CRACKS in the Foundation

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The business of advertising is under extraordinary pressure. Digital technologies, shifting consumer behavior and demands for accountability threaten--in some cases already have damaged--decades-old business models. As the industry confronts change, it is increasingly clear that the tools and key metrics used as the basis for hundreds of billions of dollars spent on media, especially TV and print, may no longer be adequate to the task.

Yet even as flaws and inefficiencies become more visible in media currencies such as Nielsen ratings, the industry faces major hurdles in turning dissatisfaction into action to shift the market to more accurate and relevant tools. That reflects the enormity of the challenge as well as a deep-seated resistance to change--a painful, messy process without a clear outcome.

While defensiveness of the status quo could prove futile, it's not surprising. "It's a classic example of the amount of energy it takes to overcome something that's established," said Harry Woodward, a management consultant and author who deals with change leadership. "This is classic inertia in change management," where people find fault with the status quo yet aren't motivated to reinvent industry practices that date back generations.

Debates about Nielsen's missing men and Rosie's missing readers have raged in recent months, but are ultimately symptomatic of far larger issues. Benchmarks for the two biggest national media--Nielsen ratings for TV, circulation metrics for magazines--need to be rethought and reset to meet marketers' needs. In the end, key media metrics need to help measure what matters most: advertisers' return on investment.

As it stands, "advertisers are not getting what they want regarding reliability or timeliness" in TV or magazine data, said Fran Kennish, media research director at WPP Group's Mediaedge:cia and chair of the media research committee at the American Association of Advertising Agencies.

The Four A's is taking on VNU's Nielsen Media Research, asking the Federal Trade Commission to investigate the service for monopolistic practices. Donna G. Campbell, VP of the Four A's media services division, said an FTC attorney has spoken with agencies around the country, and that "a couple of the broadcast networks" and some cable networks and TV sales entities also have expressed interest in talking to the FTC.


For the first time, Ms. Campbell said, anger toward Nielsen is being expressed by "all sides of the trading partners, all the stakeholders--the agencies, the advertisers and the media."

The FTC declined to discuss the Four A's assertions. Jack Loftus, senior VP-communications for Nielsen, disputed suggestions that Nielsen is a monopoly, saying competitors are free to enter the market. Nielsen, he said, is moving ahead on areas of client complaint by opening its doors to clients, expanding its sample size and evaluating and testing new technologies.

Yet given seismic shifts in TV technology, advertising and consumer lifestyles, Nielsen could be more vulnerable to competition this decade than in any period since the dawn of TV.

"I would like Nielsen to feel the hot breath of a competitor on its back," said Alan Wurtzel, president-research and media development at General Electric Co.'s NBC. "And let them say, `We can do better.' I know they can do better. They just don't."

Calls for reforms--better ad metrics, smarter magazine circulation practices--are nothing new. But the dynamics are different this time. Each constituency--media, agency, marketer--is seeing its market reset; all face urgent demands for greater accountability and lower costs; all are witnessing major changes in the way consumers use or respond to their products and services. They need look no further than the music industry, upended by consumer-empowering technologies, to see the dangers of complacency.

Headlines this fall are indicators of the sea change. Broadcast networks debunked Nielsen ratings that showed young men have been watching less prime-time TV. Nielsen's own follow-up analysis attributed 40% of the decline to revisions in its methodology. But turn down the noise, and logic suggests a simple truth: Young men, early to adopt new technologies, are playing more video games, using more DVDs, doing more online--and watching less broadcast TV.

For networks, that's a problem. For technology sellers, or agencies that can plug marketers into video games or the Net, it's an opportunity.

What about Nielsen's acknowledgment that it doesn't yet include personal video recorder households--3% of U.S. homes and growing, it says--in its national TV sample because doing so would be too "technically difficult"? That's a problem for the industry--and an opportunity for rivals.


"There is this whole new technology/lifestyle thing that is just gripping the marketplace right now, and it is creating a lot of doubt in the measurement and metrics," said George Ivie, CEO-executive director of the Media Rating Council, an industry group that audits Nielsen and other broadcast, print and Internet audience research services.

Likewise, the admission that Gruner & Jahr USA Publishing overstated circulation at Rosie points to a bigger problem. The issue isn't whether it's common practice for publishers to fabricate circulation reports; there's little indication of that. Rather, there are far more serious matters to contend with: Many publishers charge subscribers too little--pricing monthlies at less than $1 per issue--to make circulation too big; many magazines would better serve advertisers by shrinking circulation to a smaller base of readers committed enough to pay a premium. First, though, buyers would have to stop interpreting all circulation decreases as signs of weakness.

"We've got to improve a system that does not work very well," said Tom Ryder, chairman-CEO of Reader's Digest Association and chairman of the Magazine Publishers of America. Mr. Ryder took on the issue of the broken circulation model in a toughly worded speech at the American Magazine Conference this fall, stating plainly that magazines must be "produced for less and sell for more. If you doubt that, you are wrong."

Change in ad industry practices has been slow. Magazine executives called for circulation reform during the early `90s recession, when ads were slumping and they realized that circulation had been treated more like a cost than a profit center. But it was back to business as usual when the ad market and economy soared in the mid-'90s to 2000.

Similarly, the failure of the last big effort to take on Nielsen in TV ratings, Smart, shouldn't have been a big surprise. Statistical Research Inc., Smart's developer, in May 1999 scrapped plans for a national rollout after chewing through $40 million, mostly from ABC, CBS and NBC.

At the time, TiVo PVRs had been on sale for less than two months, digital TV seemed far in the future, the emergence of interactive TV had been sidetracked by the Internet, and networks and agencies were in a bull market fueled by dot-coms with money to burn. There was little incentive to rock the boat. In the 10 months before Smart called it quits, Nielsen announced long-term contracts with ABC, CBS, NBC, Time Warner and more than 100 agencies or holding companies including Interpublic Group of Cos., Omnicom Group and WPP Group.

The economy, advertising and Wall Street are in recovery again, yet this time there are compelling reasons for industry participants to rock the boat to rethink advertising measurement. There's no denying the rules are changing for marketers, agencies and media--and advertising metrics must be retooled to measure what the market needs to know.


Despite strong recent economic indicators and sizzling consumer spending, marketers remain under pressure to cut costs and to prove the value of marketing investments, and they are seeking alternative ways to reach customers who are less inclined to sit through commercials. Procurement people have a growing voice and are sure to analyze and measure the media investment more closely in the months and years ahead. Said Arthur Anderson, managing principal in advertising consultancy Morgan Anderson Consulting: "There aren't many client procurement folks who know a lot about media--yet. But that's one area where we're working in bringing them up to speed."

Agency companies have grappled with their own business issues, including consolidation, reorganization and more fundamental questions as to the value delivered to clients by giant holding companies and agency networks. They're learning to live on permanently reduced profit margins demanded by clients. And they're being pushed to change their game, offering solutions bolder than a 30-second commercial.

Media have enjoyed an ad spending rebound that began in spring 2002, but it can hardly be considered business as usual. Magazines are debating their business model, recognizing it costs too much money to sell the low-priced subscriptions needed to deliver rate bases that are inflated above what advertisers are willing to pay.

Media buyers want to see improved magazine metrics--faster audits from the Audit Bureau of Circulations, more circulation disclosure, stronger syndicated data. But more than that, magazines need to address the basic economics of circulation. Magazines have two choices: Deal with it now, when a rebounding ad market gives magazines financial flexibility to implement sounder business practices, or deal with it in the next downturn, when many publishers could find their backs against the wall (or their feet on the street).

For magazines, the problems come down to a simple truth: The circulation model is broken. For decades, magazines chased TV by promising advertisers ever-higher rate bases sustained with heavily discounted subscriptions. The magazine industry has its own issues with ad metrics, including tension between buyers and sellers involved with the Audit Bureau of Circulations (see story, left).

But the bigger point is clear: Magazines need to improve their economics by making circulation more profitable, which could mean reducing rate bases and targeting readers willing to pay a higher entrance fee. In theory at least, readers who pay more for a magazine are more likely to read the articles and ads, making them more attractive to advertisers.

Finding common ground between advertisers and publishers won't be easy given the discord between buyers and sellers over circulation. "I've never seen the degree of unhappiness that exists today," said a senior-level publishing executive. "There hasn't been this much distrust or depth of feeling in the buying or selling community relative to both the audit process but also the audit purpose. Publishers certainly feel that the buying community uses the syndicated research metric or the audit metric purely as negotiating tools."

Magazines could have a more difficult time than TV in addressing needs for better metrics and smarter business models--simply because the magazine industry isn't seeing its market upended by such dramatic changes in technology and consumer media habits. That puts the onus on publishers not just to talk, but to act.


Among major media, TV has no choice but to embrace change. It is the biggest advertising medium, accounting for more than $50 billion or about 23% of U.S. ad spending. TV revenue is booming, driven by strong demand from advertisers looking to spend to reach consumers looking to buy. But impending change is as clear as HDTV.

TV revolutions don't always come on schedule. Interactive TV, the next big thing of the early `90s, fizzled as developers and investors shifted focus to the Web. Yet the interactive "500-channel universe"--the subject of hype and derision after cable pioneer John C. Malone coined it in a 1992 speech--seems plausible today, when a viewer can control hundreds of digital cable or satellite channels with a personal video recorder. Digital cable and satellite already reach 40 million U.S. homes, or 38% of U.S. TV households, according to a July analysis by Andrew Green, managing partner-director of communication insights at Omnicom Group's OMD. TiVo has just 1 million subscribers, but growth will accelerate as cable companies roll out similar services. PVRs will be in 20% of U.S. homes by 2007, according to Yankee Group.


The mid-'90s debate of whether the defining device would be the TV or the PC seems almost quaint given the collision of technologies and markets. Cable TV systems today do a booming business delivering broadband Internet service. A PVR relies on a computer hard drive for storage. DVD devices are fast becoming standard peripherals for PCs and TVs, with household penetration of DVD players boosted by the collapse of prices this year to below $30. PC makers are expanding into TVs as the once-mature TV set market sizzles on the growth of flat-screens and HDTV.

Connect the dots, and it's easy to envision a living room later this decade with a big flat-screen monitor connected to a high-definition digital TV tuner, a computer and a DVD recorder. That would give users access to and control over a seemingly unlimited supply of content from the TV, Internet and DVDs. In that fragmented media landscape, advertisers would need more alternatives to the 30-second broadcast commercial.

The particulars of future content, ads and technology aren't important here. What's central is that the TV market is entering a remarkable period that will alter how consumers interact with TV and how advertisers reach those consumers. What's clear is that metrics used to track TV usage today--namely, the current Nielsen ratings systems--fall far short of what the market will need tomorrow.

Nielsen and its defenders say the company is delivering what the market needs and is in a good position to provide improved services as the TV market changes. "The system that exists is about as good of a system as we can get as far as TV is concerned," said Bob Barocci, president-CEO of the Advertising Research Foundation, whose members include research companies, agencies, advertisers and media firms. "Nielsen does a very diligent job of collecting the data, analyzing the data, reporting the data." He added that rather than complaining about Nielsen shortcomings, media would be better served to collaborate with Nielsen on finding solutions to such vexing issues as measuring PVR usage.

The Media Rating Council's Mr. Ivie said indictments of Nielsen overlook efforts it is making to improve services. "To give them credit, this stuff is tough," he said. "Nobody's got an easy answer to these questions. They're not ignoring these issues today, and they've got a tiger by the tail."

For now, the industry has no choice but to live with Nielsen, the central banker of the currency. "Nielsen's the only game in town," said Michael Browner, executive director-media and marketing operations at General Motors Corp., the nation's biggest advertiser. "Whether that's a good idea or bad idea, that's just the way it is."

Could competition come into the market? "I'm not sure that we can safely assume that anything that's been the case for the past 20 years will be the case for the next 20 years," Mr. Browner said. "I wouldn't automatically assume that Nielsen will be the only game in town, but I wouldn't automatically assume they won't be."


A competitor could face significant financial and antitrust hurdles in getting industry players to adopt a new standard. But Nielsen, which still relies on handwritten diaries for much of its local data collection, could be vulnerable because of advances in technology, such as digital set-top boxes that could be used (with viewers' permission) to provide continuous tracking of ratings. Comcast, the leading cable company, is testing the ability of set-top boxes to provide audience data. "There is a real upside opportunity to generate audience measurement for advertising," said Jonathan Sims, VP-research at Comcast (see story, P. 16).

A threat from a serious rival could be a win/win for those frustrated with Nielsen. An innovative new player could emerge, putting pressure on Nielsen to speed up innovation and keep a check on prices.

"We'd all be better served if we had competition in this business," said David Poltrack, exec VP-research and planning at Viacom's CBS. "We have a monopoly supplier. We are in a changing media landscape because of all the new technologies in the home. When the measurement tasks are more difficult [and] the challenges of measuring in the new digital area are this great, you need to have more than one competitor out there trying to solve the challenges in the most efficient and quickest fashion."

While critics contend Nielsen has a monopoly on its market, antitrust laws put limits on what industry players can do to inject more competition. The industry still operates under consent decrees that the Four A's and five media trade organizations signed with the Justice Department in 1956 that prohibit the Four A's from encouraging or requiring members to stick to a 15% commission.

Those decrees eventually paved the way for competition on agency fees and commissions that advertisers now expect. But the decrees appear to set a broader precedent. Legal experts said advertisers, media and agencies would be blocked from pronouncing any one ratings service as the industry standard.

That means the industry couldn't easily adopt an approach used in the U.K. and a handful of other countries, where joint industry committees put out for bid a multiyear contract to be default supplier of TV ratings. In the U.S., that would amount to restraint of trade inasmuch as buyers and sellers from one industry would be joining together to decide on one company to service the market.

"It's price fixing, because the members all agree how much they will pay the ratings service and they also agree on how much to pay to advertise based on the ratings," said Nielsen's Mr. Loftus. "In some countries that's the way things are done. Remember, television overseas was created by the government. Here in the U.S., TV developed as a commercial enterprise."


Yet it is possible for the industry to encourage competition. "A joint venture to sponsor a new competitor to produce and publish information, depending on whether it's done appropriately, is probably OK under American antitrust law," said Robert Pitofsky, a Georgetown University law professor and former chairman of the Federal Trade Commission.

Buyers and sellers could get together to set standards for an alternative or supplemental ratings system and then hire a contractor to run the program, legal experts said. The industry could not be seen as setting prices, sanctioning one supplier as the ratings standard or locking out Nielsen.

Given Nielsen's clout in the market, some legal experts said the government might look positively on an industry effort to fuel competition by bankrolling an alternative service. "There's a way to do this right," said John Kamp, a Washington attorney and former Four A's official who focuses on advertising issues.

It's open to debate whether the industry really wants an alternative, which could mean two sets of ratings. The ad industry is in something of a box because of conflicting goals. It benefits from using a single currency--Nielsen ratings--to streamline the TV buying and selling process, yet sees competition as the best tool to drive the innovation that the market needs.

Nielsen has the decided advantage of incumbency, with processes, relationships and contracts that make it the Microsoft Windows of advertising metrics--the domineering industry standard that users love to hate.

"When you change the status quo, you change the metrics for doing business," said CBS's Mr. Poltrack. "Ad agencies have norms for tracking CPM [cost-per-thousand viewers] trends. The idea of changing all of their internal systems and models to accommodate something else, that has been one of those things that keep them from enthusiastically endorsing competitors." Networks arguably are just as wedded to a ratings partner they love to berate when the ratings go down.

Despite the resistance to change, observers said it is possible for industry leaders to change the rules.

"The generic topic is significant change, not trivial change," said John Kotter, professor of leadership at Harvard Business School and author of two bestselling books on change. Whether in a firm, an industry or a nation, people aren't good at major change, and most business leaders have limited experience at driving change, he said. But the process can be managed.


Mr. Kotter has developed an eight-step model for successful change that could be applied whether the problem is TV ratings or magazine circulation woes. The initial four steps are meant to break up the status quo. The first: Establishing a sense of urgency among enough people to get the process moving. "Resignation to the status quo is not urgency," he noted.

Second, leaders need to create a guiding coalition. That team then develops a vision and strategy; it then communicates the change vision to get buy-in.

Next, the team empowers a broad base of people to take action; the group looks for short-term wins to create momentum; it then consolidates gains to drive more change. Finally, Mr. Kotter said, the team must "push, push, push till the whole thing's done" and industry practice has changed. "Do the eight steps well, and you've got it," he said.

Mr. Kotter stressed it is important for a leadership team to start with the problem, not the solution. In TV ratings, the problem or question is how the system should adapt to a changing market; the answers could come from Nielsen, a competitor or some combination.

If the industry can create the sense that something can be done and assemble a group of people with the "reputation, connections [and] smarts," then "the odds are overwhelming that they will go out and start figuring out the answer," Mr. Kotter said. The ad industry can manage to retool advertising metrics--if buyers and sellers see the imperative to push for solutions before it's too late.

contributing: Jon Fine, Richard Linnett and Ira Teinowitz

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