VOD’s Next Critical Step

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There is a view by some in the cable industry that making VOD an advertising platform is crucial to the industry’s growth — not a “nice to have,” but an essential element. And by advertising, we don’t mean today’s long-form advertising experiments that could grow into tidy revenue streams someday. And we don’t mean the nifty direct-response, get-a-coupon, maybe even buy-a-product business that might inevitably develop.

No, what this view holds is that a “big fat” VOD platform with thousands of hours of what is traditionally known as advertising-based programming is critical to cable’s future because it will protect the increasingly in-play video business that is being eroded by satellite.

NOT A ME-TOO OFFER

Here’s the thinking. Cable does not want to compete, one-on-one, with satellite on the DVR front. And it doesn’t want to compete, one-on-one, on the HDTV front, because cable’s local HD broadcast-channel edge won’t last long given DirecTV’s plans to launch local-into-local HD next year.

No, the only video answer, for the foreseeable future, is VOD. And to make VOD really work and just blow people away, cable needs the best content available on TV today. That means all the hit network shows, whether they are on broadcast or cable. And to get that, cable needs measurement statistics that agencies and advertisers can live with.

Now typically, Madison Avenue makes new technologies take a number at the end of the line for advertising revenue. Maybe advertisers will spend a few million on experiments, but typically, new technologies have long gestation periods they have to suffer through, a history with which cable is quite familiar.

But VOD just may be different. First, advertisers and agencies are worried about audience erosion. Some erosion is part of the natural evolution of television as cable ratings streak upwards. But advertisers also are worried about the generational shift to digital video recorders and what adding fast-forwarding and skipping to the viewing experience really means.

Worse, media buyers, who are actually some of cable’s best friends in this picture, are also worried about DVRs. If Coca-Cola Co. cuts its TV advertising budget by 20% and spends it on, God forbid, direct mail, the media buyer makes 20% less money. It’s in the media buyer’s vested interest to find an alternative for eyeballs lost in the DVR era.

Those media buyers have a number of choices. The initial go-to choice today is actually the Internet. The Internet Advertising Bureau pegs Internet ad spending in the $10-billion-a-year neighborhood. The Googles and Yahoos of the world are flush with ad dollars, dollars that used to be spent on television. And broadband video sites are increasingly getting attention from media buyers and advertisers.

Sure, cable has broadband connections, but how does the MSO benefit if advertisers are on ESPN’s or MTV’s broadband site?

VOD is a different animal. VOD provides a way for content providers to minimize the problems associated with DVRs. Consumers may be able to fast forward through VOD commercials, but at the moment, they can’t completely skip them. Cable operators are hard at work gathering performance metrics for VOD. It’s not perfect, but it’s getting there.

It’s entirely conceivable that by next year, MSOs will be able to give to programmers, advertisers and media buyers the aggregate data on who watched how much of any program or the commercials in those programs, as well as information on the points within programs and commercials where viewers fast-forwarded. Once those metrics are known, the parties can work on a new advertising formula, and ad money can start flowing to VOD.

MSOs that aren’t in this game might wonder: Why work so hard? Especially on an advertising play that that doesn’t have the proven ROI of basic cable, voice or data?

EXPLOIT PLATFORM

The answer is that cable is now part of a bigger media and telecommunications world. Operators extol all the time how their platform is better than anyone else’s platform. That’s true, if you use it to the fullest extent possible, extending it in areas historically foreign to your operations.

To cut to the chase, cable needs a vibrant VOD offering, scaled across the country, to battle satellite. A vibrant VOD offering requires the best of television. The best of television requires viewing metrics that can be pitched to the advertising community, not to mention dynamic ad insertion. The advertising community will respond to this new platform if it sees familiar metrics and it can place ads in VOD on the fly. Those ad dollars, in aggregate, can help “free” VOD remain “free.” If that happens, say in the next two years, DBS can’t touch it, and the telcos won’t have the scale to compete. And cable, will have a whole new ad category to itself.

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