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Bewkes: Future of Digital Is Cable TV

TW's Heir Apparent Wants to Deliver Content to Big Screens and Wide Markets

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You might think the heir to the Time Warner throne would want to focus on the company's web strategy in his public pronouncements. After all, that sometimes seems to be all Wall Street wants to hear. But Jeff Bewkes doesn't want to follow fashion; he wants to talk TV.
Time Warner President-COO Jeff Bewkes does believes the hype about online video is too one-sided, and that cable video on demand has huge potential.
Time Warner President-COO Jeff Bewkes does believes the hype about online video is too one-sided, and that cable video on demand has huge potential. Credit: Timothy Greenfield-Sanders

"Television is very important and increasing in value, and network-based interactive TV is very powerful" -- even more powerful, he said, than the internet.

Focus on TV over internet
It's a surprising opening statement given that Mr. Bewkes' corporation is home to AOL, a company that just snagged a contract to provide online ad services to News Corp. and NBC Universal's still-unnamed online video venture.

Mr. Bewkes stressed, of course, that he's not knocking new media, but he does believe the hype about online video is too one-sided, and that cable video on demand has huge potential. "Media coverage of video on demand is overweighted to the internet," he said. "The biggest audiences for video on demand are on TV screens now and in the future."

There are about 12 billion reasons Mr. Bewkes, 54, believes TV is still where it's at. Time Warner's annual report shows that of the $44 billion that cycled through the media giant in 2006, cable accounted for the largest slice of revenue, almost $12 billion, while AOL, just slightly larger than the Time Inc. publishing division, drew $7.8 billion. Elsewhere, filmed-entertainment, which includes Warner Bros. TV programming, and networks, which houses HBO, each accounted for $10 billion. HBO is the top driver of video-on-demand streams in homes with cable.

Meals better than snacks
This traditional-media empire, anchored atop an upscale shopping center on New York's Columbus Circle, has a lot resting on preserving the network-TV business model in the digital future. How is Warner Bros. going to get $13 million an episode of "ER" if an iPod user can cut out the middleman and download it for $1.99?

In Mr. Bewkes' view, the future is all about delivering content on big screens to wide markets. HBO fans might be able to info-snack on "Entourage" snippets at iTunes, but they won't be able to eat a meal. For full-length episodes, consumers will have to go to cable operators, where HBO has full video rights to its programming and delivers an extensive menu. Mr. Bewkes would like to see broadcast networks get onboard with video on demand, and doesn't believe iTunes' subscription-only model is in Time Warner's best interest. "The future of video on demand on iPods or hand-helds doesn't have to be pay-per-show; it can be ad-supported."

Mr. Bewkes, the assumed CEO-elect at Time Warner, said it's cable operators who will be best-positioned to deliver content wherever customers want it and research however advertisers want it diced.

TW third biggest
Time Warner is the country's third-largest cable operator, behind Comcast and DirecTV. Time Warner Cable acquired Adelphia Systems earlier this year and began trading on the New York Stock Exchange with its own ticker symbol in March. It serves 13.5 million customers and boasted ad revenue of $664 million in 2006, up $137 million (in part due to the acquisition).

One reason Mr. Bewkes might be eager to talk up the cable industry: Some have closely tied the valuation of Time Warner to cable's ups and downs.

In recent weeks, the stock has been under pressure, though it gained a boost April 4 following a note from Citigroup analyst Jason Bazinet, who wrote, "In effect, Time Warner is trading just like a cable stock." Investors were undervaluing the stock, he said, predicting Time Warner could gain 20% this year. The stock has ranged from $15.70 to $23.15 during the past 52 weeks.

First-quarter-earnings results are due May 2, and analysts are starting to take a new look at Time Warner. Talk of a possible sale of Time Inc. and the future of AOL led Bear Stearns analyst Spencer Wang to rate the stock "outperform" in anticipation of some realignment.

In his note, Mr. Bazinet pointed out Time Warner is valued 30% below the average media stock. He cited its strength following the Time Warner Cable spinoff and rated it a "buy."

Tempered reaction
Others have been less enthused. Richard Greenfield, a media specialist at Pali Research, wrote this month, "Without a meaningful increase in the valuation of Time Warner Cable (which we are not anticipating), the valuation on the remaining Time Warner assets is not compelling."

But Mr. Bewkes said interactive cable and the ad revenue it can attract will be a boon to Time Warner. The company can insert ads on 40 networks and break up 325 geographic zones to allow marketers to target particular subsets.

That ability to slice and dice gives cable operators the kinds of insights search giants can only dream about, Mr. Bewkes said -- they can marry TV-viewing habits to web-behavior patterns and phone.

"The future and power of your TV network is to let cable deliver all content on demand, thus enhancing the power of the network experience to introduce and bring audiences to shows rather than disaggregating the network model," Mr. Bewkes said.

He said few consumers would be well-served if cable operators bypassed the networks in video on demand. "It would be like the DVD bin at a big-box store," he said. A cable channel couldn't create the next "Heroes"; the branded-network environment is the best place for that.

Active advertising
Once network-branded video-on-demand channels take hold, cable operators can look toward an expanded audience for advanced advertising. Time Warner Cable already is working with big-name marketers on interactive and therefore highly measurable ad campaigns. Last November, Time Warner Cable launched an interactive-ad product called active advertising, which involves the cable operator placing an overlay on a traditional ad and allowing viewers to, say, request a brochure or hit a button to be taken to long-form, on-demand video from the advertiser. General Electric, American Express and Warner Bros. were part of the initial service. Mr. Bewkes is on hand to help Time Warner Cable sell its story to advertisers, and he waxed poetic on the benefits of "switched video," entering an intricate discussion of "nodes" and "coaxial cable." Since switched video sends messages to display only what's on the screen, rather than delivering all 100-odd cable channels to a set-top box, cable operators can offer much more two-way interactivity, which benefits advertisers.

Along with active advertising, Time Warner Cable offers things such as General Motors-backed Driver TV and eBay TV, which sends alerts to customers when they've been outbid. Late last year, Toyota and Axe stepped up to sponsor Time Inc.'s Sports Illustrated On Demand.

According to Joan Gillman, president of Time Warner Cable media sales, automotive is a category likely to heat up in the video-on-demand space. Still, there is work to do, and hurdles are big. "There is a lot of work to do to help the agencies to catch up," she says, describing the myriad agencies that must come to the table to make a video-on-demand buy happen. The interactive agency is different from the agency buying local spot, which is different from the agency buying TV. Even figuring out how many seconds of play might define an individual program hasn't gained any real consensus in the cable business.

Earlier this year, Time Warner launched a marketing initiative extolling the "Home of the Future" with today's technology. Despite the hype about tomorrow, it's today's $44 billion revenue base that must be preserved at all costs.

Convenient for all, sort of
Even with new digital technology, leave it to Time Warner Cable to find a way of preserving ad breaks. Its Start Over service, delivered to 3.5 million households, allows customers to watch a TV show from the beginning if they come late to the screen. It doesn't, however, allow fast-forwarding.

"It provides some real consumer value, and it provides ad value, too," said Tracey Scheppach, VP-video innovations at Starcom, the agency that helped General Motors in the on-demand space. "You can look back, but you can't skip forward."

Peter Stern, exec VP-product management at Time Warner Cable, said use of the service overindexes in households with DVRs. Those stats suggest to Mr. Bewkes that, in many cases, people don't mind watching ads, despite what they might say.

Google, of course, has been making the rounds of cable operators to find out how it can elbow its way into a share of the local-spot-cable business. Ms. Gillman's response to such competition: "We have a very healthy business. We don't need Google. We have relationships with local car dealers and restaurant groups. ... We are testing and evaluating set-top-box measurement. We have all the pieces; we don't need a middleman."

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Contributing: Abbey Klaassen
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