackling the problem of consumers who want to put online older, analog media, such as programs recorded from VHS tapes. House Judiciary Committee Chairman James Sensenbrenner, a Republican from Wisconsin, and ranking Democrat John Conyers of Michigan, last year introduced a bill that would impose criminal penalties of up to $1 million and 10 years in prison for anyone illegally copying analog material and putting it online.

The Motion Picture Association of America has tagged the legislation as one of its top priorities this year. If such laws aren't passed, "theoretically, it could be a massive revenue loss for us," says the MPAA's chief, Dan Glickman.

Freida Raynolds

Liberty Media, EchoStar Invest
In Start-Up for New TV Device

By REBECCA BUCKMAN
Staff Reporter of THE WALL STREET JOURNAL
January 31, 2006; Page B3

Media giants Liberty Media Corp. and EchoStar Communications Corp. are investing in a small Silicon Valley company that lets people watch TV on their computers away from home.

The high-profile start-up, Sling Media Inc. of San Mateo, Calif., said Liberty and EchoStar were two of the investors in a new, $46.6 million round of funding, which Sling Media will use for product development and international expansion.

Other new investors in the closely held company include Goldman, Sachs & Co. and Allen & Co. LLC, said Blake Krikorian, Sling Media's chief executive officer, in an interview. Venture-capital firms DCM-Doll Capital Management and Mobius Venture Capital, as well as Hearst Corp. -- all three were previous investors in Sling Media -- also participated in the latest funding round.

Mr. Krikorian, who co-founded Sling Media with his brother in 2004, said he couldn't talk specifically about whether Sling's main product -- a slim, silver-colored, $250 device called the Slingbox -- may be integrated with the product offerings of Liberty and EchoStar. Liberty, whose chairman is cable-industry veteran John Malone, controls Starz Entertainment Group LLC, which offers a popular movie channel, and the QVC Inc. home-shopping network; EchoStar's assets include the Dish Network, the U.S.'s No. 2 satellite broadcaster with more than 12 million subscribers.

Sling Media could help the media companies integrate their TV shows with other types of Internet content and advertising. Television programs such as News Corp.'s "American Idol," on the Fox television network, for instance, let viewers vote for their favorite contestants through the Internet or via cellphone.

A Liberty Media executive and an EchoStar spokesman declined to comment.

Richard Doherty, research director for the Envisioneering Group market-research firm, said many big media companies are acting defensively to strike new types of content-delivery deals as Internet technologies and new types of video-enabled, digital gadgets become more popular.

"They can't afford to ignore the revenue that Disney, Universal and others are generating from iTunes," he said. Last year, Walt Disney Co. and General Electric Co.'s NBC Universal struck groundbreaking deals to sell TV shows over iPod devices, made by Apple Computer Inc.

The Slingbox, however, lets people watch shows from their home TV services on regular PCs and laptop computers and, soon, high-end cellphones. The technology is known as "place shifting," since it shifts a home TV show -- whether one shown through a cable connection or cable box, satellite receiver, or digital-video recorder, such as a TiVo machine -- to another device.

A business traveler in another city, for instance, could use his or her laptop to watch a hometown sports team play a game that wouldn't be broadcast on TV in the second city. People who use Sling Media's product pay only once for the Slingbox, and don't pay any continuing subscription fees.

Mr. Krikorian said the investments in Sling Media by Liberty and EchoStar are a "clear validation" of the start-up's business. Sling Media's product is on sale at more than 3,000 retail locations, he said.

Sling Media is one of several consumer-device companies -- many of them focusing on TV-related technologies -- to snare funding from venture capitalists lately. The trend is noteworthy because venture capitalists, who buy equity stakes in small, private companies with the hope of big payouts later, have traditionally viewed gadgets as risky investments. Gadget companies often incur high start-up costs and can cost investors money if they build up big inventories of unsold products.

The proliferation of high-speed Internet links in homes, however, has changed that. Now, many consumers have stores of digital music, videos and photos they want to move around and view on various devices.

And today's more globalized, efficient supply networks for building consumer devices have helped cut down on inventory risks, says Marti Nyman, director of Best Buy Co.'s "global innovation network." Best Buy sells the Slingbox, and Mr. Nyman worked with Mr. Krikorian last year to help refine the Slingbox's packaging before its launch.

Some investors, though, remain wary of consumer-device companies, and are focused instead on digital-media services that can be accessed over the Web -- more cheaply and easily, sometimes, than through a device.

Still, major media companies that make TV shows, music and movies can't ignore the fact that consumers increasingly want to access that content on the go, says the Envisioneering Group's Mr. Doherty.

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