Fool on the Street: Disney Gets It

At a Merrill Lynch analyst conference last week, Disney's (NYSE: DIS  ) president of the ABC Television Group, Anne Sweeney, spoke to investors about the future of television broadcasting. To give you the inside scoop on what these analysts know that individual investors don't, I listened in and wrote up my thoughts.

You're doing what?
The central theme of Sweeney's presentation was portability and online delivery. To highlight her point, she announced that the popular ABC program Lost soon will reach cell phones with specially made "mobisodes" -- 13 short clips of around two minutes each, streamed to Verizon (NYSE: VZ  ) Wireless customers who have the appropriate high-speed subscriptions and video-capable phones. Along with Desperate Housewives and Grey's Anatomy, Lost is already a major hit with the downloading crowd, thanks to the availability of episodes on Apple's (Nasdaq: AAPL  ) iTunes store within 24 hours of the original air date.

Since ABC owns the content, the studio also owns "the rights required to put it on multiple platforms," Sweeney said, "which gives us the flexibility to more fully exploit that content." Although DVDs might be on the technologically out-of-date side, DVD conversions of television series have been hugely profitable for content producers. ABC knows that and is hoping to milk the same content a few extra times by selling it to us through newfangled channels, such as cell-phone downloads, ad-supported online video streaming, and more of the iTunes goodness.

Oh, that's why.
According to Sweeney, the reason Disney is pursuing this avenue harder than other studios are -- places such as, say, CBS (NYSE: CBS  ) or News Corp.'s (NYSE: NWS  ) Fox Television -- is simple: The company is listening to consumers and giving them what they want. Sweeney related a boardroom anecdote that perfectly frames why doing that is important. The morning after the first-season finale of Desperate Housewives, ABC held a staff meeting. The company was "celebrating what had to be the most joyous moment of the year" when another staffer fired up a DVD player.

Sweeney said this person "played a DVD [whose contents] he had downloaded from the Internet 15 minutes after the show had aired on the East Coast the night before. It was crystal clear, the commercials had already been stripped out of it, and at that moment, you could literally feel the air leave the room. The reality and the implications hit us hard. So we understand piracy now as a business model."

A new way of thinking
I can only imagine the sucker-punch that delivered to the celebratory mood in the room, but the company took the revelation in the right spirit. Rather than raise a hue and cry in the press or look for ways to sic its lawyers on the pirates that ripped off company property, Sweeney and her crew chose to view piracy as competition in the marketplace. "It exists to serve a need in the marketplace to, specifically, consumers who want TV content on demand," she said, "and it competes for consumers the same way we do -- through high quality, price, and availability." ABC doesn't particularly like the piracy model but accepts it as real competition that can be overcome using real business tools.

So what ABC did was to formulate a strategy that can address the same needs the piracy market fulfills: Make it easy and affordable to get the content you want, when you want it, and where you want it, only legally. Given half a chance, most people prefer to do the right thing, and piracy exists mostly because companies and governments around the world have made it so darned difficult to get what you want without breaking any laws.

When ABC ran a market test this spring to determine the value -- or lack thereof -- in streaming ad-supported, premium-quality videos online, it quickly became clear that that's exactly what consumers want today. Viewers in the test markets treated the streams much like an online VCR and watched most of the shows within 24 hours of availability. Sweeney pointed out that most TV viewers miss about 80% of the shows they want to see, and although the rise of digital video recorders is mitigating that rate a bit, having a second line of defense to fall back on can often prove invaluable.

These customers were happy to endure a few ad spots in exchange for fresh episodes of Lost, Grey's, and Housewives, and the experiment didn't even cut into iTunes sales. Consumers today want to have a choice, and ABC is giving it to them. When the ABC.com video-streaming service goes into full production in a couple of weeks, all-new episodes of the three major hits and seven new and unproven shows will be available for free to consumers, with minimal advertising and even profit-sharing agreements with local affiliate stations. This way, everybody wins.

So what's next?
Sweeney rounded off her speech with some notes on the business philosophy going forward. She noted that the youngsters watching the Disney Channel today will be tomorrow's grownup audience with tomorrow's spending money, and she expects every generation to be more tech-savvy that the one before it. It's true -- many 30-somethings today grew up setting the clock on their parents' VCR, and they're the ones now watching the rise of MySpace and mobile text-messaging in distant amazement. And so it goes.

ABC's strategy is to create great content, and everything else will grow from there. The company will support and use new technologies as they come along, but only after evaluating how to make the most of the opportunities involved. Build your business from a core set of values, face the facts of the marketplace you work in, and do your best to meet customer demands. Sounds to me like a great way to run a business, folks.

And ... cut!
That wraps up our report from this presentation with Disney, but stay on the lookout for more "Fool on the Street" reports that bring you juicy information that only the analysts have heard.

Further Foolishness:

Disney is aMotley Fool Stock Advisorrecommendation. Take the service for a 30-day free trial to see why the Gardners like the Mouse.

Fool contributorAnders Bylundis a Disney shareholder -- inherited from former Pixar stock -- but he holds no other position in any of the companies discussed here. He's spending the next few days at Disney World. You can check outAnders' holdings if you like. Foolishdisclosure rules hear all and see all.


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