The New Face of Television Advertising

How the Internet, Digital Technology and VoD Are Altering TV Ad Models

Imagine a world where TV viewers actually choose to watch advertising. That’s exactly where service providers and advertisers see things going now that IPTV and digital cable are bringing interactive programming to the table.

New fronts in measurability, targeting and formatting are turning the traditional ad model for TV on its ear. The new ad models have not yet been fully formed, but the goal is to use more targeted and/or on-demand advertising to engage viewers and get them to “lean in.” That’s industry parlance for getting the viewers to pay close attention (i.e., be sitting at the edge of their seats) to the advertising message.

Digital ad insertion is one of the centerpieces of this TV advertising sea change. It allows service providers to insert ads dynamically. Next-generation ad platforms can mark where the available spots are, then use traditional information — such as the program being shown, the target consumer profile for the advertised product, date and time, and campaign purpose, combined with “psychographics” (a mixture of demographics and things like buying and program preferences) for that particular account and viewing behavior — to create rules and orders for dynamically serving ads. Another consideration in this process is execution format — whether the content is being delivered via cable, IPTV, satellite, on-demand or DVR.

“You essentially create content for that moment,” says Reed Barker, group product director of content and advertising at TANDBERG Television, which offers the AdPoint on-demand advertising platform. “This is closer to the Internet model of showing you relevant offers depending on your surfing behavior. So you need to know a lot more about the program itself than simply ‘insert ad here.’ Has the customer already seen this ad? Have they seen something similar and rejected it by fast-forwarding on their DVR? Who is the customer? What do they watch?”

The digitalization of television allows IPTV systems and set-top boxes to capture such information about each individual subscriber, freeing advertisers from relying on the general sample demographic information on viewing behavior that Nielsen Media Research has provided for decades. The television thus becomes a conduit for one-to-one marketing, based on actual viewing behavior.

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However, strict FCC regulations about privacy say that the capture of this information cannot be linked to a name and billing information, nor can it be sent outside the systems to advertisers. So the targeting is accomplished by identifying a certain set-top box and assigning characteristics to it, without linking it back to subscriber data.

“The system doesn’t know who that person is,” explains Scott Ferris, senior vice president and general manager at Atlas, which provides advertising campaign management and measurement solutions for on-demand television. “It just knows that box No. 123 is consuming a certain piece of content. That anonymous ID gathers inferential information, such as what channels the person has been watching. If it’s all Outdoor Life, ESPN and The History Channel, chances are that person is male, for instance.” This is all combined with information from consumer reporting agencies on income levels and proclivities within a given neighborhood — like how many car lease renewals are due — to create a comprehensive (but anonymous) snapshot of the viewer. That data then is fed back into the ad server to make decisions as to which offer should be presented.

“We’re seeing trial activity in the microzoning and household targeting realm,” says Terri Swartz, director of advanced advertising at SeaChange International Inc., a digital television systems provider. “This essentially repurposes television as a personalized direct marketing medium, and that is very powerful.”

While the market-of-one proposition applies to dynamic ad insertion for linear-format TV, it deepens in value when applied to video on-demand and DVR-style “time-shifting” formats that are interactive and put consumers in control of their viewing experiences.

“When someone orders an on-demand piece of content, or saves it to his DVR for the week, it’s a much more active experience than passively tuning in to what has been broadcast for the masses,” says Tom Kennedy, senior director of marketing at Broadbus Technologies Inc. “The viewer is leaning in instead of sitting back, so the engagement is higher. It’s also a unicast mode, so there’s literally a one-to-one relationship between the viewer and that piece of content.” That level of engagement — for which the advertiser knows the person really is interested in the programming — makes those viewer eyeballs more valuable than the ones watching traditional broadcast programming.

“Even if you only have a couple thousand engaged subs, that’s valuable to an advertiser because these people aren’t busy making a ham sandwich during the show,” says Charlie Lougheed, president of Everstream, a digital measurement company. “In comparison, linear-based ads are the equivalent of dropping leaflets.”

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Advertising within interactive TV tends to be limited and is considered less intrusive. That may include bumpers, which are short spots before and after the programs, or one or two interstitials, which are ads placed within the program itself. Sponsorship — where a logo is ever-present in the corner of the screen or it is stated that the show is ‘brought to you by advertiser X’ — is another option. Interactive ads allow the subscriber to click for more information, possibly jumping the viewer to a long-form video or Web-enabled field where he or she can request more information. And a method called telescoping presents viewers with a 15-second spot and then delivers longer content on-demand. For example, in the telescoping model a viewer may be presented with a short automobile ad; that viewer can use the remote to click into a virtual test-drive, and from there he or she can go deeper into product information, at will, ultimately ending with a list of dealers in the area.

When combined with targeting, these formats have the capability to make advertising into something the viewer actually wants to see.

That’s the goal behind Comcast Corp.’s VoD advertising strategy. “If the ads have relevancy, value and importance, suddenly they aren’t really ads anymore,” says Paul Woidke, vice president of technology at Comcast Spotlight, the cableco’s advertising arm. “If we give the consumer the opportunity to view two-minute trailers for movies, then link to local theater listings and restaurant reviews, it’s an informational service.”

Comcast Spotlight offers advertisers “showcase ads” for which they can create a VoD portal for various types of long-form information, along with digital free-standing inserts such as a color picture of that week’s supermarket sale circular. To help consumers find the content, Comcast provides a “Searchlight” page within its VoD screens where consumers can select information from local advertisers in different genres. The cableco also has 30-second spots within its linear programming in certain markets that direct people to take advantage of on-demand ads. Viewers punch a number into the remote to be taken to the information. This capability, dubbed “DirectTune,” is expected to be available to 70 percent of the Comcast footprint as of Sept. 1.

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“Everyone wants to compare this to traditional television, but this is as different from that as TV was from radio,” says Woidke. “Foundational to this whole strategy is addressability. Just because we live in the same neighborhood doesn’t mean we have the same interests. By giving me something that applies to me, ads become something less intrusive and more enjoyable. If my auto lease is up, chances are an auto manufacturer would be interested in you, and you would be interested in them. Or if you have a new baby, coupons for diapers would be welcome.”

Such requests for information open up tracking to advertisers, who have gotten used to the idea of ad measurement due to the Internet model, which can track click-throughs, says Gary Sasaki, president at consulting firm digdia. “This is putting pressure on all people in the chain to come up with better ways to measure advertising,” he says. “One of the pressures is to figure out a way to make TV match expectations for the Web. IPTV and digital cable says ‘a-ha, I can do that.’”

While new digital ad capabilities enable targeting, measurement and, in theory, consumer satisfaction, the road to this advertising nirvana has been a bumpy one.

One issue that needs to be worked out is how to apply a ratings structure to this new advertising paradigm. “While the industry wants to do this, it isn’t sure how to handle it from a business contract and financial point of view,” says Sasaki. “When it comes to dynamic advertising, the variables start with X ad for Y audience at Z time and go from there, and there are a lot of decisions to make on the fly.”

Of course, the traditional model of ad-buying makes those decisions ahead of time. Every May, major networks negotiate for ad inventory — “avails” — in what is known as the upfront. This year, close to $9 billion of advertising was negotiated for the rest of the season, Sasaki says. Advertisers typically make a national buy with the network, and then there are local avails. Often, brokers buy up these avails and resell them later.

Whatever isn’t bought during the upfront is sold in the “scatter,” which happens quarterly, and the remaining small sliver of the pie is reserved for opportunistic sales and last-minute changes. “So there’s a lot of planning, and ad managers have budgets that fit this traditional model,” Sasaki says. “VoD and other digital models of advertising can turn everything on its head because it’s dynamically targeted and served.”

The ratings depend on whether something is live, live plus same day, or live plus seven days — i.e., how long does the consumer have access to the content. In a DVR example, the viewer has the opportunity to engage with an ad for seven days — not just the 30 seconds it’s live on the air. “The rating points get an uplift of several percent in that case,” says Sasaki. “During the upfront, networks tried to use live-plus-seven-day [models] when negotiating ad rate, but the advertisers don’t like that because when the ratings go up, the broadcasters can charge more — and ABC, for one, had to back down. So there are a lot of competing forces.”

Another problem lies in determining who owns the avails. Traditionally, service providers don’t make money on nationwide advertising because the networks, network owners and brokers actually own the spots. “The question becomes, who owns the ad time, and the local service provider actually doesn’t own much of it in linear broadcast programming,” says TANDBERG Television’s Barker. “The network would own most of it, and the cablecos, in turn, own many of the networks. IPTV providers have to consider that.”

Advertisers want to reach consumers in the numbers that make sense for them, Sasaki adds. “IPTV is so small right now, it’s not that attractive to a national advertiser,” he says. “So unless it’s Joe’s Tire Barn on Main Street, the bulk of IPTV revenue will remain the monthly payment for a while.”

Digital targeting and VoD can change that, offering more opportunity for the local service provider to earn a revenue split. “If a provider can leverage the network and say, ‘Here are 10,000 people we believe would be interested in your product based on more than loose sample demographic data,’ that is more valuable and would attract advertisers, while commanding a higher CPM (cost per thousand),” says Paul Delzio, director of broadband systems at digital TV vendor BigBand Networks. “But the major shareholders in the ad ecosystem — from the agencies to the service providers — need to think about how this changes the business models and come up with new ideas for addressing this.”

By enabling targeted advertising, service providers can redirect the flow of money away from those networks that cannot provide it. “Cablecos in particular are under extreme threat by this,” says Delzio. “We already see the ad dollars going toward the Web and new distribution channels like mobile, to the detriment of traditional TV. We’re seeing about 20 percent already pulled out of cable budgets because of this. IPTV infrastructure is being designed from the beginning to take advantage of digital ads, and the cablecos, with all those legacy set-top boxes in the field, are playing catch-up.”

For now, though, little progress has been made. TANDBERG Television is trying to move the market ahead by defining standards. “Once the technology is standardized, the networks can start to share avails and drive on-demand placement to meet the needs of different ad owners and distributions,” Barker says. “So if everyone interfaces with a product like ours, they can see the inventory across the national footprint, and sell against that or place orders. And they can be placed locally, even though they may have a national view.”

Other technical barriers exist. Digital ad insertion platforms still are relatively new, and rollouts have been slow. Most interactive and targeted campaigns are only in trials, and for now, service providers still are offering “baked-in” ads, which are part of the file — it doesn’t matter when you consume the content, the ad is always the same. TANDBERG Television provides Comcast’s ad platform, and for now within a single VoD asset there is a weekly turnover, Barker says.

Measurability still needs refinement, Sasaki says. “Advertisers want to know how long were the ads played and watched. When did the consumer hit fast-forward — at the beginning, or halfway through? That kind of measurement is being demanded but is thus far unavailable,” he says. Also, do new formats work? “The technology is there, but will this result in more sales of shampoo? It’s all very new and up in the air.”

Then there are legal issues. Network DVR, for instance, allows consumers to record programming on a distribution network rather than the set-top box; providers then must negotiate the content distribution rights accordingly — can they record it, then re-broadcast it? Cablevision Systems Corp. faces a lawsuit from CBS, Disney, Fox, NBC Universal and Paramount Pictures claiming its network DVR service is resulting in copyright infringement. Rather than consumers making a recording for personal use, the service is actually VoD, they say — and Cablevision is copying the programs and redistributing them without permission. The same argument would apply to advertising.

Meanwhile, a proposal to prevent interactive ads during kids’ shows already has gone to the Senate floor. FCC Commissioner Michael Copps, speaking at a conference, pointed out the downside of targeting. “Picture this: A child turns on a TV show, an icon pops up, the young viewer pushes a button on the remote and is immediately transported from the television show to a lavish Internet emporium where jingles, games and commercial products are available to tease, manipulate, sell and satisfy every desire. Shouldn’t we get a handle on this before some harmful consequences are felt?”

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