Brave New Mouse

When Disney-ABC agreed to sell its prime-time hits on Apple's iTunes, the deal set off a revolution inside the media giant. Now a digital team with the spirit of a startup is reinventing TV—And the industry is following.

“I'm not sure this is legal."

Albert Cheng, executive vice president of digital media at Disney -ABC Television Group, is showing off his team's latest creation. An online sneak peek of the Lost finale, perhaps? Behind-the-picket-fence footage of Desperate Housewives on a cell phone? No, something even more revealing: Behold the staff wiki.

"I'm not sure you can write this up," he says. "I'm not kidding." With a mischievous grin, Cheng, 36, resumes the wiki tour on the computer in his corner office in Burbank, California, the heart of TV land.

His team didn't ask permission to create the internal Web site, with staff profiles and a section called "Cool Stuff We've Done This Year." They just did it. And truth be told, Cheng is rather proud of that. The project captures what his 20-month-old incarnation of the digital-media department is all about. Speed. Collaboration. Gumption. "I see us as a Silicon Valley startup within a big company," he says.

A very big, very established company. The Walt Disney Co. has more than 133,000 employees around the world and 84 years of tradition. It has rules. But with digital technology changing the way the once-untouchable media giants create, distribute, and profit from their content, Disney needs people to break some rules and blaze new paths into the future.

Cheng scrolls through the profiles: Bernie from ABC News, who's wearing a purple wig (long story); Darcy, a senior designer at abc.com, who has posted a cartoon of herself as a South Park character; David, one of the resident tech gurus, who holds a monocle fashioned out of blue computer cable and whose profile consists of a single line: "Dave doesn't like to talk about himself." Cheng admits his own page is "pretty corporate." There's a straitlaced portrait, a shot of his wife and his pug, some personal tidbits ("Born and raised in Hawaii.... Favorite team: 49ers.... What I do in my spare time: BlackBerry all of you"). There's also a mission statement: "Digital media will be the global leader in creating, delivering, and distributing compelling digital entertainment, news, and information experiences."

The wiki isn't an act of defiance directed at the Big Mouse, and it isn't a goof. Rather, it's a nifty tool for a fast-growing 150- person virtual department. The digital-media crew is spread across the company's television units—ABC, ABC News, Disney Channel, ABC Family, and a handful of its other cable channels. The members work in three cities, five buildings in L.A. alone, and four locations in this particular high-rise on West Alameda, about a mile from ABC headquarters. The Web site allows team members to review new social- networking applications, compare vendors, and share their latest projects.

"If HR tells us we can't do this," Cheng says, "we'll apologize later."

Create what's next

Since Bob Iger replaced the brainy but embattled Michael Eisner as CEO in October 2005, Disney has managed to keep the theatrics on TV and movie screens and out of the boardroom and the headlines. The crushing financials, the no-confidence board vote that booted Eisner off the throne, the threat of a shareholder suit—they seem like ancient history now that the company is "firing on all cylinders," as David Miller, an analyst with Sanders Morris Harris, puts it.

The stock price has climbed more than 50% since Iger took over. Analysts are quick to split the credit: Eisner invested wisely; Iger has a more effective management style. Last year, Disney generated a record $34 billion in revenue (up 7% from the previous year) from an impressive string of hits including Pirates of the Caribbean: Dead Man's Chest (the year's top-grossing film and DVD); Cars (the year's top-grossing animated film); three of the top-10 prime-time shows; and Disney Channel's High School Musical, which produced the best-selling album and a lucrative franchise.

One key to the turnaround is Pixar Animation Studios, acquired a year ago in a $7.4 billion stock swap. The deal made Pixar founder and Apple CEO Steve Jobs a Disney board member (and the largest individual stockholder, with 138 million shares). No question, Pixar is resuscitating Disney's animation group. But a change with broader implications is also taking place: a monumental mind shift to embrace digital technology and rethink the business. Which, come to think of it, sounds an awful lot like Apple.

As recently as three years ago, TV viewers were chained to their TV sets to see new shows. Miss an episode of ABC's Alias and you had to locate an early member of the cult known as TiVo or wait months for the DVD. Since then, digital technology has exploded, offering new ways of watching, not necessarily all legal (see Viacom v. YouTube ). Disney has led the way in two significant instances. In October 2005, it became the first media company to sell TV episodes (with no commercials) in Apple's iTunes store, for $1.99 apiece. Last summer, ABC became the first network to stream full episodes (with minimal commercials) for free on its Web site. As we go to press, abc.com is scheduled to unveil an upgraded HD-quality version of its broadband "player," an application built to give online video a more polished, cinematic look.

Breaking ground on iTunes was a risky strategy, one that could have alienated advertisers and local affiliates. "It wasn't something you expected Disney to be the first to do, given its historically conservative operating principles," says James McQuivey, a principal analyst with Forrester Research. "But what that did was set off a chain reaction that leads all the way to Wal-Mart selling TV shows and movies online, and NBC and News Corp. announcing they're starting a new video site." (Disney was also the first studio to sell movies on iTunes.)

Although it's still too soon to gauge Jobs's impact on Disney's board, it's clear that his iTunes deal was a watershed event. Once ABC signed on, other networks followed. Sixty-one TV channels now sell shows in the store. And when ABC began streaming full episodes on the Web, the competition followed once again.

"ABC has been the real leader here," says Will Richmond, founder of Broadband Directions, a market-intelligence firm. "They're pushing into uncharted territory." That explains what Anne Sweeney, the co-chairman of Disney Media Networks and president of Disney-ABC Television Group, calls the company's unofficial mantra: Create what's next. And that's where Cheng's team comes in. "We've aggregated all the great thinkers and fast movers in this group," she says. "It's a lab."

Disney's digital startup is turning the conventional television network into what Cheng calls a "branded multiplatform ecosystem." In the process, it is changing TV viewing as we know it. You can gather online in private TV rooms to watch the teen drama Wildfire; compete in online fantasy leagues around the cads and prima donnas on daytime soaps; vote online for plot points in the High School Musical sequel (43 million votes tallied); or read the Grey's Anatomy staff blog. ("Let me tell you," one of the show's writers begins, "the day after we see Izzie and George have sex is a pretty frightening time to come on here and try to explain why.... We know you're shocked. We hear you.") The new platforms are also inspiring new types of content, like the online mini-telenovelas spun off from Ugly Betty, one of ABC's prime-time hits.

Despite millions of downloads and online streams, none of this is about to replace traditional TV. Although advertisers and affiliates fret that digital platforms will cannibalize the TV audience, Disney—without supplying many stats—says that's not the case. The numbers for Grey's Anatomy, this year's top-rated scripted TV show, do offer some support. Over the past year, the audience has increased by 4.4 million, to 24.4 million, even though episodes became available on iTunes and abc.com in September—and even though Grey's is streamed more than any other show.

Cheng maintains that the greater the number of distribution outlets, the greater the audience. Loyal viewers watch an average of 6 out of roughly 22 episodes in a season. Disney is finding that most people who go online or download an episode do so within 24 hours to catch a show they missed. They boost the overall audience and most likely the ratio of watched episodes, especially for serial dramas. (Full disclosure: this Lost-oholic has yet to miss an episode.) And these streaming viewers are in a sweet spot for advertisers; their average age is 28, 18 years younger than the average ABC-TV watcher.

Thus far, digital media is a nascent business for Disney. It won't disclose how much revenue the platforms generate. Analysts say it's most likely only a couple hundred million dollars. Best case, says Forrester's McQuivey, is that the combined revenue from downloads and streaming ads for a hit show amounts to around 5% of the show's broadcast advertising. But he expects that percentage to double next year.

"None of this is significant in terms of the numbers," says Imran Khan, an analyst with JP Morgan. "What's significant is what they're trying to do—grow a new business, better monetize their content, and think long term."

iTuning in

Anne Sweeney remembers the call as if it were yesterday. In mid-2005, CEO-elect Iger told her that Steve Jobs had inquired about ABC providing content for a new product. Would she follow up? Sweeney, a self-described "happy iPod and Mac user," was thrilled to comply. Over the course of an hour-long phone conversation, Jobs explained that customers would shop for TV shows on iTunes just as they shopped for music, and download their purchases to their computer and iPod. He wanted to kick off the video iPod launch with Lost and Desperate Housewives, ABC's two biggest hits. Pirated copies of the shows were already available on the Internet. Here was a way for ABC to control digital distribution of its content and generate revenue.

Sweeney was intrigued but cautious. "If people didn't have a good experience," she says, "it would reflect on us as much or more than it would reflect on the platform." She asked Jobs, "When can I see it?"

In September, a small team from Apple met with Sweeney and a few colleagues in a private dining room at the Team Disney building, where Snow White's dwarves stand 19 feet tall on the facade. Jobs demonstrated the iTunes store for videos, then handed Sweeney a video iPod, which was still top secret. She watched an episode of Lost, with its huge Hawaiian vistas, on a screen smaller than a credit card. Yet the audio was substantial, the resolution sharp. Sweeney felt sure she was holding the future of TV in her hand. "Suddenly, we moved from talking and talking about technology to doing it," she says. "It's that moment when you're just ready to jump off the cliff. It was so exciting."

After the demo, Sweeney and Iger talked through the implications for advertisers and affiliates and agreed to take the leap. "We believed that if we were ever going to learn about the future," she says, "we had to lead with our strength." The streamlined negotiation with Apple in early October took just three days.

It was unbelievably fast, like a whole different Disney. And in a sense, it was.

"Forget about the rules," Cheng told his digital-media crew. "If we were operating as a dotcom, what would you want to do?"

The previous spring, Sweeney had asked Cheng to consider running a new digital-media group; the original team had shrunk dramatically when the ad market plummeted following September 11. Cheng, then a rising star in the company's cable unit, had an impressive résumé: an engineering degree from MIT, a year of experience working on fighter planes for Boeing, an MBA from Harvard, a stint as a consultant. By the end of October, he was making the iTunes deal a reality—sending tapes of shows to Apple, going over the episode descriptions, getting clearance for more shows before the holiday rush.

Cheng was eager to take advantage of the momentum created by the iTunes deal, which hit Disney like a shock wave. "People recognized that we are a different company in the way we think," he says. "We need to be taking risks." So in late December 2005, when Sweeney asked him, "What should we do next?" he was ready. He and his team had decided the next step should be another platform as groundbreaking as iTunes downloads. Cheng told Sweeney that Disney should broadcast TV episodes, embedded with ads, on its Web sites for free.

62 days (and nights)

The idea had emerged from a team brainstorming session Cheng dubbed Project Neo, an allusion to The Matrix. "It's my way of saying, 'I'm a geek,'" he says. And his way of pointing out that digital media, like the film's gravity-defying protagonist, was on a mission to disrupt the system. "Forget about the rules," Cheng told his crew. "If we were operating as a dotcom, what would you want to do?"

When he told his people that Sweeney had signed off on streaming shows online, they were ecstatic. Then came the bad news: The new broadband player had to be ready by May 1, in time for the upfronts, the annual high-stakes courtship of networks and advertisers, and the beginning of a two-month trial.

Cheng put Alexis Rapo, abc.com's vice president of digital media, in charge. The challenge, she says, was to develop a player that would "put TV shows on the Web in a way no one had done before." Up to that point, video appeared on puny square screens with lousy resolution. ABC hoped to lure people away from pirate sites with a superior viewing experience. Over the next 62 days—and more than their share of all-nighters—the abc.com crew, using technology from Move Networks, built a wide-screen format designed for watching an entire 43-minute program "like in an Imax theater," as Rapo puts it.

There wasn't time for focus groups. "We went on gut," Rapo says. Their gut told them to include three 30-second spots from a single advertiser—fewer ads overall but a more concentrated message, with the sponsor's logo at the top of the screen throughout the show.

The video-streaming platform "has exceeded our expectations in every way," says one advertiser. "We're able to surround an individual."

That reflects Cheng's (and Sweeney's) sensibility, a marriage of creativity and business realities. TV, even online TV, is an ad-supported medium. So Cheng invited advertisers to create ads unique to the new streaming format, with interactive elements like links and games. The slots for the May and June test sold out in only five days.

The Florida Department of Citrus was one of the original 10 advertisers, and has been one ever since. According to ABC research, 85% of the online viewers surveyed during the trial run could recall the advertiser—off the charts compared to TV watchers. Cheryl Huckabay, the interactive media director at Click Here, the agency that developed the citrus spots, credits that phenomenon to having a sole sponsor for an entire episode. Such exclusivity is too pricey on TV, but online, she says, "We're able to surround an individual."

Click Here put together a trio of ads for the trial—a conventional TV spot, a juice maze, and a "Flu or False" quiz about the health benefits of orange juice. Each ad contained a link to the citrus department's Web site, which viewers clicked on more often from the later spots. The streaming platform, says Huckabay, has "exceeded our expectations in every way."

Cheng is conscious of the need to appease stakeholders who fear that disruptive technology could threaten their business—including the local affiliates that air and promote network shows. If consumers migrate online, the thinking goes, the local TV audience shrinks, followed by ad rates and revenue. So Rapo's team incorporated two special features for affiliates. One allows them to incorporate the broadband player into their sites; the other enables them to sell a fourth ad spot to a local advertiser.

The broadband player, which officially launched on abc.com last fall and is now available on the ABC Family and Disney Channel sites, has changed the way executives think about their shows. Fans stop Lost creator J.J. Abrams to tell him how much they enjoy the show—online. For Rapo, the most telling sign that the new platform has arrived are the calls from TV executives who want to know what she can do for their shows online.

The Emmy didn't hurt, either. In January, the streaming player nabbed a statuette for technical innovation. "We pass it around like the Stanley Cup," Rapo says. "It's across the street with our technology team because they're recruiting this week."

Afternoons in Oakdale

Actually, the award came with two Emmy statuettes. The second towers over action figures from Lost atop Cheng's bookshelf; TV's big prize is watching over a guy who was practically raised on TV.

When Cheng's parents moved to Hawaii from Taiwan, the TV in the family room was more than a source of entertainment. His mother learned much of her English from TV, and the kids were expected to do the same. Cheng figures he spent six hours a day on the plaid couch in front of the tube, watching Green Acres before school and As the World Turns with his mother after school, followed by The Electric Company and Happy Days. How much faith did his parents put in TV? "They let me watch Three's Company," he says, "as a kid."

That history shapes how he envisions TV for the digital age. He understands the emotional connection we have with TV, how we feel for the characters on-screen. He remembers the afternoons that he and his mother spent in Oakdale, the fictional town on As the World Turns.

That's the idea behind one recent project. For the March finale of Wildfire, the ABC Family horse-racing drama, the network offered viewers the chance to host online viewing parties. Fans went to the show's site, requested a virtual room, and invited up to 10 friends to watch the episode simultaneously wherever they were logged in. They could decide when to start the show and how to watch, chatting among themselves online, even pausing and rewinding the action.

The nearly 300 "rooms" that fans created added a new dimension to social networking, a top priority for Cheng's team. Still, he says, parties for Lost and other shows hinge on a critical question: "What's the financial model?"

It's a confusing time for media companies. There's endless hype about the next YouTube, the next MySpace, or some other can't-miss disruptive service. Cheng and Disney are navigating through the chaos with a methodical and strategic approach. In the process of vetting Apple, Disney identified criteria for evaluating potential ventures. Among other things, Cheng asks, "Is it a brand we want to be associated with? What's the consumer experience? Can this partner help us reach customers we can't reach ourselves?"

Although Disney has gotten a lot of attention for iTunes and free streaming, it has been conspicuously absent from other high-profile moves. It didn't sue YouTube or acquire MySpace. It passed on taking an equity stake in the new NBC and News Corp. joint venture. None of these satisfied Disney's criteria.

These days Cheng and his team are exploring cell phones as a platform for video. Would full episodes of ABC or Disney shows fly? Or perhaps original material, like the Web-only comedy Voicemail? Because it's produced in brief segments, even shorter than a traditional commercial break, it's a perfect test case. The digital-media lab has made the "Webisodes" available on abc.com as well as top-ranked social-networking sites, so they can compare traffic and draw their own conclusions.

Sweeney, for one, is a big fan of Voicemail. "Have you seen 'Edible Undies'?" she asks. Mike, the hapless twentysomething star of the video, is wrapping a gift while listening to a message from his girlfriend. Her birthday is coming up, and she knows, just knows, that he got her that pair of earrings she pointed out. As he listens, he unwraps the edible panties he'd bought and takes a bite. "It just makes you laugh," says Sweeney. "And you wonder if it could turn into something else."

Voicemail also demonstrates that Cheng and his cohort really do operate differently. "I didn't tell them to do it," Sweeney boasts. "They told me they were doing it."

Sounds like a story for the wiki.

Feedback: salter@fastcompany.com

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1 Comments

  • Ben McCallum

    Hey Chuck, great article and extremely interesting was the first section about Disney using wikis.
    I'm currently doing a course at university concerned with Enterprise 2.0 tools such as wikis in the business. Thanks for the information. I've linked to this article from my blog - http://benmccallum.wordpress.c...

    -Ben McCallum