Broadband Gold Rush Is On. (cover story)

The biggest revelation at this year's Consumer Electronics Show was not so much about what is technologically possible, but rather what's economically possible.

Announcements tied to last week's gathering in Las Vegas made it clearer than ever that money can be made in the broadband video game.

That's why everyone from giants like Google and CBS to upstarts like iWatchTV.com is jumping in.

While Google is selling top-flight CBS programs like "Survivor" commercial-free for $1.99 apiece and Apple is selling shows from ABC and NBC, iWatchNow has secured the video rights to what it calls classic, cult and hard-to-find TV shows like "The Dick Van Dyke Show," "The Andy Griffith Show," "Dragnet" and "Bonanza" and movies such as "Night of the Living Dead" and "The Toxic Avenger." Viewers have the choice of paying 99 cents per view or watching an ad-supported version for free on iWatchNow.com.

Major broadcasters had been waiting for a revenue model to appear before making their shows available on-demand. With recent deals giving them about 70 percent of the revenue their shows generate online, there's a gold rush on.

Analysts that track new media say a combination of high-quality content and a rich interactive experience is most likely to be the winning combination.

"Broadband appears to put content owners in the driver's seat, but they need the expertise of technology companies to give broadband users a satisfying online experience," said T.S. Kelly, director of research and insight at MPG.

In addition, as is the case with traditional television models, the most lucrative broadband video endeavors will be those that can deliver the most advertiser-friendly viewers.

"This time of video search can have enormous potential not only for entertainment but for marketing," Mr. Kelly said.

While the moves create new revenue streams from viewers buying shows on-demand, broadcasters risk splintering their audience and ad revenues by putting their programs on more platforms.

Ad spending already has been shifting from traditional television to online as marketers eye a medium that offers an improved ability to target viewers as well as an ability to communicate directly with those interested in making a purchase.

"This year we're going to have a number of our clients testing the waters in the broadband space," Mr. Kelly said, adding that financial clients might want to create videos about retirement planning that viewers can find online.

"Does it make the business more complicated? Absolutely," said Steve Grubbs, CEO of PHD.

But at the same time, the changes in media are creating opportunities. "Even the mass-marketed products are looking for very specific targets and if there are media vehicles that [are better able to] get to those targets and eliminate waste, it makes our business easier," Mr. Grubbs said.

Agency executives are confident they can find online the viewers they want using new technology. "On the computer we know about the user. If we start to get the opt-in information, it's only a matter of algorithms," said Mitch Oscar, executive VP of Carat Digital.

Shows are not becoming available only online. Last week News Corp. said it will make shows from FX and Fox Broadcasting available for download on DirecTV DVRs before they appear on the networks. CBS and NBC have made shows available on an on-demand basis with Comcast and DirecTV, respectively.

While the economic potential of new platforms for video is clear, the models and deals are still far from becoming standardized. The early arrangements are still partly experimental and unlikely to be the basis of exclusive alignments.

"It would be to the detriment of CBS to pick an exclusive partner right now," Mr. Kelly said.

But he said it is wise for networks like CBS to find partners as they venture online. Online viewers "aren't just watching content," Mr. Kelly said. "They're interacting, they're sharing, they're chatting, they're posting blogs and doing wikis," and established players such as Google, Yahoo and America Online "are the ones with the technical expertise."

Yahoo last week also announced its own media player--Yahoo Go--which will hook up a computer to a television monitor. Yahoo said it plans to offer ad-supported content that will be free to viewers at first. Later this year Yahoo will offer downloads for a fee.

While Google, MSN, Yahoo and AOL are the 800-pound gorillas in the room, there are several others players cobbling together content trying to be yet another conduit for content.

Mr. Kelly pointed to blinkx and DaveTV as other broadband video players offering content and search capability.

And then there's iWatchNow, a Santa Monica, Calif., company that has spent more than $3 million to develop a video player and acquire rights to more than 3,000 hours of content.

The offering is similar to AOL's In2TV, which this month will offer classic shows from the Warner Bros. catalog, including "Welcome Back, Kotter" and "Kung Fu" free of charge.

Caesar Collazo, chairman of iWatchNow Inc., claimed his technology will work with any computer and offer an improved viewer experience.

He also said there are profits to be made by focusing on content that can command a smaller revenue split, leaving more money for the distributor. Even with lesser demand for programs, he expects to make his model work.

Some of the shows appear on TV networks such as Nick at Nite and TV Land, but Mr. Collazo said those shows' digital rights were simply available from their original producers. He said viewers would prefer to watch those shows when they want instead of when a network schedules them. Already, he said, the Web site is averaging 6,337 viewers per hour, about enough to cover $125,000-a-month operating costs.

"We make more money off the old stuff because there's less royalties," he said. "We don't want blockbuster hits. We want the hard-to-find stuff."

Mr. Collazo said he's talking to the media buying units of WPP about advertising on the site, but other ad industry executives aren't enamored of cult video or user-generated content, another selling point for video search.

"I'm not really interested in your home movies," Mr. Oscarsaid. "If 100,000 viewers is terrific, then user-generated content is terrific. But if you're looking for a million or two at a time, then it won't be user-generated content."