Before a ballroom filled with onlookers at the May 2007 Cable Show in Las Vegas, Time Warner Cable chairman Glenn Britt made a surprising projection: The business of selling advertising, long treated as a sort of stepchild of the cable industry, would emerge as a bigger and more important contributor than the often-ballyhooed mobile telephone business several cable companies are vigorously pursuing.
Britt said advertising ranks behind only business communications services — a category frequently quantified in the tens of billions of dollars — in terms of revenue potential for cable.
For a business that now generates only about 5% of total cable industry revenue and historically has been treated as an ancillary component, the out-loud compliment from a CEO was unusual. But behind Britt's calculation is a growing realization that cable's two-way, digital transmission technologies may be ideally suited for marrying two powerful forces of advertising: the persuasive, emotive appeal of television and the highly efficient and targeted nature of Internet advertising.
Other industry figures are equally bullish. “Basically advertising is shifting to an interactive, two-way medium. To me it has the feel of inevitability,” said Comcast president Stephen Burke at the same conference.
The fact that cable chieftains are talking publicly about advertising as a big business signals there's more going on than just a steady continuation of the reliable revenue increases cable's local advertising business has churned out for years. Now, industry executives believe there's bigger money to be made as television makes a transition from linear broadcasting to interactive, on-demand access — and they're being more vocal than ever about the opportunity.
“Literally over the last couple months, especially from the cable community, from the highest levels I'm hearing expressions of great interest in advertising as being strategically important,” says Tim Hanlon, senior vice president of ventures for Denuo, the new media practice of international ad agency Publicis Groupe.
The chance to participate in a significant emerging media sector is one reason for cable's rising enthusiasm about advertising, but there's also a competitive urgency tied to the category. Across the media sector, advertising budgets once allocated to traditional television, and to cable outlets, are flowing to more targeted and efficient alternatives on the Internet. According to the Interactive Advertising Bureau and PricewaterhouseCoopers, online advertising revenue rose 35% in 2006 to a record $16.9 billion — more than triple the 1999 sum and much faster than the pace of growth in a relatively flat TV sector.
That budget migration, and the fear of losing money to emerging media alternatives, helps to explain why cable executives are devoting more effort to advanced-advertising initiatives. Later this year, for example, CableLabs, will organize a formal advertising group to devise standards and specifications for new advertising technologies, according to CableLabs senior vice president for advanced platforms and services Don Dulchinos.
But the rising profile of Internet advertising isn't the only reason cable executives are enthusiastic about possibilities in interactive advertising. Another inducement comes from a more TV-centric viewpoint. Executives in the cable ad category believe that because of new possibilities in on-demand advertising, operators for the first time may have a chance to participate in revenue from the $70 billion national TV advertising marketplace that until now has been firmly controlled by cable and broadcast networks like ESPN and CBS.
Here's why: Until now, those networks have been in charge of selling and televising national commercials on their traditional linear feeds. Cable operators have in turn retransmitted those feeds to subscribers with national commercials from the likes of Procter & Gamble and Ford Motor Co. running intact. As a sort of quid pro quo, cable networks usually make two or three minutes of advertising time available each hour for their cable affiliates to sell to local car dealers and other advertisers.
DIFFERENT RELATIONSHIP
But the emerging world of video-on-demand advertising requires a different relationship between cable companies and networks. Instead of passing through channels with national commercials already embedded, cable companies are contemplating arrangements in which specially designated commercials will be fed into on-demand versions of network programs immediately after customers have requested the shows.
Under this scenario, when a 22-year-old male selects an on-demand version of A&E's Dog, The Bounty Hunter, for instance, it's possible that the cable system could inject a commercial for a Honda Civic or another product or brand designed to appeal to the viewer's demographic. When a middle-aged woman next door selects the same show, an advertisement for Princess Cruise Lines might appear instead.
Cable ad executives believe the practice of letting advertisers send specially selected commercials to particular types of households will generate premium advertising rates. But from a ground-level technical standpoint, it also means that networks will need to rely more on their cable distributors to help execute campaign instructions from ad agencies. In effect, control of getting the right commercial to the right household will depend on equipment and software maintained not by the national TV network, but by the cable company.
“Going forward, the difference with non-linear television on a video-on-demand platform is that the network will have to say to the operator, 'I need you to do something technically for me on my advertising inventory,'” said Scott Ferris, senior vice president and general manager of Atlas On Demand, a unit of the advertising services company aQuantive that develops VOD advertising software. Ferris suspects cable operators will collect compensation for getting networks' on-demand commercials properly inserted, effectively giving operators a first-ever share of the $70 billion national TV advertising market. “It's an opportunity for cable operators because they've never really participated in the national TV market,” Ferris said.
Denuo's Hanlon also thinks cable operators could make a lot of money at high margins by enabling new methods of on-demand ad insertion and collecting payments from TV networks for managing the interplay with big national advertisers. “A facilitation play could easily drive a substantial revenue stream of shared advertising revenue from national advertisers to the bottom lines of cable operators,” Hanlon said.
A NEW PLATFORM
But before cable companies can even contemplate snaring a slice of the biggest TV ad category, they have plenty of work to do.
Right now, cable isn't even close to being able to routinely stitch targeted TV commercials into VOD program streams with any sort of scale. To date, that sort of “dynamic” advertising insertion has occurred in only two markets: Lawrence, Kan., where Sunflower Cablevision offers the service to a handful of local advertisers; and in St. Louis, where Charter Communications earlier this year conducted a test of the technologies needed to align selected commercials with individual on-demand streams. (Charter has since discontinued its trial and is evaluating the results.)
It's not because VOD itself is lagging. An estimated 28 million U.S. homes — representing about one-fourth of all households — are VOD-enabled. But the amount of advertising revenue tied to VOD content is relatively small. Atlas On Demand's Ferris says a widely accepted estimate for annual VOD ad revenue is between $50 and $75 million, a bare fraction of the nearly $6 billion operators now generate by selling local ad time on linear networks. And even within that modest sum, much of the action is happening outside the reach of MSOs, at the national network level. Most of today's VOD ad revenue goes to cable networks such as TBS that are embedding commercials into VOD programs before they're ever sent out to cable systems — a relatively cumbersome approach that overlooks opportunities to align commercials with unique viewing sessions.
Rolling out a more facile, dynamic VOD advertising approach on a large scale is part of a complicated effort to align technologies, business practices and economic deal making into a sort of holistic scheme.
Because it involves so many facets, the effort is taking longer than some advertisers would like, and may be increasing risks to cable companies. One risk, said Hanlon, is that advertisers who want to establish a presence in the fast-growing world of interactive media will simply turn to the Internet — not cable — to find it. Another is that as customers get accustomed to seeing on-demand shows with little or no advertising, they'll object when it eventually appears.
“The longer VOD goes without advertising, the more viewers will expect it won't have advertising,” Oxygen Media president and chief operating officer Lisa Gersh said at a Cable Show appearance.
Cable companies, though, appear to be willing to wait to get the formula right rather than rush to market with disparate approaches that may confuse advertisers. They want to avoid some of the problems that confronted the cable advertising sector during the 1980s when a patchwork geography of TV markets and multiple cable providers made it difficult for advertisers to make sense of the medium.
Those problems have since been corrected by the establishment of advertising interconnects that offer one-stop market coverage to advertisers, but the lesson lingers, according to Comcast Spotlight vice president of technology Paul Woidke. “We need a standard process by which advanced advertising is sold and reported back,” he said.
Woidke said some of the basic technology underpinnings for large-scale VOD advertising deployment already are in place. They include the video servers and content-delivery platforms that can sling on-demand programs and separate, digitally encoded digital commercials to local cable operations. Also, two Society of Cable Telecommunications Engineers standards (known as SCTE 30 2001 and SCTE 35 2001) have created a basic technology framework for getting digital commercials inserted into digital video streams — essential infrastructure for the looming VOD advertising era.
But Woidke believes there's work still to be done in getting software ready to manage the vast array of decisions that must be conducted to marry commercials with individual VOD program streams so that the right spot gets in front of the right viewer or demographic group. Plus, nitty-gritty details such as the number of pixels that are devoted to on-screen “bugs” that can trigger supplemental VOD messages need to be established. And some of the core business processes involved in trafficking, measuring and reporting viewer exposure to VOD commercials have yet to be sanctioned across the industry. “That whole component of the platform is the most challenging thing we face,” Woidke said.
A broad coalition of technology providers, MSO engineering executives and software developers is currently working on several flavors of advanced advertising featuring an on-demand component. One involves “dynamic” insertion of commercials into VOD streams — the main focus of the Charter and Sunflower deployments.
Another extends the idea of dynamic VOD insertion into a potentially broader realm of switched digital video, a way of distributing channels that essentially responds to each individual channel-tuning request by issuing a separate digital stream, and consequently could open up huge amounts of VOD advertising inventory.
The third aims to make use of capabilities within set-top boxes to determine which of several possible commercials plays in a particular home.
SCTE ROLE
Much of the work under way to come to grips with common approaches for on-demand advertising, and in particular the software engines that will make it work, is being done by an SCTE working group that's attempting to come up with standards for getting VOD advertising's back-office infrastructure in place.
The so-called DVS 629 effort aims to devise ways to capture and manage the various data associated with on-the-fly VOD advertising decisions, such as matching up available slots within on-demand streams with commercials meant to be seen by selected groups of viewers.
CableLabs also plans to take on a bigger role in stewarding specifications or standards relating to on-demand advertising when it establishes its new unit devoted to advanced advertising technologies, said Dulchinos.
The CableLabs group also will devise approaches for integrating advertising features and processes into the interactive OpenCable Applications Platform. “The technology is now ready to support some of the kinds of things that have been talked about for years,” Dulchinos said.
The cross-industry efforts involving the SCTE's DVS 629 working group and the forthcoming CableLabs initiative reflect thinking among cable executives that it's important for the cable industry to rally around common approaches for making advanced advertising available.
Cable executives say they want to create a uniform approach to on-demand advertising — and other forms of interactive advertising — that will allow buyers to use identical business processes across markets and with different networks.
“A uniformity of offering is essential, and there's furious effort among our MSOs to drive toward that,” said Matt Timothy, senior vice president of new media for the cable advertising rep firm National Cable Communications, during a Cable Show presentation on advanced advertising.
But uniformity doesn't mean every operator will offer or treat advanced advertising in exactly the same way. Woidke resists the idea that a unified VOD ad marketplace is akin to a technical platform. Instead, he describes it as a series of definitions, terminology and approaches — some of them technical, some purely business processes — that create a common framework.
That will allow advertisers to understand what it is they're buying when they add to their campaigns new interactive elements like “telescoping,” a term for using VOD platforms to offer up detailed information on products and brands introduced within traditional 30-second commercials. Woidke's favored analogy revolves around the manner in which a common grocery item is packaged and presented to shoppers. “We have to agree that when we're selling eggs, they come as a dozen in a package of two rows,” he said.
How long it will take to bring these common standards and approaches to market isn't certain. David Woodle, the chairman and CEO of C-Cor, which supplies digital advertising systems, said he's optimistic the coalescing of technology and business models supporting on-demand advertising will take hold in 2008, fostering much wider deployment than the limited efforts to date.
In the meantime, there's no shortage of optimism surrounding cable's emerging VOD advertising initiatives. Britt told a Cable Show audience he expects to introduce to the advertising marketplace the same types of viewer-targeting, measurement and reporting attributes that propelled Internet advertising into a $17 billion business last year. “We have the technology to do that on television,” he said.
Comcast Spotlight's Woidke says cable advertising's transformation to an on-demand environment represents the most profound change for the category since the conversion to digital storage-and-insertion technology a decade ago — and he's encouraged by growing support for the effort at cable's top levels. “When your boss's boss stands up and says, 'We're going to take that hill,' you realize the next 18 months is going to be the most exciting since 1994, when we figured out we could put ads on the air without ever going to tape.”
