Brave New Mouse

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."