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Sunday Gazette - Mail; Charleston, W.V.

By Amy Schatz

To understand how the TV industry is scrambling to respond to the Web's disruption of its business model, take a look at Major League Baseball.

MLB sells local and regional TV stations the right to show baseball games exclusively in their regions for about $250 million a year. It also broadcasts online 2,400 games a season, a business that last year brought in $265 million from 1.3 million subscribers. To protect TV stations' ratings, MLB.com blocks subscribers from watching local games online at home. For instance, Cubs fans who pay $79.95 for MLB.com All-Access can't watch local games from a Chicago apartment.

Invisible fences

Baseball is just one example of how the TV business depends upon a network of invisible fences and geographic limitations. Now the Web is obliterating them. As broadcasters start to fear the consequences, some are trying new technical and legal tricks to fight back. In some cases, they are even re-creating online the same kinds of geographic boundaries that supported their business before the digital age.

The TV industry has long been alarmed about the problem of digital piracy, on the rise now that more viewers watch shows via the Web, iPods and cellphones. The concerns about the industry's geographic structure are a newer and more complex issue.

"Geographic lines that have held certain parts of the TV business together are being eradicated, and it's a big concern," says Brad Adgate, senior vice president at Horizon Media, a New York consulting firm.

TV studios, for example, make most of their profits through syndication, or selling reruns to local stations in the U.S. and abroad. It is based on simple geographic boundaries, and although there is some overlap, stations generally limit their reach. That gives syndicators 210 different markets in the U.S. and hundreds more abroad.

Geographic boundaries

Midway through the 10-year run of "Friends," Warner Bros. sold new episodes of the hit comedy to General Electric Co.'s NBC for about $4 million an episode. Warner Bros., a unit of Time Warner Inc., then sold reruns of the same episodes to hundreds of local stations for another $4 million an episode. Such geographic boundaries, along with sales to cable networks, helped generate more than $1 billion in syndication fees, Warner Bros. says.

If viewers don't need a local station to watch "Friends" reruns, the show might not fetch as much in syndication. "Nobody is going to pay a very high price for a show that is all over cyberspace," says Don Lundy, general manager of McGraw-Hill Cos.' WRTV station in Indianapolis, an ABC affiliate.

Mr. Lundy says ad sales could also take a hit. "At some point, [advertisers] can say that what we offer as a local station isn't as valuable as what we have offered in the past," he says.

Similarly, TV stations overseas would be unlikely to pay top prices for reruns if viewers can use the Web and gadgets to pick up the same shows. It's no small worry: The export of TV shows to international stations is about an $8 billion annual business.

Jeffrey Schlesinger, Warner Bros.' president of international television distribution, says foreign broadcasters have begun to express "grave concerns" about the implications of new entertainment technology, although he says none are yet trying to push down prices. Says Matt Baker, a spokesman for the United Kingdom's Channel 4: "We obviously pay a good price for American product and the value would be reduced if residents of the U.K. could see those shows on the Internet."

Slingbox disrupts status quo

A particularly disruptive new technology is a device called the Slingbox. Once connected to a TV and a high-speed Internet connection, it allows users to control their TV set and watch programming from any computer connected to the Web. In the industry, this trick is known as "place-shifting." (The term echoes another technology that is rocking the TV industry: digital recording devices such as TiVo that allow "time-shifting.")

San Francisco brothers Blake and Jason Krikorian invented the Slingbox with a friend after becoming frustrated at being unable to watch Giants baseball games while traveling on business during the 2002 season. Their first effort was the size of a small refrigerator. Two years later, they started Sling Media Inc. to market the gadget, carefully building in restrictions, including preventing more than one consumer from using the device at a time. The idea was to fend off potential lawsuits.

Retired banker William R. Falzone uses a Slingbox to watch Tampa Bay Buccaneers football games, his local newscast and other shows when he's away from his home in Seminole, Fla. One recent use was during a vacation in Daytona Beach. The Slingbox essentially transfers everything from his living room TV to his laptop computer.

Watching TV on a Slingbox creates an additional layer of complexity for TV executives. If those users could be counted, they could be added to a station's ratings - after all, they're still watching the local programming. But at the same time, the stations where the Slingbox user happens to be situated might be losing out, and it's not clear how they could be compensated.

So far, networks have offered shows online in a haphazard fashion. News Corp.'s Fox has streamed comedies on MySpace.com, a social networking site the company bought last year. CBS Corp. offers episodes of "Survivor" on CBS.com and episodes of "CSI: Crime Scene Investigation" on Google Inc.'s Web site. It's also offering free coverage online of the early stages of the NCAA basketball tournament, blocking only games shown by a viewer's local affiliate.

Others, including Walt Disney Co.'s ABC and Viacom Inc.'s Comedy Central and Nickelodeon, sell shows through Apple Computer Inc.'s iTunes service. Apple won't say how many TV shows it sells on iTunes. In one indication, executives at NBC Universal say consumers have downloaded about 1.5 million episodes of the sitcom "The Office" since it became available on iTunes in December; episodes cost $1.99 each.

Networks want geofiltering

TV giants are now working to build electronic fences to protect this new way of conducting business. The television business has even coined a term for restricting video content to certain geographic areas: "geofiltering."

Broadcasters are already complaining that devices such as the Slingbox violate their ownership rights. The Slingbox is also now compatible with some cellphones as well as computers.

TV executives are mulling over a variety of ways to address the nascent threat posed by place-shifting. Options include litigation and revenue-sharing models that would, for example, compensate Los Angeles stations when viewers there are watching New York programming.

"The whole business model in the broadcast industry is based on geographic exclusivity. ... The potential use of the Slingbox fractures that," says Jerald Fritz, senior vice president for legal and strategic affairs at Allbritton Communications Co., which owns local stations in six states and Washington, D.C.

Mr. Fritz says one solution would be for the device maker and the program-rights owner to share any resulting profits, even if it takes a lawsuit to reach that point. "We're trying to figure out how that would work," he says.

Blake Krikorian, the chief executive officer of Sling Media, says he hasn't discussed sharing revenue with broadcasters and adds that consumers are legally allowed to watch TV wherever they want.

Looking for legislation

These new technologies are fueling efforts this year by the entertainment industry to persuade Congress to pass legislation that gives studios and networks new legal tools to fight piracy.

In 2003, the Federal Communications Commission required consumer- electronics makers to add technology to digital devices that would stop consumers from copying TV shows or movies in a way that allowed them to be put online. A coalition of technology firms and interest groups, including the American Library Association and Electronic Frontier Foundation, challenged the FCC's authority over the matter. Last year the U.S. Court of Appeals for the District of Columbia circuit overruled the agency.

Congress is considering giving the FCC the requisite authority, although no formal legislation has yet been introduced yet in either the House or Senate. Gordon Smith, a Republican Senator from Oregon, recently introduced draft legislation to address the issue.