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New Yorker Paul Ella unwinds from a long day at work, settling down on his couch in front of the television. But he isn't about to veg out, passively watching whatever happens to be on, especially not the endless commercials. No, Ella is taking charge of his television. With a super remote device that controls everything from the TV set to his DVD player and stereo, the 33-year-old project manager switches on his Replay TV, going into a menu of recorded programs. Regardless of when the show aired, Replay TV allows him to watch it when he wants, and how he wants, on his own time and without commercials. “I don't have to wade through hundreds of channels,� he says.

But the key to Ella's newfound power is more than scheduling — it's being able to eliminate advertising from his evening TV viewing ritual. “The ability to skip through commercials makes the experience more seamless,� Ella says. “You get product bombardment every day. It's on the subways, on the billboards, on the radio and television. So, when you go home and you want to watch a program like CSI, it's quite an intense storyline and I don't want it broken up every 10 minutes by five minutes worth of advertisements. It just doesn't make sense.�

Even though he'd rather just zap them all, advertisers and commercial TV programmers and distributors have become keenly aware that they need to pay attention to Ella: he's one of an increasing number of viewers. While the penetration of digital video recorders, also known as DVRs, is still low — about 2 percent of U.S. homes have them — the growth rates are expected to explode in the next few years. Right now, industry experts say anecdotal evidence indicates that DVR users are primarily young males with high discretionary incomes.

But that will all change — and rapidly — in the near future. DVRs will be in almost 25 million homes, or 20 percent of U.S. households, by 2008, based on projections in a study conducted by The Yankee Group, a Boston communications and networking research firm. Recording devices are expected to become more common as satellite TV and cable companies offer them to their subscribers and as consumer electronics manufacturers integrate the technology into set-top boxes.

Aditya Kishore, Yankee Group's media and entertainment strategies analyst, says the prevalence of DVRs in the next few years will alter the television industry's business model. “Between 65 percent and 75 percent of DVR households fast-forward through commercials,� he says. “Media buyers and planners have to stop thinking about the 30-second commercial, and they will have to be more opportunistic. If [a 30-second commercial] is all you have in your arsenal, you're at a disadvantage from advertisers who have been experimenting with new technologies and trying new things.�

By 2007, Yankee Group projects advertisers will spend $5.5 billion on TV advertising that viewers with DVRs will never see. Forrester Research, a technology research firm in Boston forecasts that DVRs will cause an $8 billion drop in TV ad dollars between 2006 and 2008. “From a consumer standpoint it is a wonderful machine and I'm surprised it hasn't caught on more rapidly in the U.S.,� says Steve Grubbs, CEO of PHD USA, the media buying division of Omnicom and a TiVo owner. “From an advertiser standpoint it scares the heck out of me.�

Damage Control

Grubbs and others are not panicking — at least, not yet. Instead, they are looking at how DVRs will change the way people watch television and receive ads and how to adjust to the shift. “It's forcing us to look at other touchpoints to reach the consumer,� he says. Already some major advertisers like Ford Motor Co., The Coca-Cola Co. and Gap Inc.'s Old Navy are experimenting with ways to reach consumers beyond the 30-second ad. As a result, the line between entertainment and advertising is becoming blurred.

“We're going to see advertising on television become closer to entertainment and entertainment becoming more like advertising,� says Alex de Havenon, VP of display marketing for X3D Technologies Inc., a company based in New York that produces three-dimensional ads. The technology works by having in-store advertising video clips float inside and up to three feet in the air outside the screen.

Nowhere is that blurring more evident than in the partnership between ABC, a unit of Walt Disney Co., and MindShare, the media-buying unit of WPP Group PLC, a worldwide advertising corporation, to develop television shows together. MindShare's clients include Sears, Roebuck & Co. and Unilever. If it goes according to plan, these clients will advertise on the shows created and produced by the partnership as well as promote their products and services in the programs.

While that deal was inked in early December, other TV programs already have integrated advertising in profound ways. The Fox series 24, starring Kiefer Sutherland, premiered in the fall with a single sponsor, the Ford-150 truck. A three-minute short film featuring Ford's pick-up was shown before the show and another one aired after. There were no commercial interruptions in between. Further straddling the line between the series and its commercial sponsor, Sutherland's character drives a Ford Explorer in the show. Grubbs says the carmaker's promotion was smartly done. “They created a short film that was very similar to the style and form of the series itself, yet the hero of the short film was the car,� he says.

TiVo users, like Sam and Ashley Dunham, both 34, of Charleston, S. C., were willing to watch Ford's commercials in exchange for an uninterrupted viewing experience, similar to watching HBO's The Sopranos or Six Feet Under. “It really draws you into the story and you're able to focus on it for the hour,� says Ashley.

This sponsorship approach is similar to one used by BMW of North America LLC a few years ago. The car manufacturer hired prominent action filmmakers to create online movies in which characters drive BMW sports cars. In addition to increased use of sponsorship, the so-called reality TV genre has been fertile ground for product placement. Participants on CBS's Survivor have at times subsisted on Frito-Lay's Doritos, Pepsi Co.'s Mountain Dew or Anheuser-Busch's Budweiser beer. And Fox's American Idol contestants have enjoyed their share of Coke drinks and Old Navy clothes.

Déjà Vu All Over Again

This commingling of show and sell — whether through sponsorship or embedded products — is nothing new. “The beginning of electronic media with radio and TV was basically sponsorship,� says Bill Harvey, cofounder of Next Century Media and currently senior vice president and general manager of OpenTV Research, a subsidiary of OpenTV, which provides interactive TV products and content. Done well, sponsorship is not an intrusion on consumer's lives; it's a gift to the audience, Harvey says. The soft-sell approach, similar to what PBS does, is more effective in getting an audience to do business with advertisers than regular advertising. “They're not the bad guys that interrupt your program,� he says, “but advertisers that can bring them content that they like.�

When Harvey studied Internet advertising for such clients as Procter & Gamble, Volvo, Nestlé and American Express, he found consumers were much more willing to consider a product from an advertiser that sponsored useful content on a Web site than one that simply placed banner ads or pop-ups on one. Respondents in the study were 29 percent more inclined to consider buying a brand that sponsored a site. In contrast, TV advertisers on average receive only a 4 percent increase in brand preference with a 30-second spot. “That shows that you can attract more flies with honey than with vinegar,� Harvey says.

Because technology is making it easier for consumers to avoid 30-second commercials, Harvey sees advertisers returning to the more classic sponsorship approach used in TV's infancy when Milton Berle hosted the Texaco Star Theater and future President Ronald Reagan hosted GE Theater. “It could lead to a very major shift in advertising,� he says. “A return to the good old days of sponsorship and the way it used to be.�

Although sponsorships and product placements have been used effectively in the past, they have their own risks. Grubbs points to the first season of American Idol's shameless shilling for Coke, which he says, “just looked bad.� While Grubbs gives the thumbs down to Coke's venture, he gives thumbs up to the Old Navy ads. “They took the competitors to the store and did a combination shopping spree-wardrobe consultant,� he says. “The piece itself was comical as they tried to reestablish and redress the look of a lot of the competitors.�

However, advertisers are learning how to make the transition from traditional ads to more creative ones. “People are experimenting and trying to find the right balance between brand message and not interfering with the consumer's enjoyment of the show,� he says. “It should be tastefully done. I've seen several examples where placement has been gratuitous and forced.�

Still, others in the ad industry balk at the retro idea of sponsorship and product placement. “Advertisers are always finding ‘back-to-the-future’ approaches to things. We have too much commercial clutter so they figure product placement is the answer, but that was the answer 30 years ago,� says Mitch Oscar, executive VP at Carat Digital, a media communications company. As for sponsorship, he says it still won't guarantee big audiences for an ad. He estimates household ratings have plummeted, from an average of 17.5 points in the mid-'70s to less than 8 points today. And with 80 percent to 85 percent of new programs failing each television season, he adds that sponsorship hardly seems like a perfect solution to commercial zapping.

While some advertisers and TV networks try to accommodate the new video recording technology, others are fighting it. In 2001, the major television networks sued Replay TV's original parent company, SonicBlue, after it released recorders that permitted the sharing of shows as well as a deadly ad-skipping feature that viewers could preprogram to skip commercials altogether. SonicBlue went bankrupt because of the suit, and Replay TV is now owned by Japanese company D&M Holdings Inc. Replay TV doesn't include that feature on its current models.

But even without ad-zapping capabilities, the fact is, consumers who use DVRs have more control over the content and the ads they view, and Oscar says the industry needs to work with that, not against it. He recalls speaking to a group of industry leaders about the DVR problem a year or so ago and joking, “We're testing a way to get people to stop skipping. When they try to skip a commercial the television blows up. That way they'll never do that again and we can train them.�

Joking aside, Oscar says advertisers don't have to sink to such drastic measures. “We should be putting our energy into what the future will be, instead of trying to hold back what the endemic rights of consumers in the U.S. are,� he says, adding, “the DVRs are wonderful consumer electronic devices.�

While the biggest fear is that the DVR will enable consumers to avoid commercials, Oscar says the devices don't eliminate them completely. “As long as the speeds of the fast-forwarding aren't super fast, you are watching the commercial and people should acknowledge that,� he says. So if a viewer is intrigued by an ad, he may stop or rewind to watch it, Oscar explains. And DVR owners are not necessarily averse to ads. “I'll tune in to an ad if it looks like an interesting ad, or if it's something I'm interested in,� says Sam Dunham.

Although Yankee Group titled its report on DVRs “The Death of the 30-second Commercial,� advertisers argue that the television staple will survive. “When you have great creative, the 30-second spot is still hugely impactful,� says Grubbs. “Great creative will always break through.�

Smart Ads

That said, consumers are already changing their TV viewing habits. For those who are using DVRs, Yankee Group estimates that 80 percent view recorded programming, and 65 percent to 70 percent are fast-forwarding advertisements. When DVR penetration is up to 20 percent of U.S. households in 2008, it may be too late for some advertisers to adjust. By then, Yankee Group estimates DVR households will skip by 55 percent of all TV advertising.

One aspect of the technology, however, could be a boon for advertisers: the enhanced target marketing ability that DVRs offer. Studies by Next Research have already shown that TiVo users watch 5 to 6 more hours of television weekly on average, because viewers can focus more on the programs they like. Russ Booth, director of developing technology for MediaCom, a strategic media planning and buying company in New York, says advertisers can capitalize on such targeted interest. “Their watching tends to be more enjoyable and as a result there's probably a greater connection between the viewer and what they're watching — that engagement is good for us as advertisers,� he says.

Rather than simply relying on the 30-second ad, Booth envisions DVRs creating an ad environment similar to the direction online advertising has been going, where the ads are contextual and viewers can choose to learn more about a product that interests them. OpenTV has made interactive TV programs that feature products from national advertisers, including Procter & Gamble, Coca-Cola and Ford. Last year, OpenTV worked with Coca-Cola to sponsor interactive content during the American Music Awards. Seven million households with Wink systems on their TV sets were able to vote for their choice of winners.

TiVo has experimented with this by providing downloads from advertising partners like Best Buy and New Line Cinema. According to the Yankee Group study, two-thirds of TiVo subscribers viewed nine promotional video segments during a two-week campaign prior to the opening of the latest Austin Powers movie, Goldmember. Technology could also allow the DVR to eventually serve up different ads to different television sets within a home. So the kitchen set would get different advertisements than the one in the living room or the bedroom, Booth says. “It's going to be very much a smart, personalized television experience,� he says.

Right now, Booth adds, is an “ah ha� moment for advertisers, as they begin to recognize that the DVR could actually enhance the experience of the “anytime, anywhere� consumer who is plugged in to media throughout his day. “People are willing to engage in advertising, if the advertising is delivered in the right way and is engaging,� he says.

At X3D, de Havenon says 3-D ads — which the company is currently rolling out in retail stores like Toys “R� Us — is an exciting glimpse into the future. “This is an experience people have not had before,� he says. Already in use in Europe, he says the technology catches eyeballs. “It literally stops people in their tracks because it's a new medium and breaks through the clutter.� While bringing this to homes is still only in the R&D stage, he believes it is the kind of entertaining spots that are needed to break down the wall around consumers. “Who knows, maybe people will eventually ‘TiVo’ good ads,� he muses.

Some advertisers already use the technology creatively. For instance, Wink on Direct TV, allows consumers to click on an icon to get more information about a product or something in a program they're watching, says Oscar. “When you finish you go right back into the program without loss of content,� he says. With a more interactive experience, advertisers will also be able to mine consumers for more information in exchange for, say, a free movie with Video-on-Demand. “Advertisers will say, ‘We want to learn more about your behavior,’ so opt in and answer a series of questions for us from time to time, and whenever you do, we'll give a free [video-on-demand] movie,� says Oscar. “Everyone is spending so much time trying to hold back the horse, but if it's going to run let's help in its direction.�

DVR users like Sam Dunham agree. One of the aspects of his Direct TV/TiVo package is a menu that offers targeted advertising he can click and watch. So far, he's clicked on advertising for cars, tech devices and movies, among others. “I think that's the way advertisers have to go,� he says. “The ways of shotgun advertising are slowly on the way out. It's like on the computer, where I rarely click on a pop-up ad, but if it's something I'm interested in, I'll take a look at it.�

In the end, regardless of how the ad is delivered, it will have to be worthy of attention. Even without a DVR, consumers are tuning in to television ads less and less. Before the Dunhams bought their TiVo about a year ago, Ashley Dunham says she wore out the remote control. The DVR is the latest device to make it easier to watch TV “I think flipping to other channels during commercials is what runs the batteries down on most remotes,� she says. “TiVo is a nice way to get around that.�

Susan Thea Posnock is a New York-based freelancer writer, who covers the media industry for Folio: magazine and other publications.

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