YouTube Outfoxes TV Foes

Networks line up to give away the store -- just to boost Net traffic.
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Imagine if

WalMart

(WMT) - Get Report

decided to end shoplifting by giving away the store.

Far-fetched? Well, a crude, digital equivalent of that scenario may actually be playing out.

General Electric's

(GE) - Get Report

NBC Universal entertainment division and

News Corp.'s

(NWS) - Get Report

Fox unveiled a huge partnership Thursday aimed at creating an online video site.

The move has been portrayed as old media's latest bid to gang up on

Google's

(GOOG) - Get Report

YouTube.

NBC and Fox, after all, signed deals with major technology players including

Yahoo!

(YHOO)

,

Microsoft

(MSFT) - Get Report

and

Time Warner's

(TWX)

AOL. And Google already is

under attack on the YouTube front, thanks to last week's $1 billion lawsuit from

Viacom

(VIAB) - Get Report

.

But a look at the sums at stake in online and TV advertising suggests the big TV networks will feel the effect of this deal far more acutely than Google.

By offering their high-quality content online, NBC and News Corp. are giving consumers a way to watch their programs while avoiding their television broadcasts altogether. Indeed, while the grainy, minutes-long clips posted on YouTube may well have served as teasers for TV shows, what NBC and Fox are planning on offering could stand in as a good reason to avoid tuning in.

The online ad revenue the companies are banking on is a far cry from the amounts spent on TV ads. In 2006, video and graphic display ads -- the type News Corp. and NBC will likely rely on to generate revenue from their content -- garnered $4.9 billion in spending. But large advertisers alone spent $65.4 billion during the same year on TV ad spending, according to TNS Media Intelligence.

And the media companies' slice of any potential online revenue will be even smaller once they have given Microsoft, AOL, Yahoo! and MySpace each their cut. The tech companies, meanwhile, have every incentive to court users to their own sites and dissuade them from heading to those of NBC or News Corp.

This will further help companies grow their slice of the revenue, even though it is the media players who are cannibalizing their own content to draw viewers in the first place.

Damage to television revenue is only the beginning, since both companies intend to put films such as

Borat

and

Little Miss Sunshine

-- both popular and fairly recent releases -- online for free.

This will cut into box-office revenue as viewers wonder why they should pay $10 for a ticket for content they will soon get gratis. Box-office revenue totaled $9.2 billion during 2006, according to the Web site Box Office Mojo. NBC and News Corp. subsidiaries accounted for a combined $2.4 billion of that.

DVD and video cassette revenue, meanwhile, will likely be especially hard hit. Consumers spent $24.2 billion renting and buying those items in 2006, according to the Digital Entertainment Group. And DVDs are increasingly important, as they continue to account for an increasing slice of revenue a production generates, especially internationally.

But having popular films and TV shows just a mouse click away will reduce the incentive to do so. That's especially the case given the ease of hooking up TVs to computers, and in the wake of wireless devices such as Apple TV.

Finally, in hoping to replicate their own rendition of YouTube, it's possible that NBC and News Corp. will instead miss out on the benefits of a partnership instead. A high-profile move to broadcast their own content could easily make the companies more protective of it. But, oddly, YouTube is an ideal position to promote the content of other networks precisely because it is not owned by any network.

Much of the appeal of even the network-owned content on YouTube stems from the fact that it was another user who uploaded and rated it. This means that users are receptive to watching it because it is likely to be good -- not because if furthers the interest of the content owner. Users would hardly tune in for incomplete snippets of TV shows or movie trailers with such enthusiasm if they knew they were being hawked by the owner of the content instead.

Yhat's what makes YouTube so powerful as a potential partner. A quick search on YouTube reveals highly rated

Borat

film trailers in English, German, French and Italian. That will result in the creation of new customers around the world for the film.

But the networks today are instead cheering that they have found a way to give the movie for free. And they were even clever enough to find a way to line the pockets of everyone from Microsoft's to Yahoo! in the process.