Chasing Eyeballs

April 2008

There is no doubt that broadcast television in the U.S. and elsewhere is in a state of flux.The “wherever, whenever” style of watching programming that viewers are embracing has changed the rules of the game. Some people are wondering about the future of linear channels and many more are questioning the effectiveness of the traditional 30-second spot.

If any further confirmation were needed that free TV is facing real challenges, it was delivered loud and clear in late February in the results of research conducted by the Association of National Advertisers (ANA) in the U.S., along with Forrester Research.

Among the survey’s main findings: 62 percent of marketers think television advertising has become less effective in the past two years; nearly 50 percent of the advertisers surveyed have already started to experiment with new types of advertising to work with DVRs (digital video recorders) and VOD programs; 87 percent of advertisers think branded entertainment will play a stronger role in TV advertising in the coming year; advertisers want to try new advertising formats, including ads in online TV shows (65 percent), ads embedded in VOD (55 percent), interactive television ads (43 percent), and ads within the set-top box menu (32 percent); and 87 percent of the respondents said they intend to spend more on web advertising this year.

Change is happening fast, but it is still evolutionary. Traditional television advertising still occupies center stage. TNS Media Intelligence predicts that spot TV advertising will grow by 9.9 percent in 2008, while cable-TV ad revenue rises by 5 percent and network-TV ad income grows by 2.7 percent. Overall, TNS sees television’s share of total ad spending actually inching up to 44.1 percent in 2007–2008 from 44 percent in 2006–2007. Internet advertising spending is seen to be growing by 14.4 percent but will still account for only 8 percent of the total, up from 7.1 percent last year.

It might seem odd to be talking about the demise of the traditional approach when FOX had what it called the greatest day in its history in February, with the Super Bowl generating about $250 million in advertising revenue. Super Bowl XLII was viewed by a record 97.5 million people in the U.S.—more than any previous Super Bowl. The highest-rated commercial minute, a spot for Victoria’s Secret, was seen by 103.7 million people. But Super Bowls only happen once a year.

“Traditional network viewing is now declining quite precipitously, at 10 percent or 15 percent year on year,” says Jason Maltby, the president and co-executive director for national broadcast of WPP’s New York–based media planning and buying agency MindShare North America. “But those viewers are not disappearing. Television usage is not really down. They are migrating to cable. So the market is fragmenting rather than shrinking. The whole world is experiencing this. It is still possible to reach the viewers with television—it’s just not so easy.”

Indeed, the total average time an American household had a TV set turned on during the 2006-2007 season was 8 hours and 14 minutes per day, the same amount of time as during the 2005-2006 season—and a record high—according to Nielsen Media Research. The 2006-2007 television season was the first in which measurement of digital video recording was included in Nielsen’s estimates.

And therein dwells the further wrinkle that complicates the picture. As DVR penetration increases, so does commercials avoidance. “So people are watching as much TV as ever, but not as many commercials,” Maltby says. “This is where the problem is.”

TO ZAP OR NOT TO ZAP

Every time a new technology en-gendering a new pattern of consumer behavior arrives in the market, there are pundits eager to proclaim that it is “the future.” But of course each new innovation is only part of the future. Nowadays, with so many technologies and new behaviors coming hard on top of each other, this is clearer than ever. The question is, how big a part of the future does each play?

The DVR is exceptional. While most new technologies have eventually been digested and accom-modated within the existing broadcast-television business model, and sometimes, by extension, into new areas such as online, the DVR has been perceived as pretty close to purely negative by people selling and buying advertising—perhaps more than any other piece of equipment has been before.

The number of households with DVRs now stands at 20.5 percent according to Nielsen’s National People Meter sample. When Nielsen began including households with DVRs in its samples, in January 2006, penetration was estimated at about 8 percent. In the ANA research, more than half the marketers reported that when 50 percent of all TV households use DVRs, they will cut spending on TV advertising by 12 percent.

Having a DVR does not automatically mean not watching advertising (the Super Bowl commercial with the highest gain from DVR playback, a promotion for The Chronicles of Narnia: Prince Caspian movie, was viewed by 4.1 million people on DVR playback).

According to ZenithOptimedia, the early adopters of DVR technology were more prone to fast-forwarding through advertising than those coming on board later. As the universe of DVR homes grows, ad-avoidance research suggests that not all that much commercial viewing is being missed.

Moreover, the use of the DVR can actually be seen as an opportunity for engagement. “When people record programs, a proportion of them do fast-forward the ads, but those who don’t are more attentive to the advertising, because they have selected that program and taken the time to sit down and watch it,” Rupert McPetrie, the television director of ZenithOptimedia, said during a recent roundtable on the future of the 30-second spot.

He did acknowledge, however, that the advertising business would be foolish to pretend there was not a danger.

According to MindShare’s Maltby, there are a few ways to approach the problem. The “low-hanging fruit,” as he puts it, is product placement, with the advertiser’s product written into the script. Another is sponsorship around the program. The third is looking at the media mix. Assuming there’s a limit on the product placement, advertisers need to think about being online, where most prerolls are embedded and can’t be avoided. But the numbers don’t add up easily. Online audiences are growing fast, but they are still a long way from the critical mass of television’s broad market reach. “Advertiser dollars can only shift as fast as eyeballs shift,” he says.

AGGREGATING VIEWERS

Advertising in the fragmented television environment is not necessarily costlier than it used to be. But it certainly requires more effort. “In the ’60s, you could buy three spots on the three main U.S. networks and reach 70 percent of the country,” MindShare’s Maltby says. Today, “if you ran spots on the main networks, you wouldn’t even reach 45 percent. If you have a brand that wants 60-percent reach, you need broadcast and 20-plus cable channels and VOD. The sheer volume of units is into the thousands when it used to be in the tens.”

In the U.K., where networks face identical problems, Channel 4 has changed its sales approach over the past two or three years. “We used to see online as competition and we would say that it wasn’t good at branding,” says Mike Parker, Channel 4’s head of strategic sales and commercial marketing. “Now we present it as complementary. TV emotionally connects, and it drives search online, where people can find out about product availability and pricing and possibly even make purchases.”

The 30-second-spot format is the business foundation of Channel 4, which also operates several digital channels. The company does about £900 million a year in spot sales, about £40 million in sponsorship and less than £10 million online. The last category is growing at about 40 percent a year, but it’s still a small part of the total.

“Our strategy is very much geared to selling across a family of channels with slightly different demographic targets,” Parker says. “We have C4 for the broadest audience, E4 skews younger and More4 is for a somewhat more upscale and older group, as is Film4. We package across the channels. Many brands want C4 and the youth target, while others want C4 and the older, and some advertise on all four of them.”

One of the important things to recognize about the market is that free-to-air digital terrestrial has been growing dramatically. In 2012, the U.K. will switch off analogue transmission and these channels will be part of the mainstream.

Advertisers are generally aiming to integrate traditional television advertising with digital alternatives. One of the factors that is making the transition to new-media advertising tricky is that not all eyeballs are equal on all media. There is a difference between raw exposure and more qualitative results such as recall or engagement. Is a rating point on network TV worth more than an online rating point—or less? It varies. The engagement generated by the Super Bowl on television is not replicated by the rerun of a sitcom. If you consider that most online entertainment takes at least three clicks to navigate to, that shows engagement too.

In the U.S., the market is moving to a one-stop shop, as television programming extends into new media. “In the case of series like Heroes or Lost, with a strong online presence, it’s not enough for the advertiser to run spots on TV,” says MindShare’s Maltby. “Fans want to get deeper into the content and advertisers can follow them online, closer to the content. The extension into new media starts to become all the more attractive for advertisers as the fans move into the blogosphere to have their conversations. Those are the super fans. They can be followed all the way down the chain, but it’s harder because they are moving away from the one-stop shop, into an environment that is not controlled by the network or the producer.”

Moreover, Maltby adds, as they get further away from television, it becomes all the more important for the advertising message to “belong” in the context or the fans smell a rat. “‘Organic’ is an over-used word but it’s the right one. There must be something in it for the consumer. The advertiser must give something and if it’s done right there’s a halo effect.”

Once advertising starts to move in this direction, the deals also get further from their traditional 30-second roots. “Advertisers and agencies want to do cross-platform deals, but it is not always easy,” Channel 4’s Parker says. “The TV-spot market is commoditized. Sponsorship and online are more ideas-led. So it is hard to package across the platforms. It’s possible that they will become more commoditized over the next two or three years, which is a bit depressing from a creative standpoint. Advertisers are trying to make that happen, not consciously but by default. They want more value, and commoditization is a way to drive down costs.”

To satisfy advertiser demand for more value, networks can also work on the advertising end. That’s what’s happening in Europe at Viacom Brand Solutions (VBS), which represents MTV, VH1, Paramount Comedy and Nickelodeon.

“Spot revenue accounts for the vast majority of our business, even if it’s not growing as fast as online or, especially, the area of what we call partnerships, where we create bespoke solutions for advertisers in advertising, events and across platforms,” says Agostino di Falco, the VP of insight and research at VBS for the U.K. and Ireland.

“We are working with more and more advertisers to create spots specifically for our programming environment. This approach generally leads to greater advertising effectiveness. In the past 12 months, we have created more than 300 spots for the U.K. and Ireland, and our international department has been making similar deals on a pan-European basis. This advertising is made just for our channels. It doesn’t appear anywhere else.” He adds, “Being a relatively small player in the U.K., we’ve sought to build share through these bespoke creative solutions, and it’s certainly worked for us. It may be the sort of thing that bigger players might be interested in doing, but it could be more difficult for them—you have to be nimble. If they do move that way, it would be good for the market. This approach elevates advertising above the commodity level.”

PROPER INTEGRATION

The solution of product placement has been rising rapidly for the past few years in the U.S., where the market is pretty free of regulatory inhibition. NBC recently made a deal with Ford to supply the car used in a new remake of the 1980s series Knight Rider.

The audience has generally accepted product placement as long as it’s relevant. Some reality shows, like The Apprentice, seem to exist just for product placement. But with dramatic programming, there’s a thin line beyond which recall can become negative. “We’re all struggling to see how far you can push it without going too far,” says MindShare’s Maltby. “It will happen. There’s always someone who goes too far with it and gets spanked.”

In Europe, meanwhile, broadcasters will be testing that envelope too before long, as regulations ease up.

“Things are about to happen,” says Ross Biggam, the general director of the Brussels-based Association of Commercial Television, Europe’s main broadcast lobbying group. “Product placement has been a classic legal gray area. Nobody knew what was authorized as product placement and what constituted surreptitious advertising, which is clearly illegal. Last year the E.U. confirmed in the revision of the Television Without Frontiers Directive that product placement would be permitted.”

The basic E.U. conditions are that product placement must not have undue prominence within programming. Children’s, documentary and news programming remain off-limits.

Now it is up to the member states to decide whether they want to follow the lead of Brussels in permitting product placement on the same conditions. Most of them are inclined to do so, according to Biggam. Over the next 18 months or so, 27 national debates will take place on the issue. The timetable will be determined by the vagaries of local politics. Portugal is likely to tackle the matter first, with the U.K. following soon after. France may choose to incorporate product placement regulation within a broader TV reform currently being discussed. Germany will probably get around to the debate later.

“It’s a welcome clarification,” says Biggam. “Brands should have the opportunity to use product placement. I think they, along with broadcasters and advertisers, are likely to proceed at a sensible pace. We’re probably going to see a gradual evolution similar to what happened with sponsorship, rather than a big bang.”

The directive has also opened up the spot-advertising market somewhat. The volume limit of 12 minutes per hour remains in place, but greater flexibility is now allowed when advertising is inserted.

In the U.S., NBC Universal has shown its increasing sensitivity to what advertisers want by deciding to move to a 52-week schedule of staggered program introductions, which will enable the network to be more flexible to demand. The network is also keen to get advertisers to build marketing plans around specific shows and perhaps to integrate brands and products into them.

“Broadcasters have hours to fill, not minutes,” says Mick Brown, the co-founder and creative director of Coast, a London-based production company specializing in advertiser-funded programming that has produced programs underwritten by the likes of Canon, Microsoft, HSBC and Toyota. “If you can bring them programming of genuine interest that an advertiser funds, then it makes sense for them. I think this is the way everything is heading.”

It used to be that one sponsor paid for an entire show. These were programs of genuine interest to the public. Perhaps it was a one-hour drama every week. Then it became too expensive for single sponsors and at the same time the broadcasters saw that they could make more money getting in advertisers supporting the program 30 seconds at a time. Now that solution is becoming too expensive for the advertisers because the audience is shrinking. To get their value, they need to change their approach, taking the consumer through a shared interest to a message about the brand. That’s moving back toward sponsorship again.

It seems that as the distribution mechanisms proliferate, so do the nuances. As MindShare’s Maltby puts it, “The market is so complex that increasingly the job of companies like ours is managing the complexity. A large part of our job is determining what’s vapor and what’s not.”

One thing that is definitely not vapor is the DVR. But it’s not necessarily to be feared. “Looking to the future, are there ways that we can use this technology, which we perceive as a threat, to force engagement?” asks McPetrie of ZenithOptimedia. “Can we make people watch an ad? Or do we [create an incentive for] them?” One way to do the latter, he suggests, is for the broadcaster to let viewers earn reward points by watching ads.

And before anybody tears up the old game plan, it’s worth noting that even in the new and exciting online world, the advertising spot is still the basic format with prerolls of 20 or 30 seconds that can’t be avoided. Plus ça change.