It's an Interconnected World, After All

When it comes to media-buying power, local cable always seems to take a backseat to broadcast and network cable. It may not be "always" much longer.

In a five-year effort, major cable systems are cooperating across corporate lines to create media-buying networks called "interconnects."

With the potential for billions of dollars in local advertising revenue at stake, these networks are growing dramatically. Seventy-six interconnects already exist in the top 100 markets, with 11 more set to launch by the end of the year.

For cable operators, interconnects are crucial to selling entire marketplaces instead of single systems. And much is at stake. In 2004, cable sales should top $5.3 billion. Ten years ago, that figure was $1.4 billion.

An interconnect is easy to explain but difficult to execute. Generally, an interconnect involves two or more cable systems distributing a commercial signal simultaneously. For example, half of the customers in a city might watch a program on one system, while the other half see it via a second cable operator. In an interconnect, they will see the same commercial. It's simple, in a way, but also very complex.

Interconnects shifted into high gear when Comcast, Cox, and Time Warner teamed up to consolidate sales efforts through a consortium called National Cable Communications (NCC).

"We've been working on setting up interconnects for the better part of two or three years," notes Jim Heneghan, senior vice president of ad sales for Charter Media. "It's only gotten play in the last year or so because Comcast has moved into some other markets."

Regardless, Heneghan says all cable operators have something in common: making the most of their cable footprint.

"Basically, we wanted to grow profits," says Steve Feingold, group vice president for Comcast, East. "There's a tremendous amount of viewership on cable, and building interconnects was critical toward our ability to take our viewership and make that available to regional and national advertisers who had historically been buying broadcast television."

But there is a kind of gamble involved, cable operators acknowledge. In order to reap ad dollars from interconnects, cable companies had to overcome deep-seated rivalries. But they quickly realized the potential of their investment.

"The cable companies figured out they had to cooperate with one another in order to make money, because the revenue stream they had with subscriptions was starting to reach a saturation point," says Jean Pool, executive vice president and chief operating officer, Universal-McCann North America.

"So the question became: How do we keep growing? The answer was advertising," Pool says. "So you had the Time Warners and the Adelphias and the Comcasts sitting around a table and swapping markets."

The jury is still out on whether the interconnects will pay off substantially or incrementally for the cable operators. Many are groping for criteria that will evaluate whether the entire enterprise has been worth it.

"For us, we have to beat the revenue number that we achieved in the previous two years in order to feel that this is working," says Heneghan. "We have to beat the increase that we got in 2002 and 2003. We will have to beat that this year in order to feel that this is successful."

For the most part, though, most operators say interconnects are a no-lose proposition.

"Interconnects are inherently successful," Feingold says. "The different measure of success is the growth rates compared to those of broadcast television. And we're growing at a much higher level, in terms of the share of the marketplace. Our commitment to interconnects is beyond just pure infrastructure."

The imbalance in penetration of most local markets, where one cable operator is the predominant player amid one or two lesser operators, made it easy for cable companies to combine efforts.

"For example, we realized that we only had 30% of the Nashville DMA," Charter's Henegan says. "Comcast had close to 70% there. So we decided to go ahead and allow them to sell the entire market. There were no Charter media people in the market at all. That way, [Comcast] could sell the market, and we have a guarantee that they have to make at least as much money, plus a percentage of our budget increase for 2004. It was the easiest way for us to say to a client, 'I can do better than newspaper, radio, and the local affiliates.'"

The nature of cable delivery helped alleviate the traditional rivalries between cable systems.

"There weren't any major issues from a competitive viewpoint because their wire only went to their distribution stream and my wire went to mine," Heneghan says.

He acknowledges that there was some competition for clients along the border of operators' footprints. "But that paled in comparison with all the money that NBC, ABC, and Fox had been getting because the cable companies couldn't get their acts together."

By burying the hatchet, cable operators are looking to compete for broadcast clientele. "The industry has literally invested billions of capital to create interconnection capabilities so that advertising agencies and their clients are served more effectively," says Ken Little, executive vice president, operations and technology for NCC.

The current goal of cable companies for interconnects is to make them even more efficient. One initiative involves the creation of uniform standards.

"We have standards internally, and I think the industry is evolving to those standards," Comcast's Feingold says. "Really, as a practical matter, they are: one tape, one contract, and one invoice. We're working with NCC on electronic invoicing, and we're working with the Cabletelevision Advertising Bureau to make that the industry standard by the end of the year."

Electronic invoicing is another major benefit cited by cable operators and media buyers as part of the interconnect movement.

NCC's use of "syscodes" helps streamline the process. Created by Assigned Media Systems, syscodes are four-digit identification numbers assigned to commercials, NCC's 2,850 cable systems, and even the interconnects themselves.

To illustrate the ease that syscodes have created for MSOs and media agencies, consider Los Angeles. That market is composed of 76 syscodes that identify the various parts of the market.

The sheer number of syscodes can be somewhat unwieldy for media buyers, so one syscode is used to identify the entire market. In other words, it serves as a "parent" to the smaller ones, says NCC's Little.

"With the interconnect, an agency is able to access an entire market with one syscode, with the added benefit of only having to make one call to an ad-sales manager," Little says. "The beauty is, it's much more cost-effective for an agency to reach those markets through a single syscode. What NCC provides is, we've created syscodes for all cable systems and it is a universal currency that agencies use."

While media buyers recognize the effort to make spot cable a better buy, they point out that local cable lacks the value of competing ad platforms, on a cost-per-thousand basis (CPM).

"Comcast and the others are doing a terrific job in setting up interconnects," says Kathy Crawford, president of MindShare's local broadcast group. She acknowledges that buying an entire marketplace—rather than a single system—is an appealing concept.

"But a CPM is still a CPM," Crawford says. "It doesn't matter, interconnect or not. As a result of that, unless they're going to be competitive on pricing, it doesn't matter."

Still, cable operators believe that the creation of interconnects will help offset concerns about pricing when local cable television is viewed as an important part of the TV universe.

"The industry as a whole has embraced the idea that creating an interconnect in standalone markets helps facilitate the concept of trying to make the interaction between us and agencies as customer-friendly as possible," says Billy Farina, senior vice president for advertising sales, Cox Communications.

Ultimately, interconnects could help eliminate the fundamental differences between broadcast and cable television, while reaching entire markets with a single message.

Says Farina, "It's another step in the journey of positioning our product as pure television."