If TV viewers pay, do ads go away?

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As broadcast TV faces its stiffest competition for ad dollars and viewers, it's upending its 50-year-old business model by letting consumers pay for prime-time on demand-and advertisers are scrambling to figure out where they fit in.

NBC's deal with DirecTV, unveiled last week, will offer DirecTV's Plus DVR customers the chance to download prime-time programming for 99¢. CBS a few hours later revealed a similarly priced and structured video-on-demand pact with Comcast. Both follow ABC's distribution deal with Apple's iTunes, which charges $1.99 per show starting the day after its airs.

Most notably, the NBC and ABC programs will air ad-free.

"You really have to applaud them for experimenting with alternatives," said Charlie Rutman, CEO of Havas' MPG. "That's what our clients are asking us to do. ... I'd be interested in partnering with all or any of those networks to find out what they learned and how consumers adopted this."

Martin Franks, CBS exec VP-policy and planning, said the network has heard from several agencies interested in how they can partner on the VOD deal: "We've said, `We're open for business, guys.' "

Unfortunately for advertisers, the deals come at time when consumers are footing as much of the tab for media as advertisers-this year both will spend just shy of $200 billion, according to PQ Media-and consumers are clearly comfortable paying for content they want and can control, as indicated by the growth of such products as ring tones and satellite radio.

`Not in the cards'

Jeff Zucker, president of NBC Universal Television Group, is confident prime-time TV programming will carve out a profit with an on-demand model just as the music industry has made money selling its a-la-carte offerings. But while he doesn't rule out an ad-supported VOD model, he said it's "just not in the cards at this time."

NBC's on-demand shows will be commercial free, but CBS's will retain the national spots embedded within them for the initial airing. Still, CBS sees VOD as a revenue boon. Dave Poltrack, the network's exec VP-research and planning, said VOD could be worth as much as $5 billion a year to broadcast networks. According a CBS study, consumers were almost evenly split between those who would pay $1 for a show without ads and those who would pay 50¢ for a show with ads.

MediaVest conducted research on the same topic and found consumers overwhelmingly prefer free, ad-supported VOD. The good news for advertisers, said Jim Kite, Media-Vest, exec VP-director of research, insight and accountability, is that a VOD environment appears to elicit a high amount of viewer engagement-75% of viewers don't flip channels once they've activated a VOD program and 43% said they don't leave the room or multitask while watching.

Most agree that dynamic ad insertion-being able to insert ads tailored to specific households-is key to creating a VOD model that takes advantage of the medium's targeted, opt-in nature. The ability to do so lies with VOD technology providers.

"This is putting more and more pressure on the VOD business model and the need for resolution," said Scott Ferris, senior VP-general manager of Atlas on Demand, which has partnered with Sea Change and C-Cor, the two largest VOD technology providers, to create a simplified dynamic ad insertion service. Others suggest marketing through VOD will look very different from the 30-second spot, whether it's a single sponsor underwriting a program or a marketer running a "free VOD" promotion, as some marketers have done by giving away songs on iTunes.

Conspicuously absent from the spate of on-demand deals is News Corp.'s Fox, which recently made a series of high-profile Internet acquisitions. In an earnings call with analysts last week, News Corp. executives addressed their VOD plans. "We are in discussions with various people both on the demand front and on the mobile front," said Peter Chernin, president-chief operator. But the company is moving cautiously, he said, given that the business models now emerging could set the tone for some time.

Read more: AdAge.com QwikFIND aar11o, aar10z

Contributing: Nat Ives

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