How Can Advertising Supported Television Continue If Increasing Numbers of Viewers Skip the Ads?
It Can’t, So Get Ready for a Television Advertising Revolution.

Philip Stone April 18, 2005

Since so many of us now have, or are getting, the technological means to skip TV ads, and advertisers know what we are doing, then what future is there for the traditional free television model financed by advertising? The answer from some of the biggest names in television is basically, “We have to rethink the way we sell advertising”. And quickly.

And that is exactly what is happening. Witness, for instance, the huge increase in television product placements. Also, since some cable and satellite services already use interactivity look for that to be expanded to ads, too. And technology is being worked on so, with your co-operation, only the ads on subjects you want to see are delivered to your home. But why such sudden changes to a system that has served the industry well for so many years?

It started with the fast forward on video recorders – we would just skip through the ads – but now with digital video recorders (DVRs) in US homes skipping some 70% of all advertising, and the number of those recorders expected to increase five fold within five years – there is real concern today in the executive suites of television networks and independent stations around the world. 

“When we put six to eight 30-second commercials back to back, we put up a sign saying, ‘Go away now,’” according to Peter Chermin, News Corp’s president and chief operating officer.

He and other US television bigwigs participated on a panel at the recent US National Cable & Telecommunications Association annual meeting and what they had to say sent chills down the spines of those attending. They were united in their view that digital video recorders already has a profound affect on their business and the usage growth forecasts means that traditional TV advertising models that have served the industry well for the past 50 years cannot be sustained.

DVRs, also known as digital video recorders, are high capacity hard drive units embedded in a set top that records video programming from a television. Software operated, users can manage a variety of special applications including most particularly skipping ads.  TIVo first introduced DVRs in the US in 1999.

Chernin says one way to stop the ad skipping is to provide more live programming that viewers want to watch when it is transmitted rather than record. That includes news, sports, and reality programming.  He predicts the rates for live events will sell at a premium.

He also said the television industry needs to get more into the video-on-demand business and DVDs. And he thinks television must get more into product integration – selling not just the advertising time but include those products where possible within the programming.

Bob Wright, NBC Universal’s chairman and CEO, said that television must either encourage people to watch commercial sponsored programming, or television has to come up with a way to make people pay for what they watch. NBC Universal is also into product placement in a big way, having signed already a $200 million deal with Volkswagen. He made clear he was not a big DVR fan.

Bob Iger, who later this year replaces Michael Eisner as CEO at Disney owner of the US ABC network, noted that Disney itself has held off investing more in traditional television.  He said it is “fragile and vulnerable business in a world that is changing dramatically through technology.”

Just a week after they spoke the global research firm Accenture produced a report that basically told the industry things were already much worse than thought. According to Accenture, DVR users are skipping 70% of ads and it predicted the situation would only grow worse since the current 8% of US homes which now has a DVR is forecast to grow to 40% by 2009.

But what was really scary was the price tag that Accenture put on all this. It said that because of the ad skipping TV advertising revenues will grow by only 3% in the next four years rather than the 6 – 10% forecast by others who did not take DVRs into consideration.  With US TV advertising revenue in 2004 put at $60 billion, that means, according to Accenture, those DVRs will cost the industry some $27 billion in lost growth in the next five years.

And while this may seem to be just a US problem for now, whatever happens there will have its effects felt globally.

Ironically, the very technology that is causing so much consternation to the networks is also working on the solution. Plans are afoot for advertisers to be able to target their TV messages much like direct mail. If the DVR user cooperates in saying what the household is interested in then those households that want to know about travel, for instance, will get travel ads while those that have absolutely no interest in feminine hygiene ads will never see those.

But TIVo has just launched a twist of its own. Recognizing that the fast forward button is used so much to skip ads, its new fast forward tag now places a fleeting advertisement on the bottom of the television screen as fast forward is pressed!