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ISP dreams: We can do TV, too

New media? It's old hat. Net companies' new hope is to model themselves after cable TV. On the face of it, the idea sounds simple. But it's far from clear if it can translate online.

Forget the revolutionary promises of "new media." Internet companies' newest hope is to model themselves after the business successes of cable TV.
Read more about ISPs' ambitions

America Online wants to be the Internet's HBO, scheduling exclusive content that people will go out of their way to pay for, according to CEO Richard Parsons. SBC Communications has linked hands with Yahoo to create its own bundles of "programming"--music, video, and other content and services.

Other Internet service providers (ISPs) and content companies are increasingly striking variations on the same tune: The ISP business needs to attract people with content, in much the same way cable TV does. The trouble is, some analysts say, there's not yet much reason to believe that people will respond the same way they do to cable TV.

"When you look at the actual user data, there's no confluence of evidence showing that content will help attract or retain subscribers," said Imran Khan, an analyst with Frost and Sullivan. "Realistically, you can create as much content as you want, but how are you going to get people to pay for it?"

On its face, the idea sounds simple. Cable companies have drawn tens of millions of people to their services using programming as a lure. The not-quite-arm's-length relationship between programming studios and network companies has proven financially successful.

But it's far from clear that this equation translates online. Content companies and ISPs have conducted an on-again, off-again flirtation since the beginning of the commercial Internet, without ever proving that the model has worked. The most ambitious ISPs have occasionally dipped into content production themselves, but with a record that is spotty at best.

AOL, with its once-vast array of exclusive content, was for a time the model for this idea. More than any other company, it has depended on that content to keep its subscriber rolls up. MSN has dabbled with home-grown content. Companies like Excite@Home tripped over themselves trying to emulate the "cable TV" model, marrying exclusive, often self-produced content to its high-speed ISP service. As that company's experience showed, consumers have often evidenced lukewarm interest at best, and outright annoyance at worst.

That's when the content is free--or at least free along with the ISP subscription. Adding an extra price tag for premium services--a near-necessity when talking about real-world content like movies or music that has to be licensed--is another barrier to consumers' interest.

Eye on AOL
AOL will likely be the test of the most ambitious model. The ISP division of the company has reorganized around a new team whose mandate appears in part to be to draw people to the service with "the creation of distinctive new content and features," particularly on the company's struggling broadband side.

One of new CEO Jonathan Miller's early acts was to put former AOL Studios head Ted Leonsis in charge of a series of "councils" tasked with shepherding the ISP's brand, product and technology strategy. Leonsis was long a proponent of developing new kinds of interactive content through the Studios division, but in the late 1990s the company moved more toward licensing content from outside companies instead.

AOL's future, Miller said in the company's release announcing the management shakeup, was dependent on its ability to create "exciting, relevant and distinctive new products and content that will change the way both dial-up and high-speed consumers think about AOL." He cited AOL's current "Sessons@AOL" and "First Listen" products, interviews with pop artists and pre-release album tracks that are available on Netscape's site free of charge. The company already has some exclusive content available on AOL Broadband.

The deal between SBC and Yahoo is more typical of other ISPs' strategies. Like other telephone companies, SBC has long dreamed of getting a piece of consumers' entertainment dollars, even going so far as to open its own TV service to compete with cable TV. For the last several years, it's been slowly moving toward the ability to offer co-branded music, video and gaming services over its broadband lines.

The Yahoo deal will finally allow it a foothold in this market. Along with ISP service, subscribers can sign up for packages that include basic Yahoo features, such as photo storage or finance news at no extra cost, and receive discounts on entertainment services such as music or video subscription services.

Other ISPs such as EarthLink, Road Runner and Speakeasy are signing up companies such as Listen.com and Full Audio to provide music programming and are looking for other partners for video on demand and games. BellSouth has offered its subscribers discounts on RealNetworks' RealOne programming service.

"Most ISPs want to do a mix, with some outside programming, and do some themselves," said Listen.com CEO Sean Ryan, who has spent much of the last year in negotiations with ISPs on behalf of his company's music subscription service. "I don't think any of us have found the right mix yet."

Money talks
Despite the spotty record, the economics of broadband make the content push almost inevitable, some analysts say.

For ISPs that don't own the cable or DSL lines running to a customer's house, providing broadband service is an expensive business. They have to pay the cable or telephone company for rights to the lines, making it virtually impossible to compete with those network giants on price alone. That leaves little other than bundled "programming" for them to compete and make money with.

AOL, with its substantial financial resources, brand name and access to Time Warner artists and content, has a better chance of succeeding along this line than do ISPs without that history, analysts say.

"It's almost the best possible model for someone who doesn't own the lines," said Joe Laszlo, an analyst with Jupiter Research.

For the content companies, the ISPs are a natural distribution partner. Broadband customers are the only people likely to spend any money at all on music, games and video. Distributing through the broadband ISPs allows a much tighter marketing focus than do Web sites or online advertising.

Moreover, ISPs have a critical billing relationship with their subscribers. Persuading people to pull out a credit card and sign up for something new online has proven difficult for even the strongest brand names. Adding a new line on an ISP bill that already comes once a month may be an easier pill to swallow, some content companies believe.

AOL's idea of becoming an HBO may be difficult, or at least unusual, however. Few companies are willing to offer content exclusively to one ISP. The most prominent example of exclusive content licensing so far has been Real's subscription offer, which gives access to major league baseball, NASCAR, Big Brother TV clips and more. But Real isn't an ISP--it's a software program downloadable by anybody online.

Most of the budding content services such as music subscription plans and video-on-demand services are available through their own sites or though several distribution partners. And for the most part, ISPs haven't sought exclusivity, for some bottom-line business reasons.

"If you go exclusive with some content, other (rival) content companies don't want to give you their content," Listen's Ryan said. Moreover, giving ISPs exclusive rights to content dramatically limits the potential audience, a step most content companies are loath to take, he noted.

That puts ISPs into a bind. Exclusive content, developed in-house or licensed from the outside, is expensive, with no guarantee that enough subscribers will be interested to justify the cost. But nonexclusive content won't be as much of a draw for consumers.

Particularly in the broadband world, people are used to flitting around the Net for the sites they want. This habit increases the longer people have been online, analysts say, making cable TV-style packages a harder sell.

"When people have a longer history online, they know what they want from the Internet," Khan said. "I don't think ISPs are going to get a whole lot out of content at this point."