1 Charlie Dale American University Kogod School of Business MKTG-391 Marketing Internship Spring 2012 White Paper TV Revenue

ue in 21st Century America: How New Technologies like DVRs and Online Streaming Affect Television Advertising INTRODUCTION Television has served as an essential piece of American culture for the better part of the past century. It has been Americans primary medium for receiving news, consuming entertainment, and feeling a sense of connection with the world outside their living rooms. Knowing this, companies quickly realized that the television represented a way to reach potential customers through advertising. The most popular form of this advertising is commercials that air in between different segments of a program. Until recently, watching these commercials was considered a necessary evil if one wanted to watch a television program. The earliest TVs did not come with remote controls so changing the channel during a program meant people had to get up and physically switch the channel on the TV set, which most would consider too much effort just to avoid a few advertisements for 3-5 minutes. The introduction of remote controls made changing channels to avoid ads much easier, but it still did not significantly alter the strategies of advertisers. All that is now changing, however, with the growing popularity of new technologies like Digital Video Recorders (DVRs) and online streaming of television shows. DVRs give viewers the option to fast-forward through commercials of pre-recorded programs, a potential problem for advertisers who are paying broadcasters based on the assumption that a certain percentage of the programs audience will stick around for the commercials. Watching television on computers via online streaming websites like Hulu.com has also become extremely popular, but this

2 practice also presents an issue for advertisers in that people often do not give online ads the same attention they would give regular television ads. This paper will analyze the challenges that television advertisers are facing in the 21st century, particularly in regards to DVRs and online streaming websites. Many argue that these technologies will cause the death of television as we know it, while others attest that advertisers and broadcasters can still be successful so long as they understand and adapt to these changes. I will attempt to include both of these perspectives; however, there are definitely steps that broadcasters can take to bring in revenue from advertising. These recommendations will make up the final part of this paper.

THE DIGITAL VIDEO RECORDER (DVR) AND ITS EFFECT ON TV ADVERTISING An interesting way to begin thinking about the effects of DVRs is to look at predictions from ten years ago about how it would work. In 2003, Randal Picker correctly suggested that DVRs allow viewers to unbundle content and advertising, meaning one can choose to consume content coming from broadcasters without consuming commercials from advertisers.1 He argued that this threatens the basic financing model for ad-supported television. Jamie Kellner, former head of Turner Broadcasting Systems, went even further, describing the commercial-skipping feature of DVRs as theft, arguing, Your contract with the network when you get the show is that youre going to watch the spots. Otherwise you couldnt get the show on an ad-supported basis. Any time you skip a commercialyoure actually stealing the programming.2 This seems to be a rather nave and pessimistic view of the DVR, which is understandable considering the DVR was still in its infancy at the time this assessment was made. To say that skipping
1

Picker, Randal. "The Digital Video Recorder: Unbundling Advertising and Content." The University of Chicago Law Review 71.1 (2004): 205-22. ABI/INFORM. Web. 7 Mar. 2012. 2 Picker

3 commercials is equitable to stealing programming disregards the potential benefits of the unbundling of content and ads, Picker argues. This unbundling allows for personalization of commercials, which in turn may improve the content itself.3 When content and ads are bundled together, ads only reach individuals who are interested in the content the ads are tied to; but DVRs have the ability to subvert this matching process and ensure that ads are seen as meaningful by a larger part of the audience they reach.4 To fully understand the effect that DVRs have on advertisement effectiveness, one should be aware of the five types of television advertisement avoidance methods. The first is zapping, which is the common act of using a remote control to change channels when the program you are watching breaks for commercial. The second is multitasking, which occurs when a viewer does not change the channel during a commercial, but instead diverts his/her attention to something else. These distractions could be another person in the room, other forms of media like a laptop or tablet, or even a telephone conversation. Another method is physical zapping, which is when the viewer physically leaves the room (this is similar to multitasking, but different in that the person must move somewhere else, whereas in multitasking the person may stay in the same room). The fourth type of advertisement avoidance is muting or turning off the television. Some people have a desire to avoid commercials so strong that they are willing to sit in a silent room until the program comes back on. The fifth and final method is zipping, which is fast-forwarding through prerecorded programming. This is the main issue that DVRs present in regards to advertisement avoidance; before the DVR, fast-forwarding through commercials required the use of the now-outdated VCR machines, which were much less user-friendly than the DVR.

3 4

Picker Picker

4 Next, we must address the reasons why viewers want to avoid advertisements in the first place. One main reason is when the viewer has possible substitute activities like conversation or watching other channels, and the viewer finds these activities as more worthy of his/her time than watching a commercial. Another reason is that the ads are not sufficiently creative or visually engaging. Many people attest that they do not like any commercials; but it is fairly easy to prove these people wrong by presenting an ad that they find unique or appealing to their senses. But many ads fail to do this, with the result that many viewers are not engaged and will instead seek to avoid the ads. A third reason why ads are avoided relates to overexposure: if a person has already seen an ad many times and no longer finds value in watching it, he/she will avoid it. Finally, perhaps the most common reason for avoiding ads is that a viewer is not in the market for the advertised product. Many times it does not matter how much production value was put into a commercial: if the consumer has no intention of ever purchasing the advertised product or service, he/she will not usually be interested in buying it. Considering all these factors, many people have concluded that DVRs are bad for advertisers. A 2007 study found that DVR-users zip through 68% of commercials in recorded programming.5 These results are certainly not good news for advertisers whose ads rely on the viewers attention to be effective. It is worth noting, however, that the sample selection in this study is not necessarily accurate: DVR-users do not yet represent the average television watcher (only about 40% of Americans have DVRs)6, and are fundamentally more likely to skip through a commercial than the rest of the viewing population.7 Also, many people argue that DVRs increase total TV consumption, but this claim is not true across the board. A

Wilbur, Kenneth. "HOW THE DIGITAL VIDEO RECORDER (DVR) CHANGES TRADITIONAL TELEVISION ADVERTISING." Journal of Advertising 37.1 (2008): 143-49. ABI/INFORM. Web. 7 Mar. 2012. 6 State of the Media: Consumer Usage Report 2011. Rep. Nielsen, 2012. Web. 28 Apr. 2012. 7 Wilbur

5 JupiterResearch report found that DVRs increase total TV consumption only in households that record and watch a show in the same day or week.8 These findings suggest that the adamant television fans that remain committed to their shows will be the ones to have and use DVRs (and therefore in many cases, skip ads), whereas more fair-weather fans may use DVRs, but wont be watching any more television because of them. So while some networks will try to counteract zipping by increasing total TV consumption, these findings suggest that doing so is not very easy. Despite these negative opinions surrounding the Digital Video Recorder, DVRs have not caused the death of traditional television advertisements just yet. In fact, there are many reasons why advertisers should not be concerned that the DVR will ruin their entire industry. First, while DVRs do increase zipping through commercials, they decrease the other ad avoidance models discussed previously.9 That is to say that most DVR-users would rather watch a show on a slight delay and zip through the commercials than change channels, leave the room, or do something else because these strategies require more effort and carry the risk of not returning to the live program in time.10 In this sense, advertisers can take advantage of the laziness of DVR-users by assuming that they are much more likely to use their remote to zip through ads than get off the couch and take their eyes off the television. Another reason DVRs can be useful for advertisers is that the DVR technology allows networks and advertisers to see which parts of a broadcast were zipped through, providing valuable insight as to which ads are most engaging.11 For instance, DVR company TiVo collects second-by-second data showing how much of an ad is seen by viewers watching TiVo DVRs,

O'Regan, Courtney. "JupiterResearch Estimates DVR Commercial Skipping Could Threaten $8 Billion in TV Advertising." Business Wire (2006): 1. ABI/INFORM. Web. 7 Mar. 2012. 9 Wilbur 10 Wilbur 11 Wilbur

6 either live or timeshifted up to two weeks.12 That way, advertisers learn which of their ads are effective and which are not, and broadcasters learn which companies are producing ads that keep their viewers engaged (people who are engaged during commercials are more likely to remain engaged for the return of the programming). Also, advertisers can use this data to minimize ad wear-out by seeing if/how much zipping through an ad increases as the ad is shown more and more times, and address lack of interest in certain ads by comparing zipping rates across products, programs, and time periods.13 One must also consider the fact that just because an ad is zipped through, that does not mean the ad is completely ineffective. This is due to three main reasons, the first of which is heightened attention.14 People pay more attention to the screen when they are fast-forwarding through ads, because they do not want to overrun into the return of the program.15 This is especially true for instances when the program cuts to a commercial break right after a cliffhanger moment is presented. While these cliffhangers leave the viewer anxiously awaiting the next scene, the viewer will want to view this scene on his/her own terms, not by fastforwarding through the answer to their question and ruining the climactic moment. So because people pay such close attention to the screen while zipping, they may still be positively influenced by brand names, logos, people/characters, and other images being displayed. Zipped ads can also be effective due to latent effects: exposure to an advertisement can still affect your consideration sets even if you do not have specific memories about that ad.16 Even if someone is not consciously aware of whats on the screen, the images may still hold a place in preconscious attention, and may even be called upon later when the consumer is making a decision regarding
12

Bellman, Steven, Anika Schweda, and Duane Varan. "THE RESIDUAL IMPACT OF AVOIDED TELEVISION ADVERTISING." Journal of Advertising 39.1 (2010): 67-81. ABI/INFORM. Web. 7 Mar. 2012. 13 Wilbur 14 Wilbur 15 Wilbur 16 Wilbur

7 that product category. Finally, the effect of time compression in zipped ads may also render them at least marginally effective. Numerous studies have found that the compression of an ad into a smaller time period increases television commercial liking and that high-speed exposure to these commercials boosts prior learning about the brand.17 This concept is the same idea present in radio ads that feature speaking very quickly, except that the compressed TV ads have the visual component but not audio, whereas radio ads have the audio component but not visual.18 The final reason that the DVR has not caused the death of traditional TV advertisements yet is that many programs such as sporting events and reality competition shows focus on the need for viewers to watch the live broadcast rather than record it and watch later (and obviously, when you watch live, you cant skip zip through the commercials). While many avid sports fans will want to watch a game in its entirety because they enjoy seeing the athletes play, the 24-hour news cycle of todays world makes it very difficult for people to avoid hearing the results of a game through social media, the TV news, the radio, or even from friends or family. And if a person does not want the suspense of the games outcome to be lost, he/she will most likely choose to watch the game (and therefore, the ads) live. Reality competition shows like American Idol or The Voice are also better when viewed live because they encourage heavy social media interaction throughout the broadcast and also invite viewers to vote for their favorite contestants before the next nights results show. This sort of interaction creates a deeper connection between programs and its viewers, because people will want to watch something while the rest of the world is watching it so that they can engage in conversations about it.

17 18

Wilbur Wilbur

8 ONLINE STREAMING SITES & THEIR EFFECT ON TELEVISION ADVERTISING The other major emerging technology threatening the existing television advertising model is online streaming of television shows. Many Americans find it cheaper or more convenient (or both) to watch their shows on their computers rather than on television; this is worrisome for advertisers and broadcasters who are used to their viewers watching ads in front of their televisions. These streaming services can come in the form of independent websites like Netflix or Hulu, or from the broadcasters directly, as many networks like CBS and NBC will put full episodes of their shows online after their initial airing. In a recent report entitled The Battle for the North American Couch Potato: Online & Traditional TV and Movie Distribution, the Convergence Consulting Group estimates that between 2008 and 2011, 2.65 million Americans2.6% of the nations total populationended their pay-TV subscriptions and replaced them with online streaming services such as Netflix.19 Most analysts suggest that this trend is only going to continue. In 2011, about 18% of U.S. broadcast specialty network viewers watched between one and two shows online per week, a figure that is up from 16% in 2010.20 Despite this seemingly bad news for advertisers, the report did suggest that at least some advertisers and broadcasters are successful at adapting to this new medium, as online TV networks ad revenue is expected to increase by 3% in 2012.21 There are a few reasons why websites like Hulu are cause for concern for advertisers and broadcasters. The most obvious reason is the fact that many of these sites are free for users. So as long as someone has a computer and pays for Internet accesswhich roughly 87% of Americans already dohe/she can watch episodes of most recent shows online. 22 In fact, many people

19

Skelton, Alissa. "Millions of Americans Cut the TV Cord [STUDY]." Mashable. 04 Apr. 2012. Web. 05 Apr. 2012. <http://mashable.com/2012/04/04/cut-the-tv-cord/>. 20 Skelton 21 Skelton 22 Pensky, Nathan. "Twice as Many Americans Have Internet Access since 2000."VatorNews. 24 Feb. 2012. Web. 28 Apr. 2012.

9 (especially college students) choose to forgo paying for cable altogether, and instead just watch all their shows online. Another reason comes in the sheer lack of commercials presented during online streaming broadcasts compared to traditional television broadcasts. A typical 30-minute broadcast on most online streaming sites will have viewers watching 1-2 minutes of commercials every 8 minutes or so, whereas a standard TV broadcast has commercial breaks may come slightly less frequently, but are usually 4-5 minutes in duration. So in general terms, the fewer the amount of ads displayed during a broadcast, the fewer chances an advertiser has to expose their product to a consumer. Aside from the lower quantity of ads displayed, some advertisers worry about lack of control of which ads are displayed. Some online streaming sites place smaller ads around the video player, but these ads sometimes are not determined by the shows network, but by the external website.23 So while the website may be bringing in revenue for those ads, the broadcaster is not, which is where the true threat to the survival of television lies. Despite these reasons why online streaming can be seen as a threat to the basic television revenue model, there are many who suggest otherwise. Hulu has consistently downplayed talks that it encourages consumers to turn on their computers rather than their televisions, arguing that the site does not seek to be a replacement to television, so cable networks should stop worrying.24 The Convergence Online study found that in 2011, online TV ad revenue was $1.9 billion, but that is still only 2.8% of total U.S. Broadcast/Cable TV ad revenue.25 That percentage is certainly going to continue to risethe Convergence Online study predicted it would climb to 3% in 2012but at the end of the day, online TV ad revenue represents only a very small piece
23

O'Reilly, Lara. "Broadcaster Fears of Lost Control Put Web-TV on Pause." Marketing Week 22 Sept. 2011: 1-7. ABI/INFORM. Web. 7 Mar. 2012. 24 Learmonth, Michael. "Maybe Hulu Really Wants to Take over the (TV) World."Advertising Age 8 June 2009: 12. ABI/INFORM. Web. 7 Mar. 2012. 25 The Battle for the North American (US/Canada) Couch Potato: Online & Traditional TV and Movie Distribution. Rep. Toronto: Convergence Consulting Group Limited, 2012. Print.

10 of the pie.26 Also, networks can charge a higher price from advertisers because people go on sites like Hulu looking for a specific program.27 For example, in 2010 it cost advertisers sixty dollars per thousand viewers to advertise on Hulu or TV.com for spots within an episode of The Simpsons; the same advertisement would cost between twenty and forty dollars on standard TV.28 This higher cost is worth it for most advertisers, as they end up reaching the audience number that they were guaranteed.29 There are also some more practical reasons why online streaming does not pose a huge threat to standard television. A lot of people simply prefer to watch shows on their televisions than on the computer. A January 2012 study by Leightman Research Group found that 69% of households in the U.S. have at least one high definition television set (up from 17% in 2006).30 That trend suggests that Americans are still shelling out plenty of money to make sure they have a television that provides them with a quality viewing experience. So when people are spending money to buy big-screen HDTVs, they are probably not going to watch a show on a small computer screen. Another reason why online streaming is not the end of the world for advertisers is the targeting technology that can be used to make observations about users of these sites. During the start of the Internet boom, online ads were all the rage but then plummeted due to trivial amounts of revenue per click.31 Since then, advertisers have become more adept at creating online ads that are nonintrusive yet still measurable in effect.32 Larry Goldman attests that marketers need to

26

The Battle for the North American (US/Canada) Couch Potato: Online & Traditional TV and Movie Distribution. DeBray, Blake E., and Mustafa Kamal. "Customer Focused Advertising Through Server Based Broadcast." Journal of Business & Economics Research 9.1 (2011): 71-77.ABI/INFORM. Web. 7 Mar. 2012. 28 DeBray 29 DeBray 30 "Study: 69 Percent of US Homes Have HDTVs." Light Reading Cable. LR Cable News Wire Feed, 04 Jan. 2012. Web. 20 Apr. 2012. 31 Goldman, Larry. "Ads Are Back." Information Management 16.6 (2006): 18.ABI/INFORM. Web. 7 Mar. 2012. 32 Goldman
27

11 create databases that hold five types of information: 1) impressions or the number of times and advertisement is shown, 2) who the advertisement is shown to, 3) the clickthrough, including what site the click was initiated from, 4) the conversion after the clickthrough (did the consumer perform the requested activity like buying something, reading something, or registering for an activity), and 5) the context of what the user was doing when the ad was triggered.33 In order to capture this final element, advertisers can take advantage of new technologies. Tracking software such as DoubleClick helps organizations understand what ads are being displayed, and targeting software such as TACODA helps marketing organizations track browsing behavior, allowing them to create business rules regarding when to show particular advertisements.34

SUGGESTIONS FOR MOVING FORWARD Moving forward, there are certain strategies that both advertisers and the broadcasters relying on their money must follow in order to remain successful amidst these new technologies like DVRs and online streaming sites. Saul Berman suggests that there are three key principles for companies to consider: focus on the experience, embrace new distribution platforms, and expand their revenue models.35 In order to create an increased focus on the experience, advertisers must be more creative and seek innovative ways to advertise their product throughout the television consumption experience itself. Product placement, if used effectively, can be a fantastic way to make sure that your product is being exposed to the consumer in a positive manner. Most television viewers can attest that there are many instances of ineffective product placement in which advertisers try to

33 34

Goldman Goldman 35 Berman, Saul J., Bill Battino, and Karen Feldman. "New Business Models for Emerging Media and Entertainment Revenue Opportunities." Strategy & Leadership 39.3 (2011): 44-53. ABI/INFORM. Web. 7 Mar. 2012.

12 shamelessly thrust the product into the viewers face without developing any true coordination between the ad and the rest of the show. But if advertisers come up with creative ways to integrate a product into the show without being blatantly obvious, the consumer will often have very positive recollections about their brand. The television consumption experience should also be made to be more social, because a more social experience means viewers will feel a higher pressure to watch a show live rather than use a DVR. Networks can encourage their viewers to be social in physical terms by making the broadcast seem like an event that is best enjoyed with other people in the room, but can also encouraged viewers to get social online through engagement on blogs and social networking sites like Facebook and Twitter. Finally, the consumption experience can be enhanced through the use of data collection technologies previously discussed. Present viewers with options and then use their responses to improve ad development and distribution. Hulu even asks Is this ad relevant to you? during each ad shown; using a viewers yes or no response helps the site know which ads are most likely to generate a viewer response, and therefore which types of ads should be shown subsequently. Advertisers and broadcasters must also embrace all new distribution platforms if they wish to be successful. Obviously it would be easy if consumers kept watching TV and ads while sitting on the couch in their living roomand steps can be taken to try to maximize the amount of people that do actually do thisbut whether companies like it or not, Americans are consuming their TV programming on an increasing number of devices. The successful companies will be the ones that embrace this trend rather than try to mitigate it. These devices can include smartphones, PCs, gaming consoles, tablets, e-readers, mobile music players anything that has a screen and can be connected to cable or the Internet.36 Networks need not prevent their shows from being watched on devices like the iPad, but rather make sure that
36

Berman

13 creative, engaging, and relevant advertisements are also being shown on these devices. Yet these ads should not be presented in the standard form of multiple 30-second spots being shown backto-back-to-back, because doing so takes away the viewers incentive for using these devices. Most consumers use these devices to get away from all the commercials they find on television, so networks should not risk frustrating their viewers and potentially losing them to other broadcasters who do not present as many commercials. In addition, networks should embrace the fact that many of their viewers use two or more of these devices concurrently.37 NBC found that a significant number of viewers used two or more screens during its presentation of the Olympics.38 When this occurred, ad recall increased, because NBC was able to successfully create a more engaging and interactive experience across the different devices. 39 Success stories like these should serve as a model for all networks moving forward. Finally, Berman suggests that networks must evolve beyond a one size fits all revenue model, and instead offer the relevancy, choice, integration, and packaging options that consumers demand.40 These models need to appeal to the digital consumer and focus on consumer-centric marketing tactics.41 In the paid media category, contextual marketing makes messages and content more relevant to consumers and creates deeper integration between content and advertising messages. In the owned media category, branded applicationsprimarily used for mobile devicesenhance the value of a brand through immersive experiences and relationships directly with the consumer.42 In the earned media category, social networking

37 38

Berman Berman 39 Berman 40 Berman 41 Berman 42 Berman

14 focuses on profiling audiences, targeting social influencers, and becoming a popular topic of conversation among a target market.43 Through the implementation of these strategies, both broadcasters and advertisers can navigate the increasingly complicated television revenue landscape. The key is also to remember to remain flexible with emerging technologies: it is very likely that DVRs and online streaming sites will be updated or replaced within the next decade, so companies should always be looking for creative, innovative ways to stay relevant.

43

Berman