CABLE TV: LOCAL CABLE REQUIRES MAJOR OVERHAUL: TIME WARNER EXEC ZIPIN ALSO WANTS TO BUILD INBOUND NATIONAL SPOT

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Time Warner Cable, the nation's second-largest multiple systems operator, writes about 20% of all local cable ad sales business. Recently, Advertising Age Media Editor Chuck Ross sat down with Larry Zipin, VP-advertising sales for Time Warner Cable, to talk about various issues facing the giant MSO and the industry, including Mr. Zipin's belief that rep companies and agencies need to rethink local cable.

Advertising Age: You aren't particularly happy with the way local cable is being presented to the national agencies, are you?

Larry Zipin: Both the rep firms and the national agencies need to redefine their objectives and this product.

AA: Is that realistic?

Mr. Zipin: Yes, I think it is. Even the national spot television world is already divided on the buying side. There are those who absolutely still want to buy it on a full designated market area basis, and therefore are only interested in the least common denominator or our abilities in any one DMA.

But there are at least an equal number of buyers who are interested in helping their clients reach more targeted needs. So we can have a dialogue that says, "in this particular market, let me tell you about two-thirds of the households that you can reach in ways you never thought you could before because of our state of the art interconnect" or whatever. And that may be the exact right part of the market anyway.

AA: Have you actually had any of these discussions yet?

Mr. Zipin: Only at a conceptual level, in various [Cabletelevision Advertising Bureau] committees and such, particularly with people that are working on [Electronic Data Interchange].

AA: When would you like to move those discussions to the next level?

Mr. Zipin: That's really an economic decision that the rep firms will make. After 15 years of trying to increase their distribution of cable-represented households, my premise is that they need to divide the cable universe into two worlds: Those that are highly capable and can do certain things for certain advertisers, versus those that can't. The problem is that right now we don't see the return on the national spot side keeping pace with the developments we've made in our fulfillment capabilitieJump hedline headline there

with some of our interconnects. All of that is coming on the local side. The cable rep firms are still pursuing the broadcast spot TV buyers as being the exclusive prospects for spot cable. The national reps are at a critical fork in the road. They need to seek out those agencies and national clients who would benefit from buying cable in terms of cable's capabilities, not simply to replicate a spot TV buy in the marketplace.

AA: How are Time Warner Cable's local ad sales going?

Mr. Zipin: We just ended the year, on a gross billing basis, doing about $35 a subscriber. I remember when numbers like that were seen as the Holy Grail of this business.

AA: Ad sales have become a major revenue stream for you, haven't they?

Mr. Zipin: Yes. The relative importance of ad sales cash flow, compared to other things our company is engaged in, has changed dramatically. I just had an ad sales conference last week and when Kevin Leddy, who's our senior vice president of marketing, made his companywide presentation to the ad sales managers, he pointed out that if you look at cash flow, not revenue, ad sales cash flow is ranked third at Time Warner Cable after basic subscription and consumer equipment. What that means is that right now ad sales is generating more cash flow than pay-per-view or premium services or a short list of other ancillary services. That's still in an environment where nobody engaged in this business thinks that we're even close to obtaining our potential.

AA: What is that potential?

Mr. Zipin: That's very quantifiable. I look at three different areas. One is local DMA television, another is other measured advertising vehicles in the local category and the third goes beyond measured media to the information you can glean on all other forms of targeted marketing. Some call that marketing and promotion dollars. Some call it direct marketing dollars. I lump it all together.

You add all three of those together, using fairly reliable points of information, and you come to about $1,500 a household. DMA television is not the majority share. About $230 is from local television, and $800 from direct marketing and other media in-between. For me, it would be nice to say the opportunity is infinite, but it's also comforting to know I'm in a business that's currently doing about $35 a household and that there's a $1,500-a-household universe that's somewhat attainable.

AA: So you're target is the $230 per household local TV pie?

Mr. Zipin: No. What makes our company's approach to local cable ad sales perhaps different than some others is that we're not just focused on getting our share of the DMA television dollars, even though that would be significant. Even though we could still quadruple our business in attaining our fair share of just that category, I think there is long been an appreciation that the elements of cable ad sales-and this certainly will be true as technology evolves-make us more competitive with other media.

AA: Why?

Mr. Zipin: Because broadcast television is defined as singular networks that reach a lot of people at one time. As long as broadcast television doesn't change that, that form of advertising distribution is still going to be desirable by certain advertisers and certain brands to accomplish certain purposes.

Cable TV will always compete for some share of doing the same thing. In other words, if we have a digital interconnect in place that truly reaches 60% or 70% of the households in a given DMA, then certainly we can compete for the exact same reasons that an advertiser would choose to buy broadcast television. The advertiser should use cable to fill in that gap between the broadcast viewing and cable viewing in the cable home. We want to add to that a lot of other elements of cable television, even today, that make us much more competitive against what advertisers are trying to accomplish on radio or in newspapers by reaching a targeted local audience.

AA: And interconnects will let you easily either target or hit the entire DMA.

Mr. Zipin: Yes. While we may have been in the process of building DMA-wide interconnects, and while we have been pursuing technology so as to make us able to do that much more efficiently, at the same time we have been equally focused on making sure the technology would not prevent us from continuing to be able to target small local pieces or small demographic pieces. With the combination of fiber plant and digital ad insertion the notion of head-ends might be disappearing. The notion of fiber nodes, or fiber strands has kind of replaced that. So while we're building large, market-wide digital-video platforms in places like Orlando and Tampa and New York, we'll start soon even on a statewide basis. North Carolina is a perfect example. That's going to be a single digital-video platform. It's going to serve five television DMAs, but at the same time it's going to preserve the localism of 49 different zones. To that extent, if someone wants to put a commercial in all 1.2 million or 1.3 million households the platform can do that, but if someone only wants to reach one of those 49 zones that many only serve as few as 10,000 homes, we will still be able to do that.

AA: What's your revenue split between local and national ads?

Mr. Zipin: We're looking at our revenue stream coming from essentially four categories. The true direct retailers who are dealing directly with us with no agencies or rep firms in-between. That represents somewhere around 25% of our business. The next category would be local accounts who would be purchasing through an ad agency. Some of those may be in-house agencies. That's now about 55% of our local business. Revenues from interconnects represent another 10% of our business. The remaining 10% is the true inbound national spot. In most cases were not handling those ourselves-they're handled by rep firms. For the most part that category still represents traditional spot TV buyers who are buying cable through the rep firms to match spot cable they are already buying on broadcast television.

AA: Is that the category you really want to see get bigger?

Mr. Zipin: Yes. Absolutely. If you look at the local DMA television category, it's basically equally divided between revenue locally generated and revenue generated by your rep firm from out of your DMA-in the top 25 DMAs at least.

AA: What about that old bugaboo, which is the buyers complaints of local cable's CPMs?

Mr. Zipin: I think that's a non-issue. The same client companies, whose agency buyers are trying to compare cable CPMs to broadcast CPMs, in some other part of their marketing arena, are buying magazines at very different price points because of the highly targeted nature of those publications. All I'm saying is that if we properly define our product, and present it to the people who can properly appreciate it, I don't think price is going to be an issue.Zipin

sertion, the notion of head-ends might be disappearing. The notion of fiber nodes, or fiber strands, has kind of replaced that. So while we're building large, market-wide digital-video platforms in places like Orlando and Tampa and New York, we'll start soon even on a statewide basis.

AA: What's your revenue split between local and national ads?

Mr. Zipin: We're looking at our revenue stream coming from essentially four categories. The true direct retailers who are dealing directly with us with no agencies or rep firms in-between-that represents somewhere around 25% of our business. The next category would be local accounts purchasing through an ad agency. Some of those may be in-house agencies. That's now about 55% of our local business. Revenues from interconnects represent another 10% of our business. The remaining 10% is the true inbound national spot. In most cases we are not handling those ourselves-they're handled by rep firms.

AA: Is that the category you really want to see get bigger?

Mr. Zipin: Yes. Absolutely. If you look at the local DMA television category, it's basically equally divided between revenue locally generated and revenue generated by your rep firm from out of your DMA-in the top 25 DMAs at least.

AA: What about that old bugaboo, which is the buyer complaints of local cable's CPMs?

Mr. Zipin: I think that's a non-issue. All I'm saying is that if we properly define our product, and present it to the people who can properly appreciate it, I don't think price is going to be an issue.

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