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Online-Content Models Are Works in Progress

9/24/2000 8:00 PM Eastern

New York-The vexing problem of how content providers will make money in a broadband world with infinite channel capacity and switching capabilities took center stage at last week's PriceWaterhouseCoopers media and entertainment summit in New York.

The issue is embodied in the dispute over Napster Inc., the music-downloading service that was threatened with extermination this summer after it had drawn millions of users.

Napster strikes at the heart of the copyright issues presented by the Internet, panelists said.

"The music industry is making a dreadful mistake if they kill Napster," said Frank Biondi, the former Universal Studios chairman and current managing director of WaterView Advisors, a venture-capital firm.

But how do companies balance copyright issues with new technology? The solution is somewhere between Napster's free model and the higher-subscription concepts favored by the entrenched media.

Biondi said even before he left Universal, executives there were working on online-content business models. But ideas died on their way up the chain of command, he said, because senior executives were not willing to initiate a course of action, fearing a mistake would end their careers. "Everyone is afraid of making final decisions."

What occurred in that vacuum were enterpreneurs like Napster, ready to take on traditional media companies, even if meant challenging copyright laws.

There's no doubt that consumers loved Napster, as more than 30 million used the service. George Bell, chairman and CEO of Excite@Home Corp. said the day Napster's existence was first threatened by a lawsuit, traffic on @Home's network rose 35 percent.

But while free music downloads and peer-to-peer sharing terrifies artists and media companies, consumers would stand to pay a lot for what they once obtained for free.

"If they think people will pay $3 for a single or $16 for a CD, they're in for a rude awakening," Biondi said. "You've got to make it easy and a good market price."

The Napster debate is an example of the dilemma facing huge, content-rich media companies. Newer companies have advantages.

"There's so much to protect, where do your resources go?" asked Bell. "There is a huge sea change that will have to happen inside traditional media companies."

Bell argued that the pace of broadband deployment would force media companies to pay more attention to preparing their content for the broadband world.

"The consumer needs to see content in a different way," he said. And since the same content is found in many places, "exclusive content isn't a product differentiator," as it was in traditional media markets.

But Bell envisioned unique broadband-enabled content opportunities that will draw traffic. Imagine if the Rolling Stones were on a 10-city tour, and each night at 11 p.m. Mick Jagger conducted a post-concert online chat. That "event" would be supplemented with merchandising sales to drive revenue.

Other panelists on the broadband-content frontier said they were still searching for sustainable business models.

Pamela Thomas-Graham, CEO of CNBC.com, said streaming remains a problem. "The economics aren't particularly favorable."

The view from Viacom Inc. was even more cautious.

"The broadband plans within the company first and foremost keeps return to shareholders as its mantra," said Russell Pillar, president and CEO of the CBS Internet Group. "It's a question of when and that 'when' is not readily apparent."

"The first move is an extension of existing content," or marketing extensions like the CBSSurvivorWeb site that accompanied the hit show, he said. In many cases, CBS has used its two dozen Internet investments to promote its traditional TV content.CBS Marketwatchhas its own Saturday-morning network program and is mentioned by Dan Rather on theCBS Evening News.

Graham said CNBC.com has 1.5 million registered users, which is "still an unexplored opportunity. We still haven't figured out how to monetize that asset." Privacy issues rest on one side of the equation, she said. But cataloguers and direct-mail companies have used such lists to generate revenue.

Steven Heyer, president of Turner Broadcasting System Inc., said the merged AOL Time Warner would allow marketers and advertisers to distribute their message across a variety of platforms.

The problem is the ad community itself. "Advertisers aren't organized to work across platforms," Heyer said. "It won't be cost per thousands, but cost per acquisition."

One point seems certain. Consumers' use of bandwidth isn't satiated. Bell said his 2 million worldwide users consume the same amount of data packets as 12 million of AOL's subscribers.

"They are sucking up more bandwidth than we expected," Bell said, pointing to his new ClickVideo service, where usage is at 2.5 million minutes a month.

Excite@Home burned through its full-year $200 million capital budget by the end of September, he said, not because of inaccurate new-user predictions, but because of the amount of bandwidth consumed by current subscribers.

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