The Next Business Model for Ad-Supported TV?

Viewpoint: John Osborn on Consumer Choice

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John Osborn
John Osborn
Many in the advertising business are calling for a new business model for ad-supported TV. It is clear that the value of traditional TV as a medium for delivering advertising messages effectively is quickly eroding, and there is a scramble for new technologies and models to fill the void. Three current and emerging ways for consumers to get TV or video content (including advertising) offer a good place to start to understand how we might answer these calls for change:

  1. Traditional, linear-programmed, multichannel TV with optional DVR and video on demand delivered by cable systems, telecoms or satellite providers. Greater two-way interactivity is one or two years away.
  2. Behaviorally or demographically addressable ads delivered at the household or sub-household level using TV-distributor data within acceptable privacy guidelines (baby-food ads in homes with babies, for example).
  3. Consumers searching for and fetching desired programs from internet sites via broadband, bypassing cable or satellite services and bundled networks entirely. Content may be played on computer or TV screens.

It is noteworthy that the more-traditional delivery methods (Nos. 1 and 2 above) can be described with a verb that denotes a push of content ("delivered"), while the third method uses verbs that indicate an active choice by the viewer ("search," "fetch") -- a pull of content. Even consumers in scenario No. 1 are searching for, recording and retrieving content through their DVRs and watching their choices when and where they want to -- and, by the way, skipping the commercials. Consumers are increasingly embracing these more-empowering ways to enjoy programs on their terms, and advertising is being bypassed in the process.

My 4-year-old granddaughter recently was watching "Frosty the Snowman" (which I had recorded on DVR from CBS's linear schedule) and yelled out to me, "Grandpa, the show went off," when it went to a commercial break. I found myself (a 25-year veteran of the agency media-planning and -buying business) reassuring her, "That's OK, we can skip through these commercials and you can watch 'Frosty' again." I'm sure she'll never understand how we could expect people to sit through 20 minutes of ads to get 40 minutes of TV content in a one-hour period. Truthfully, that two-for-one deal makes less and less sense to me as new ways of watching TV arrive -- let's call them "TV 2.0."

How did we get here? A short history of TV supply and demand
When three networks controlled both the production and distribution of content, which was limited by a finite number of time slots, they had the whole U.S. viewing audience to compete for in huge numbers, providing value to advertisers as the ultimate mass medium. Advertiser demand was mostly growing; supply was limited and controlled by a few; and high prices and high profits were the norm. This formula led to the beginning of an upfront buying season, when new programming was announced, and advertisers competed with each other under the premise that after the initial inventory was sold, the remaining "scatter" inventory would be much more expensive and higher-quality programs would be sold out.

John Osborn is a 25-year veteran the advertising-media sector, primarily at BBDO Media and OMD. He is a consultant for emerging ad-supported-TV business opportunities and sits on the advisory board of Ultramercial.
When cable arrived in the '80s, 85% of U.S. households eventually agreed to pay local system operators a monthly fee for a bundle of new and ever-expanding niche programming networks along with the legislated (and expanding number of) broadcast networks. The cable fees were used in part to pay cable networks for their channels of programming, creating a dual revenue stream for networks that also sold advertising. Along with better picture and sound quality, options emerged to buy additional premium content through pay cable channels such as HBO, where, for the first time, viewers could see feature films at home without commercial interruption. Eventually pay-per-view events and recent theatrical releases available on demand for a fee became part of the menu. Advertisers benefitted from more supply through lower cost-per-thousand rates and the ability to better target their messages by buying more-targeted cable programs. For a few years in the mid-1990s, there was a large investment in interactive TV, but the infrastructure to deliver high volumes of digital video content just wasn't there.

Advertisers were willing to pay a premium for broadcast TV for its reach. Cable networks proliferated, and distributors found ways to make their "pipes" bigger to accommodate more and more content.

At that point, advertisers and media consumers had 200-plus channels of content to choose from, and most parties were happy with the change, though the fragmented marketplace complicated the planning, buying and tracking of advertisers' media spending.

In the first decade of the 21st century, broadband cable became the distribution channel of choice for high-speed internet access, and as technology improved, it has become possible to stream or download full-length TV and movie programming in less and less time.

High-speed-internet services in "triple play" packaging along with cable TV and telephone landlines proved popular, and increased the price/value proposition for subscribers. Today telecoms are getting in on the act, with AT&T U-verse and Verizon Fios building out large fiber-optic networks to the home, intent on competing with cable companies. Both have surpassed 1 million subscribers.

TV 2.0 supply-and-demand economics
Advertisers and consumers are now seeing a plethora of media options, and even platforms on which to receive TV content: DVD rentals and purchases, streaming video from the web that can be connected to the TV through intermediary devices such Apple TV or video-game consoles.

One would think this apparent increase in access would increase supply and lower costs for advertisers. A closer look, however, reveals that only the declining linear, non-DVR TV options are actually selling the traditional supply of ad inventory to advertisers, who are still clinging to the hope that their ads will actually be seen by viewers. (If John Wannamaker once said half his advertising was wasted, he just don't know which half, then today it might be reasonable to adjust that figure to three-quarters -- or more.)

While internet TV sites are increasing the outlets for TV content through VOD, they are mostly new distribution channels for existing TV content and audiences. These audiences migrating to new platforms only have so much time in the day to consume long-form programming. On top of that, inventory is being reduced by the Hulus of the world, where most ads are no longer than 15 seconds, and the load per program is far smaller than on TV channels. And in traditional TV distribution, content without ads (free VOD) and pay-per-view VOD are providing increasing amounts of ad-free viewing.

It is wise to remember that in the last half of the 20th century, except for a few rare years, TV ad prices never went down in the traditional marketplace, even when inventory grew or economic conditions reduced demand. In any economic model, prices increase when supply drops and demand holds or doesn't fall proportionately. On top of all that, buyers and planners of media understand that ad avoidance has never been greater, which reduces effectiveness.

Combined with the changes in ad-inventory supply discussed here, the traditional supply/demand formula and the cost/value relationship for TV planners and buyers are a collapsing house of cards, telegraphing increased future costs for little or no increase in value. So what comes next?

(Note: Internet banner display advertising is seeing the opposite affect for advertisers: A flood of supply with the proliferating use and technology of ad networks; ever-growing publisher sites not limited to large media companies; and increasing click fraud are reducing ad prices. This article, however, focuses on the sight-sound-motion-emotion medium of TV, which accounts for more than 65% of advertising spending.)

The quid-pro-quo solution
Make no mistake: Consumers (not unlike my granddaughter) love not having to sit through ads, or as many ads, and not being interrupted by ads. The solution change from the perspective of the media planner and buyer: to view the inventory formula not as commercial availabilities per channel times the number of channels, but rather total engagement opportunities. But how can we measure this? I believe it is through embracing a trackable quid-pro-quo model and increasing the effectiveness of ads through willing engagement by TV viewers.

"Quid pro quo" ("something for something" in Latin) is defined as a fair exchange, or one thing in return for another of similar value. By returning to this simple and human principle that was the basis for the original, 20th-century radio and TV business model, the advertising business can reinvent itself by reaching content-hungry consumers with advertising that becomes a "fair partner" that brings content to you at the lowest possible cost (in terms of both time and money). In reality, the only really valuable supply advertisers are concerned with is consumer attention, something neither media providers nor advertisers have traditionally had any control over, and something that has been very hard to measure, "day-after recall" methodology notwithstanding.

However, with a quid-pro-quo approach, combined with fewer, shorter or less-interruptive ads, advertisers and agencies can employ media companies to provide available windows of voluntary consumer attention to inform, interest, invite and ultimately involve their customers with their brands. The CPM impressions should and will be higher than in the current model, but so will the value and accountability of these new kinds of engaged communication occasions, so that should not be a problem. What's needed is a paradigm shift to replace concepts of ad-inventory supply with ad-engagement supply through quid-pro-quo exchange of consumer attention for fewer, less-interruptive commercial messages.

This kind of open-minded, innovative thinking will drive a very real renewal of the ad-supported-media business.

Some companies pioneering new ways to empower the consumer with choice and reduce advertising intrusion, thereby reinventing the ad-supported-TV model, include:

  • Hulu, which offers the option of watching several 15-second ads before viewing a full-length video uninterrupted vs. 15-second ads during a program, like traditional TV.
  • Cablevision, which has developed the Power:30SM, using the 30-second unit as a point where consumers can enter VOD and ITV channels dedicated to a specific advertiser.
  • Ultramercial, a 6-and-a-half-year-old company that has developed a TV 2.0 version of its patented online and mobile process, in which consumers agree to engage with advertising in exchange for premium content they would otherwise need to pay for.
  • Public television, which has been doing this for years by asking viewers (mostly separate from actual programming) to contribute directly to the cost of programming in order to insure the continuation of programs they love. As cable systems and online-video sites move to VOD delivery, it will be intriguing to see how this PBS quid-pro-quo model evolves.

However uncomfortable and even unnerving these shifts in how our business works might be to those of us who have made our careers with the existing model, we have a tremendous opportunity to look at our own behaviors in order to understand what media consumers really want. We in the ad business who have DVRs are just as drawn to being our own programmers and watching a two-and-a-half-hour sporting event in half that time, or enjoying a half-hour sitcom in about 20 minutes by avoiding commercials, courtesy of our fast-forward buttons.

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