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Breaking Point

Anyone who has spent any time in the TV business has heard the mantra before: This year is advanced advertising’s year. But unlike the past two decades, in which many a promising ad-tech initiative has stumbled, cable and broadcast executives may finally have the incentive to make targeted ads reality.

For advanced advertising — using the torrent of data from set-top boxes, digital and mobile devices to target messages to specific households and individuals — the erosion of the traditional TV model could be the force that frees the technology. As viewing habits have shifted away from linear TV, distributors, networks and advertisers themselves all have a vested interest in reaching that elusive market.

“When models reach the breaking point, that’s when breakouts happen,” Tom Rogers, chairman of TRget Media LLC and the former TiVo CEO, said in an interview. “It’s been clear for some time that the traditional linear TV model has had its challenges. We’re really beginning to see some things happen that are very, very significant accelerations.”

And networks, distributors and ad buyers alike are buying in, with distributors like Comcast and Altice USA snapping up small ad-tech companies, networks forming consortiums like OpenAP to identify opportunities and set standards, and even, in the case of NBCUniversal, devoting a growing piece of their ad budgets to targeting.

Related: The Future of Television Is Now

In March, NBCU said it would offer about $1 billion in inventory to targeted ads this year. And at the recent upfronts, NBCU chairman of advertising sales and client partnerships Linda Yaccarino slammed the questionable reach of some digital ads.

“Has a ‘view’ ever bought any of your products?” Yaccarino asked at NBCU’s May 15 upfront event. “Has a ‘like’ ever walked into a store? … Viewers buy products.”

Related: Data Drives Some Talk at Upfront Presentations [subscription required]

First-Quarter Slippage
Exacerbating the need for more focused ads is the mounting evidence that cord-cutting, cord-shaving and skinny programming bundles are gaining steam. In the first quarter, the pay TV distribution market fell by 762,000 subscribers, the single largest first-quarter decline ever, according to MoffettNathanson. And once indestructible brands, like The Walt Disney Co.’s ESPN, have seen their subscriber bases shrink as viewers move to other venues and devices to fill their content needs.

ESPN has lost between 12 million and 13 million subscribers from its peak and plans to launch a direct-to-consumer service targeted at younger viewers later this year. At the same time, ratings stalwart the National Football League saw its ratings fall 9% last year (double that for the coveted 18-24 year old demographic), while other sports are getting older. Meanwhile, younger viewers are staying away from the living room TV set.

According to TechCrunch, viewers are watching 1 billion hours of YouTube video clips per day.

Related: OTT Players Poised to Win TV’s Future [subscription required]

Traditional distributors and programmers are taking notice. Comcast has purchased several ad-tech companies over the past few years, including FreeWheel, and Visible World. Altice USA bought advanced ad company Audience Partners in March, and in April programmers Viacom, Turner and 21st Century Fox formed consortium OpenAP to standardize the way targeted audiences are defined and measured.

The TV industry still has some time before the ad model completely disintegrates, Pivotal Research Group senior analyst Brian Weiser said.

“To me, it’s evolutionary, not revolutionary,” Wieser said. “Ratings can fall by double digits, yet traditional TV is a source of premium video content with adjacent advertising opportunities. It continues to dwarf everything else.”

Industry group the Internet Advertising Bureau (IAB) pegged digital video ad revenue at about $9.1 billion in 2016, compared with $69 billion for TV ads.

Wieser said a dramatic shift in viewers could sway the market, but it would have to be very dramatic.

“For TV to find itself in a position where advertisers would all of a sudden make radical changes, you would have to find a good core of the audience evaporate,” Wieser said. “And by evaporate I mean reach goes away.”

The emergence of groups like OpenAP are more a means to show the industry that programmers are not out of step with the times, Weiser said, adding that perception is a bigger force of change in the ad market than reality.

“Decisions end up getting made based on the perception of how things are going, and fear,” Wieser said. He pointed to the TV ad market in 2015, which to some was the indicator that the traditional TV ad model had broken, but was, Wieser said, merely a bad year made to look worse by unfavorable comparables to the prior year. In 2016, when heavy ad spending by such daily fantasy sports sites as FanDuel and DraftKings spurred the TV market, the problem appeared to be solved. Now in 2017, the ad market is in decline again.

“What’s happening now is what people feared would happen a couple of years ago,” Wieser said. “Cost constraints are more pronounced than they have ever been. Now we’re at a place where I’m feeling doubtful that national TV will grow again. But it’s not because of digital, per se.”

At TVSquared, an ad-tech company that tracks brand traffic and helps advertisers choose how to target their messages, chief technology officer Kevin O’Reilly agreed fears the TV ad model is dead are overblown.

O’Reilly said the TV apocalypse has been coming for the past 15 years, and this wave is being fueled by the emergence of the second screen.

“If the apocalypse is coming, it’s coming slowly,” he said. But he added that ad buyers and sellers are realizing that both traditional and advanced models can coexist.

“Advertisers are saying, look, I know linear TV works, it really does drive efficient traffic. And one of the big benefits of efficiency is if I can find a way to be slightly more efficient in an efficient marketplace, I’m going to make money,” O’Reilly said. “There is major value in still reaching a very large audience, I just want to make sure I’m reaching the right part of that audience. And when I’m not reaching the right part of the audience, I can change my buy and optimize it into parts where I’m seeing it perform better.”

Getting to that point will probably take a round of consolidation in the business, Rogers said, creating one-stop shops for participants to access the expertise they need.

“The problem is, there are so many silos, so many companies, that it is a bit of a mess,” Rogers said, adding that there is an increasing need to put ad-tech solutions under a single roof. “Until that is solved, it’s going to be difficult for a massive breakthrough.”

The convergence of ad tech and distribution has been a long time coming with the inherent convergence of data-driven advertising and those who compile the data, said Waller Capital Partners managing director Roddy Moon, who leads the boutique investment bank’s digital media practice and who has covered the ad-tech sector since its early days.

Related: Waller Capital's Video Services Consolidation Chart

Helping to spur along that convergence is the dominance of digital behemoths Google and Facebook in the digital ad space. Morgan Stanley estimates that about 85 cents of every new online ad dollar goes to those two companies.

“There are still a tremendous number of companies chasing that remaining 15 cents,” Moon said. “But that’s just digital ad spend; the 800-pound gorilla is still TV ad budgets.”

To address that market, Moon said, the industry is beginning to realize it needs a common, integrated data-driven platform. With scores of small, medium and large ad-tech companies out there, many are realizing that creating a one-stop shop for distributors, content owners and advertisers can help the development along.

“It used to be that it was an ‘either-or’ mentality,” Moon said of the ad-tech business. “You were either digital or traditional television. Now there is more of a mindset from the marketing side that it should be holistic.”

Cable Jumps In, Too
At the same time, cable and telco distributors are trying to dispel the notion that others are taking over this emerging business. Comcast started buying ad-tech firms in 2005, with Strata Marketing, followed by Seattle-based thePlatform in 2006. In the past three years, Comcast has purchased video ad startup FreeWheel (2014), This Technology (2015), Visible World (2015) and StickyAds (2016), all with a view toward offering more targeted ad product.

Earlier this month, Comcast named Marcien Jenckes, a former ad-tech entrepreneur, as president of advertising. Jenckes has held several roles at Comcast since joining the company in 2010 — he was most recently executive vice president of consumer services at Comcast Cable, where he oversaw its video, internet, voice and Xfinity Home businesses.

The newest entry to the U.S. cable space — Altice USA, a unit of European telecom company Altice N.V. — has also dipped its toes in the ad-tech space. Altice USA purchased Suddenlink Communications in December 2015 for $9.1 billion and in June 2016 bought Cablevision Systems for $17.7 billion, making it the fourth largest cable operator in the country with 4.6 million residential and business services subscribers.

Cablevision had been a pioneer in taking a digital-like approach to advertising, Altice USA chief data officer Paul Haddad said. Haddad had served as senior vice president and general manager of advanced data and analytics at Cablevision, playing a key role in its advanced advertising strategy.

That expertise and experience now in demand in the business, Haddad said, and advertisers and networks, who may have given advanced ads short shrift in the past, are getting a lot more serious.

“We’re being asked to discuss our strategy with major players,” Haddad said. “In previous years, people were assessing the value proposition, versus today I can sense they want to test, they want to discuss business plans. To us, this is the real sign that, yes, we think it’s going to start gaining major traction starting this year. In 18 to 24 months I could see it becoming a standard request when it comes to advertising in the industry.”

Already, some early aggregators are beginning to emerge. In 2016, former Cablevision CEO James Dolan and his wife, former cable company chief operating officer Kristin, formed Dolan Family Ventures, an investment company focused on the ad-tech space. Dolan Family Ventures formed data analytics company 605 shortly after its purchase of Analytics Media Group, a New York-based data analytics specialist. The idea behind 605 is to combine AMG’s analytics and technology platform with set-top box data to provide clients with the kind of information that can help them develop targeted, optimized ad campaigns.

Kristin Dolan serves as CEO of 605, overseeing a management team that includes several former AMG and Cablevision ad executives, including former Cablevision Media Sales president Ben Tatta.

As ad buyers, distributors and networks become increasingly frustrated over how ads are sold, targeting will gain traction, Kristin Dolan said in an interview.

“In order to continue selling television advertising, the advertisers and the brands are expecting that they will get the same capability to target people that they have been experiencing on digital for years,” she said. “The time has come.”

And with NBCUniversal committing $1 billion to targeted inventory and consortiums like OpenAP emerging, she added that she sees the light at the end of the targeting tunnel.

“Television advertising is a great medium; [it’s] the best way to reach large audiences,” Dolan said. “Coupled with targeted calls to action, it really allows the brand to be more effective. Hopefully in the next 12 to 18 months, you will see significant increase in utilization to drive the industry forward. Buyers are demanding it, and the sellers like NBC are responding, as are the MVPDs. Everybody seems finally ready to move on this.”

That buyers are finally stepping up to the advanced ad plate is a significant development. In the past, as cable companies and data firms touted their ability to pinpoint homes via set-top box data, buyers have dismissed the technology as not being specific enough. An age-old argument against targeted ads was that just knowing a household buys dog food isn’t enough; advertisers wanted to know who was buying it and what they were watching.

Getting Real
But advances in data have made what was once the Holy Grail of targeted advertising a reality.

“Now you can do that,” One2One Media president Michael Bologna, a 20-year veteran of the advanced advertising business, said. “Media marketers are getting pressure from CMOs, and they are now pushing their buyers and their agencies and they are now changing the conversation.

“Will there be a time when an advertiser will say, ‘I completely don’t care what the program is as long as I know it’s the audience?’ We’re definitely headed down that road in certain ways, but content will always play a factor,” Bologna added. “But now that the advertisers are seeing first hand that they can target these granular segments, and they see that targeting these granular segments is generating sales, they are becoming less focused on ‘I have to be on this particular show at this particular time.’ That’s a really interesting and fulfilling trend.”

Bologna said advanced ad addressability won’t take over the TV ad market — he estimated that when fully deployed, 25% to 35% of an advertiser’s ad budget will go to addressable — but it will balance it.

“No major advertiser is ever going to put 100% of their budget toward addressability,” Bologna said. “If you wait until someone is 40 years old to show them a Mercedes ad when they can afford to buy a Mercedes, you’ve missed them. What addressability will ultimately do, in the long run, is help balance the frequency of messaging to the mass audience versus the very niche audience. And between now and then, every advertiser is going to have their own allocation methodology.”