This week Microsoft pulled the plug on plans to sponsor a half-hour variety show produced by Seth MacFarlane, creator of the Fox comedy Family Guy.
The idea was to promote its latest operating system, Windows 7, on what was tentatively called Family Guy Presents: Seth & Alex's Almost Live Comedy Show, without commercial interruption. But after attending an Oct. 16 taping, and feeling the brunt of its characteristic off-color humor, Microsoft ( MSFT - news - people ) execs got cold feet. "It became clear that the content was not a fit with the Windows brand," says a Microsoft spokesperson, who won't disclose details about the nature of the sponsorship. Fox still plans to run the show, but with another, as yet unnamed, sponsor.
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So-called branded entertainment is the latest craze among advertisers--everything from product placement and sponsorship of a single TV episode or webisode to writers weaving a product into a plot line. The idea is to peddle more wares to more people in more novel ways, and sometimes to control the message by integrating within the main attraction (comedy, drama, reality show). As the defenestration of the Windows7/Fox deal illustrate, the results can be ugly.
The earliest forms of this sort of advertising date back to the Maxwell House Hour radio show and P&G ( PG - news - people ) soap operas. Today, digital video has spawned new incarnations, including customized webisodes that can cost up to six figures. The Great Recession, and the shift in ad dollars to the Web, is only fragmenting the market further.
"Interrupted advertising isn't as effective online," says Scott Donaton, chief executive of Ensemble, the branded entertainment arm of IPG's Mediabrands. Adds David Lang, the president of North America for Mindshare Entertainment: "The 30-second spot isn't providing and delivering what it used to because the world is a different place."
No one is keeping count of all the ad dollars flowing this way, but they must be considerable. Last week, Fox Filmed Entertainment announced the creation of Fox Digital Studios, a new group that will focus on branded programming, primarily for younger viewers. Last year, the Disney ( DIS - news - people )-ABC Television Group launched a digital content studio, Stage 9 Digital Media, later folded into ABC.com. The studio's first release was a three-and-a-half-minute Toyota ( TM - news - people )-sponsored comedy called "Squeegees," sent over ABC.com and YouTube.
CBS ( CBS - news - people ) uses its Web channel, TV.com, to stream corporate-backed shows like "Easy to Assemble." The resulting three minute-long videos about people who work at Ikea--who might've dreamed that could be interesting?--was co-produced by the Swedish furniture company and SXM, a Web-branded entertainment company. In July, SXM sold a show called "Ctrl," which was sponsored by Coca-Cola ( KO - news - people )'s Nestea, to NBC, which kicking it out over NBC.com, Hulu.com, Zune (Microsoft's audio player), Xbox and elsewhere.
"NBC is the most flexible and aggressive networks looking toward a new model," says Jon Kamen, chief executive of @radical.media. "After losing the No. 1 spot, their creative situation is forcing them to be more inventive in their business models." Part of the plan is to encourage their advertisers to play along in that spirit. Anheuser-Busch sponsored the Oct. 17 episode of Saturday Night Live, filling every 30-second spot with Bud Light commercials and never-before-seen SNL footage.
Eight sponsors--including Yoplait, Subway and 24 Hour Fitness--underwrite the NBC weight loss reality show The Biggest Loser. Thanks to merchandising deals with gym equipment makers and online memberships in its weight-loss club, the show brings in $25 million a year. As part of a long-running branded entertainment agreement with Nissan ( NSANY - news - people ) North America, the Nissan Cube played a cameo role in NBC's TV drama Heroes. Marketers shell out up to $500,000 for product integration per episode of a popular show.
For now, most branded entertainment on the Web stays there. The first--and, so far, only--migration to broadcast television didn't last long. The ABC sitcom In the Motherhood started out as an online Web series that Mindshare created for Unilever and Sprint Nextel ( S - news - people ). Five-second billboard ads that read "Conceived by Sprint" and "Conceived by Sprint Nextel" preceded and followed the five- to seven-minute webisodes.
The show attracted 25 million viewers over two seasons. Encouraged by its online popularity, ABC bought the rights to the show for an undisclosed sum. But a day after premiering the show, the network cut its episode order by half. Two months later, it killed the show.