Apple rips up TV ad playbook

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Steve Jobs is fast-forwarding the evolution of TV advertising with his decision to offer up Susan, Bree and the rest of Wisteria Lane on iTunes.

The good news for marketers is distributing TV in a one-to-one Internet-like environment will give it the desirable traits of interactive advertising-the ability to hyper-target down to the IP address and more accountable, ROI-minded metrics. The bad news? If paying for broadcast content catches on, it's yet another opportunity for consumers to cut advertisers out of the picture.

To be sure, Apple's video iPod hasn't yet sold a single unit and media buyers aren't expecting viewers to swap 32-inch TVs for a 2.5-inch iPod, but strategists say it will accelerate a shift already in motion. TV's economic model is changing, thanks to on-demand programming, IPTV and, now, top-shelf content available anytime, anywhere.

"It's further proof the advertiser isn't in control of the content, the consumer is," said Jon Mandel, CEO of WPP Group's MediaCom.

Economic model

The distribution of Disney-owned TV content was Mr. Jobs' biggest surprise when he last week introduced the new video iPod. Under the agreement, iTunes will sell for $1.99 downloadable episodes of ABC hits "Desperate Housewives" and "Lost"-TV's second- and third-most-watched shows-as well as "Night Stalker" and Disney Channel's "That's So Raven" and "The Suite Lives of Zack & Cody." Apple will offer both archived and current episodes, commercial-free available the day after they air.

The video iPod isn't the first portable video player to market-Echostar offers its portable, time-shifting PocketDish device, TivoToGo lets users move TV content to laptops and Sony's PSP supports downloaded movie and game trailers. And then there are video-enabled cellphones, broadcasting downloadable ad-supported content as well as subscription-supported short-form programming, available through services such as V Cast.

But, said Mohan Renganathan, associate director of digital strategy for Publicis Groupe's Mediavest, "this is the first time a major network has put a toe in the water to see if this [downloadable TV content] can be an economic model, not just a distribution model."

Of course, other networks, from MTV to NBC, see iTunes as an attractive distribution partner and are likely follow suit. The major broadcasters were eager to put out the word that their digital media groups are talking to a variety of players.

The big question facing marketers is where advertising fits into a world in which users are willing to pay for better access to TV content. While the content is currently ad free, most expect an ad-supported model to emerge-either on iTunes or somewhere else.

"What I'm hoping will evolve, and I think it will, is the capability to target individual users like we can on the Internet," said Coleen Kuehn, exec VP-strategic development at Havas' MPG. Basic ad implementation, she said, could look much like what's currently offered for broadband video-15-second spots or one 30-second spot before the show rolls.

How much advertising such a model would support will be determined by how much consumers are willing to pay for content. Might consumers be willing to pay half price for a show that has a few commercials at the beginning but no breaks in the middle? Or would they prefer a premium price for no commercials at all?

Dave Poltrack, CBS's exec VP-research and planning, tried to determine that last year by asking a series of focus groups if they'd pay $1 to skip commercials in the top 20 prime-time programs. "Yes" response rates among the groups varied from 6% to 33%. Because each viewer of an hour of prime-time programming is worth about 36¢ to the network, he surmised it is indeed economically possible for a network to structure VOD pricing so that more ad-resistant viewers could buy a commercial-free environment. (While Apple and Disney didn't disclose financial terms of the agreement, one media analyst projected Disney would earn $1.60 on each download, based on the pricing model Apple uses with the music industry. Most cable VOD models share half of the fee with the network.)

"There will be different revenue models-some with the consumer footing the bill, some with the content creator paying and some that are advertiser supported," said Tolman Geffs, managing director of the investment bank Jordan, Edmiston Group. "You'll probably see a friendly combination of those."

And then there's the question of how businesses built on TV distribution deal with the kind of next generation competition the Internet has spawned.

"This is video on demand without the problem of cable operators," said Tim Hanlon, senior VP, Publicis Media, noting that "Apple has trumped Comcast" in the area of on-demand programming.

Perhaps then, it is not surprising that just an hour after after Mr. Jobs' iTunes announcement, rumors began circulating that cable giant Comcast was in talks with Google to acquire a significant stake in Time Warner's AOL. An executive familiar with discussions confirmed they were preliminary but ongoing. Comcast didn't comment, but such a deal would help it diversify its business-essentially boosting its online distribution capacity-at a time when its core cable-centric model faces major competition.

Contributing: Claire Atkinson

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