Ads on Digital Set-Tops: Lessons from the Net

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After years of false starts, it now appears certain that
the digital-television age is at hand. It will be "official" with the widespread
deployment in 1999 of second-generation OpenCable digital set-top boxes, which are
considered by computer- and communications-industry observers to be the hot new
information appliances for the next millennium.

Along with the realization that there is huge potential in
these new boxes is the inevitable question of which application(s) will fuel their
adoption by consumers. There is a growing recognition in the cable industry -- most
eloquently stated by John C. Malone, chairman and CEO of Tele-Communications Inc. -- that
advertising and e-commerce will be extremely important to the development of the digital
platform. Some are even speculating that digital-TV advertising may be the digital set-top
box's elusive "killer application."

An advertising-driven model is, of course, a whole new
experience for cable operators, as consumer subscriptions have traditionally comprised
more than 85 percent of their revenues, and advertising less than 8 percent. On the other
hand, this model has some real advantages. As a former senior marketing executive at a
top-five MSO, I know only too well that there are limits to the amounts that consumers
will pay for entertainment and information services. Advertising represents a
"stealth" revenue source, which the consumer doesn't see directly on his or
her bill.

ADVERTISING ON THE INTERNET

Unlike cable, the Internet started out as an advertising-
and e-commerce-driven business. Only a few sites require subscription, and everyone's
business model for the Web is predicated on advertising and transactions. Mainstream
advertisers like Procter & Gamble Co. are taking a hard look at Internet-advertising
opportunities, including banners, sponsorships, interstitials and sweepstakes.

Interactivity is, of course, the heart and soul of the
Internet; it is a click-through medium. Yet it is not interactivity, per se, that will
drive Web advertising. Until recently, statistics showed that an average of only 2 percent
of Internet users clicked on any given banner for more information. Net Ratings Inc.
recently reported that this number has now dropped to 1 percent. In fact, what really
"spins Web marketers' wheels" is not interactivity, but the ability to
target messages to users through cookies, which track the individual's use of the
Net.

IMPLICATIONS FOR DIGITAL TELEVISION

Because of the interactive nature of the digital set-top
box and the apparent parallels to the Internet, many assume that interactive click-through
applications will be the most important advertising medium on the box. These applications
are typified by "click on remote," where the consumer clicks on an ad to get
more information on a product. The example that is often used is clicking on a 30-second
automobile ad to get a brochure describing the vehicle. While interactivity will play a
role in digital set-top advertising, there are a number of reasons why it may not be a
dominant one.

The main reason: It requires consumer action.We all
know about the United States consumer's couch-potato behavior. Is he or she really
going to click on ads in large numbers when the novelty of "click on remote"
wears off? If Internet users only click on ads 1 percent of the time, it is reasonable to
predict that TV viewers -- in an inherently less interactive medium -- will do it even
less frequently.

Click-through only makes sense for certain product
categories. The example of a car company soliciting test drivers is often cited, but a
majority of product categories like cereal, fast food and soap will not benefit from
click-through.

Consumers may view it as another unwanted form of
advertising. The last thing that consumers say they want is more advertising. New ads, in
the form of buttons and banners on their TV screens, may be a real turnoff.

Cable networks and operators risk an overreliance on direct
marketing. Television is a great medium for creating and enhancing brand image. It is sold
on a cost-per-thousand-homes (CPM) basis because of its unique ability to create
impressions with viewers. If cable is sold extensively as a direct-response medium,
traditional CPMs may suffer.

Advertisers must develop new creative for interactive
advertising. Advertisers spend tens of millions of dollars on creating commercials for
television. While agencies are certainly willing to create new ads for interactive media,
such as the Internet, a bigger payoff comes from making their existing investment in TV
commercials more effective.

WHAT, IF NOT CLICK-THROUGH?

If interactive-advertising applications are not the Holy
Grail, what is? I believe that there are a number of advertising applications that are
enabled by the digital set-top platform and that will thrive in the digital-television
environment, including:

Addressable Advertising: The ability to target
television commercials to specific homes.

Requested Notification: Providing information to
consumers on products that they are most interested in.

Spotcasting: Filling the time that it takes to change
digital channels with ads.

Pop-Up Ads: Presenting information interstitially, a la
America Online Inc.

Viewers already interact extensively with their remotes,
and the digital box will enhance the interactive-TV experience by providing a much richer
variety of things to click to. Similar to the Internet, interactivity will occur most
often within television content (click for the scores of other games, the latest local
weather, etc.) and for direct purchases (e-commerce) in a shopping environment. The types
of consumer transactions that are popular on the Net, like travel and financial services,
will thrive on television. But viewers will click on banner-like ads infrequently while
watching TV programs.

On the other hand, technology that helps advertisers to
target their best prospects, to track their behavior and to make existing advertising more
effective will be extremely powerful. Targeting based on user "cookies" is an
important component of Internet advertising, but television -- with its large audiences
and powerful video messages -- has the opportunity to do it even better.

Addressable television advertising, in my opinion,
represents a huge revenue stream for cable operators and for cable and broadcast networks.
John Wanamaker reportedly said: "I know that one-half of my TV advertising is wasted;
I just don't know which half." Through its ability to direct commercials to
homes with desired characteristics, addressable advertising enables the television
advertiser to target his or her commercials to the "right" half.

To summarize, the benefits offered by the digital set-top
box to advertisers are not only about interactivity. Other capabilities -- particularly
the ability to target specific homes with television messages and to track viewing
behavior -- will ultimately prove to be more valuable to marketers. As a consequence, it
will be these advertising methodologies that will hasten the arrival of the
digital-television age.

Frederick C. (Ted) Livingston is a business-development
executive specializing in bringing innovative applications and content to the cable-modem
and digital set-top platforms. He is the former senior vice president, marketing for
Continental Cablevision Inc.

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