Revenge of the Nerds

Scrappy Start-up Backchannel Is Plotting to Change the Face of TV Advertising

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In a converted 19th century bank in Boston's semi-seedy tannery district, 30 self-proclaimed nerds are plotting to save TV advertising.
Geek squad: Backchannel CEO Michael Kokernak, left, with Chairman co-CEO Dan Hassan, center; and COO Harvey Koeppel
Geek squad: Backchannel CEO Michael Kokernak, left, with Chairman co-CEO Dan Hassan, center; and COO Harvey Koeppel Credit: Darryl Estrine

From the bulkhead of a DRTV media shop that has lost a cumulative $500,000 on billings of about $40 million, they plan to render Google, Nielsen Media Research and the upfront obsolete. And if that's not enough to make them seem insane, consider this statement by their leader: "This is such a great time to be in the TV-advertising business."

Not so insane
But Michael Kokernak, CEO of Backchannel Media, can't be completely crazy. After all, he's tapped a former chief information officer of Citibank as his chief operating officer, lined up possible test commitments of $200 million or more from advertisers and has the ear of media players whose world he wants to change.

"He's a visionary," said media consultant Erwin Ephron, who serves on the agency's board of advisers.

Mr. Kokernak's vision is to implement long-sought dreams of fully interactive, individually addressable and accountable TV. Backchannel wants to become the software and technology backbone of a new era dawning in TV as it transitions from analog to digital broadcasting -- one Mr. Kokernak likens to the broadband tipping point that ushered in the age of YouTube.

In this era, ads are served to people according to the blocks or households where they live. They respond to TV ads with a simple remote click on an icon to, say, get more information about a car they just saw advertised, buy a song they just heard on the Grammys or the book Oprah just touted, or reserve a table at a nearby restaurant. In this era, based on real-time analysis of who's clicking on what offers and programs, media plans change continuously.

TV, like the internet, but better?
In Backchannel's vision, TV is a direct medium a la the internet, only, as Mr. Kokernak sees it, much better -- without click fraud, phishing scams and other security threats. It's enough, he believes, to shift much of the money that's been going into search and other direct media back into TV, replace eyeball counts with the harder currency of response, and ultimately eliminate most upfront deals as dollars gravitate daily in a continuous-improvement cycle toward programming proven to generate response.

To his thinking, such a system would turn conventional brand advertisers into direct-response marketers faster than they already are, and it would transform a lot of traditional direct marketers and local advertisers into TV advertisers. Commercial pods and 30-second spots would shrink or disappear, to be largely supplanted by clickable ads rendered banner style at the bottom of TV screens, like many network promos today.

While conventional TV-ad inventory would shrink, costs per thousand would skyrocket as proven moneymakers among programs or networks command top dollar, he believes. TV networks would get more money than ever. Creative and media agencies will too because while their work might change significantly, the tangible value of that work will become measurable.

Backchannel background
Mr. Kokernak started after college in 1990 working in the institutional-equities department at Lehman Brothers before moving on to consulting with or working for several TV shopping networks, including the Video Catalog Channel, Future Mart and the Shop At Home channel, where he handled relations with cable systems, PR and investor relations. In 1995, he began studying media fragmentation in an effort to prove Mr. Ephron's recency theory, which holds that ads are most effective when shown immediately before the time of decision.

Backchannel was founded in 2001, essentially as a bootstrap operation to fund development of a new-media system as Mr. Kokernak learned the old one firsthand from buying direct-response inventory. Though Backchannel has lost money on its DRTV media shop, it's also invested $7 million, raised through angel investors and loans, into the new system. He's now in the process of seeking tens of millions more dollars from venture-capital firms.

Dan Hassan, chairman and co-CEO, and son of Schering-Plough CEO Fred Hassan, has raised much of the money to date. "The bootstrapping I think is a big difference between Backchannel and a lot of other people in the space who think they can be the solution for television," Mr. Hassan said. "[Mr. Kokernak] understands top to bottom all the pain points for buyers and agencies."

Recruiting talent
Mr. Kokernak began recruiting Harvey Koeppel, then chief information officer of Citigroup's global consumer business, last August. At first, Mr. Koeppel acknowledged, "I thought the guy was total Looney Tunes." He added: "I use this as a term of endearment."

At the time, Mr. Koeppel had probably one of the top five IT jobs in the U.S. But after two to three months of research, "I began to realize he was on to something," Mr. Koeppel said. "And I asked myself, how often do you get to be on the ground floor of changing the way an industry works?" He became chief operating officer of Backchannel in February.

To add someone with experience developing technology behind new advertising-supported models, Mr. Kokernak also hired a senior VP-engineering, Shane O'Donoghue, a former VP-technical services for CBS who later served as a consultant working with equipment manufacturers and car companies to develop the systems behind XM and Sirius satellite radio.
Faces of a revolution? The Backchannel staff outside the company's Boston HQ.
Faces of a revolution? The Backchannel staff outside the company's Boston HQ. Credit: Darryl Estrine

Mr. O'Donoghue's career is living testimony that brave new advertising worlds don't always arrive as planned or on schedule. Even before satellite radio, which has fallen well short of replacing terrestrial radio, he worked in the 1990s on a project to develop a competitor to Nielsen ratings. Despite $60 million in investment commitments from broadcast networks and support from major marketers, the project never got past a Philadelphia pilot.

Trying to 'break the system'
Mr. Kokernak originally hired Mr. O'Donoghue as an outside consultant last year to "break the system," essentially to prove that it would fail on a technology basis. "Obviously there were hurdles, but we as consultants couldn't tell them it didn't work," he said.

He's now developing plans for a Backchannel media lab in New York to show broadcasters, cable networks and media agencies how the system will work in a real home. The next step will be to take it to a beta test with a cable network or operator such as Verizon Fios wiring 30 to 50 homes with Backchannel's system.

Interactive-TV schemes, of course, have intellectually intrigued marketers for decades but failed to gain traction. They floundered because the technology backbone wasn't there to support them, Mr. Kokernak said, adding that the conversion to digital broadcasting will change that.

Glitches, politics and inertia could all get in the way, though the Backchannel executives say they have backup plans for most contingencies. If set-top-box manufacturers can't be persuaded to incorporate their technology, for example, the execs plan to try adapting the response system for cellphones rather than TV remotes.

Setting up shop
Backchannel is in talks with at least one -- and possibly two -- major advertisers to test its system as soon as this fall with $200 million to $500 million in spending and using toll-free response, rather than clickable TV ads, as the "back channel."

"If [Backchannel] can demonstrate the advantage, they get the buy in [from all the parties they need]," said Mr. Ephron. That the three largest agency TV buyers have all left for new-media roles in recent months is one of many signs that the industry is primed for a big change, he said. "It's either change or die."

That so many major ad spenders, such as Procter & Gamble Co., the automakers and drug marketers, already are becoming DRTV advertisers helps pave the way for Backchannel, he added.

Mitch Oscar, exec VP of Aegis Group's Carat Digital, said recent tests the agency has done with Chase Bank and Hyundai and upcoming tests using information from database provider Acxiom to target cable ads are signs of growing interest both from consumers and marketers in an approach like Backchannel's. The difference is that most existing plans for interactive TV require people to leave what they're watching and go to another channel or to their computers. "With a system like Backchannel," he said, "you to go right where you wish to go at a time when you feel most comfortable. We feel that's certainly positive."

Distribution challenge
Getting distribution from cable and satellite operators, however, "will be an interesting challenge," Mr. Oscar said. "Ask anyone who's trying something new."

Sarah Fay, president of Aegis' Isobar Communications, Boston, doubts Backchannel could ever really replace search, online display or other direct media. "No medium has every really replaced another," she said. "The internet industry got in trouble by telling people they were better than TV or other forms of media. Advertisers may add [Backchannel] to the mix, but they won't drop everything else."

Like some others, including Mr. Koeppel, she said her initial reaction to Mr. Kokernak was: "Is this for real? ... And then, when I met with them, I thought, at some point, somebody's going to start measuring TV and delivering advertising across the TV landscape like they do the internet. Why not them?"
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