WSJ.com – TV Downloads May Undercut ABC Stations:

Last Thursday morning, Apple Computer Inc. started selling an episode of the hit television series “Lost” through its iTunes Music Store for $1.99 after the show aired the night before on ABC. It marked the first time a popular show was made available for legal downloading over the Internet so quickly after its original airing. With that, Apple may have helped open a Pandora’s box for the media business. The Cupertino, Calif., company and its first TV partner — Walt Disney Co., the parent of ABC — have taken a potentially significant step in the dismantling of a decades-old system for distributing TV programming to viewers, a move that could have profound long-term consequences for broadcasters, cable systems and satellite companies if more users download shows instead of watching them the old-fashioned way.

Apple’s deal with Disney, which also includes past and current episodes of “Desperate Housewives,” “Night Stalker” and “That’s So Raven,” is already causing waves in the TV business. On Friday, Leon Long, the president of the association representing ABC’s affiliate stations, expressed misgivings about the partnership, which was announced publicly by Apple Chief Executive Steve Jobs and Disney CEO Robert Iger at an event last Wednesday. In a letter Mr. Long sent to the president of the ABC network, Alex Wallau, Mr. Long said ABC affiliates are concerned that they weren’t given an opportunity for financial participation in a new form of distributing shows that derives value through the promotion and broadcasting of affiliates.

The letter, a copy of which was reviewed by The Wall Street Journal, says: “It is both disappointing and unsettling that ABC would embark on a new — and competitive — network program distribution partnership without the fundamental courtesy of consultation” with its affiliates.

Mr. Long, who runs the ABC affiliate WXON in Biloxi, Miss., didn’t return calls seeking comment. Mr. Wallau said he would respond to the affiliates this week but declined to comment further.

For TV affiliates, Apple’s new offering “is really bad,” says Josh Bernoff, an analyst at Forrester Research in Cambridge, Mass. “You don’t get anything. You just get a smaller audience,” he says.

Also concerned about the Apple-Disney partnership are the unions that represent TV-show writers, producers, directors and actors. Soon after Disney and Apple’s announcement, those unions issued a joint statement saying, “We look forward to a dialogue that ensures our members are properly compensated for this exploitation of their work.”

Patric Verrone, president of the Writers Guild of America West, says the Apple-Disney pact would fall under current guidelines that cover video-on-demand and other forms of pay TV, which is 1.2% of the licensing fee that a production entity receives for retransmitting a TV show or movie. Apple and Disney haven’t said how they’re splitting the revenue from the $1.99 sale of TV episodes.

It’s unlikely Apple will cause a meaningful diversion of viewers from traditional TV in the near term. For now, it offers less than a half-dozen TV series from Disney through iTunes. Shows can take more than an hour to download if users don’t have the speediest Internet connection. And the video quality is inferior if displayed on a large television, though the picture looks better on a computer or one of Apple’s new video-capable iPod portable players.

But the partnership with Disney may be merely a first step for Apple, which said it expects to offer more TV shows. If downloading episodes over the Internet proves popular, analysts believe Apple will get permission to offer shows with better-fidelity pictures. Any success Apple has won’t go unnoticed by other online media powerhouses with expanding video initiatives like Yahoo Inc., Google Inc. and Microsoft Corp., which could all help extend TV downloading to more viewers.

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The Disney deal with Apple is part of a whirl of efforts at all major media companies to explore new means of distributing TV shows. Live broadcasts of news channels like MSNBC are now available on cellular phones. Programmers typically make hit shows available on DVD within a year after the episodes have aired on a network.

On cable networks, there’s a growing selection of TV shows available through video-on-demand, though hit shows aren’t typically available for on-demand viewing as quickly as iTunes is putting Disney programming on the Internet. Cable giant Comcast Corp., for instance, has been trying for some time to strike a similar deal with Disney to offer “Desperate Housewives” on video-on-demand soon after it airs on the network. These talks haven’t advanced to a serious level because Comcast generally prefers to get content for video-on-demand free of charge, which it typically offers at no additional charge to subscribers beyond their regular monthly cable bills.

The technologies are all part of the slow death of “appointment viewing,” the mantra networks lived by for decades as they sought to habituate viewers to watching shows at one time on one outlet. The growth of TiVo and other personal video recorders that make it easy for viewers to record shows and watch them when they like, while skipping through commercials, helped undermine the networks’ control over viewing habits.

If Apple is able to assemble enough top-notch TV programming for iTunes, it could prove vexing to cable operators like Comcast. In the past, cable operators have faced pressure by politicians and consumer groups to offer individual channels “a la carte,” rather than forcing all subscribers to pay for large packages of programming that most don’t watch in their entirety.

Apple is, in effect, giving consumers the opportunity to cherry-pick programs for $1.99 each, though analysts expect it will be years before Internet companies represent a viable alternative to cable TV. On the other hand, the iTunes video offerings could help boost demand for the high-speed cable Internet connections supplied by Comcast and others.

TV advertisers, too, could someday be forced to adapt if Internet downloading of shows takes off, since the programs Apple is selling are commercial-free. Advertisers typically pay fees based on the size of TV audiences; if audiences shrink, they pay less. The Apple deal “is part of the changed world that we are living in,” says Peter Gardiner, a media executive at Interpublic Group’s Deutsch ad agency. “This is about finding news ways to distribute content and it’s up to us to find new ways to advertise.”