The Business: The $14 Billion Opportunity
For more than a decade, big thinkers have championed the idea of Advanced Advertising (AA) on television. AA promises to deliver “interactive” messages that engage consumers based on viewer behavior with hyper-targeted commercials. Think Google ads, but on TV. After years of unfulfilled potential, the U.S. television industry finally appears to be on the cusp of transforming AA into meaningful reality.
In our view, several dynamics will promote AA development during the next 12-24 months, including:
• An installed base of about 91 million digital TV subscribers;
• Heightened distributor focus on new sources of growth, especially with a combined Comcast/NBC Universal entering the fold
• Success in local cable deployment of AA, in particular with Cablevision
• A growing national interactive footprint
• A pending national launch of interactive television on cable
• A planned launch to about 19.5 million satellite homes in 2011
• Robust growth in the dynamic ad insertion VOD footprint
Although much work and execution risk remain, momentum in AA can yield substantial reward. Our preliminary model suggests AA could unlock a $14 billion opportunity for the television advertising market during the next five years, accelerating TV’s mid-single-digit growth trajectory and increasing its share of total media ad dollars toward the 40%-43% range (vs. 33 percent today).
Who Wins and Loses
AA touches numerous participants in the TV advertising ecosystem, from the long-established broadcast networks and major advertising agencies to newer entities such as cable networks and pay TV distributors, as well as a vibrant mix of young technology and service-related firms. Winners and losers in the new $14 billion market will be driven by ownership and enablement of the 30-second spot on television.
Due to their vast control of pay TV spots, national cable networks, as well as satellite, telecom and cable systems, are well-positioned to capture the bulk of AA dollars. Agencies and technology enablers embracing the shift also will participate in the upside presented by this market. We view direct marketing and traditional, nondirect media such as newspapers and radio as losers, representing a potential pool of roughly $65 billion in ad revenue that could shift toward AA.
Targeting New Demand
AA has the ability to bring new advertisers to TV by growing the total pie. The ad verticals that will be most likely to utilize AA are industries with a high “lifetime value” of subscriber -- which includes four of the top five verticals in automotive, media, communications and financial -- and those that already commit dollars to direct-response advertising. To make the medium attractive to brand-focused advertisers, AA must enhance the value of the 30-second spot.
Benefits and Risks
As with any new business model, there is a fine line between opportunity and
risk. Key benefits of the AA model include:
• A powerful combination of TV’s reach with direct advertising’s targeting, down to the household level
• An expansion of the TV-advertising pie via CPM premiums and new revenue streams
• Improved data measurement and postcampaign analytics
• A probable emergence of new inventory-management models
Conversely, the key challenges for success in AA are:
• Winning buy-in from guarded parties on a new model with a new currency
• Privacy concerns
• Achieving scale
• Programmer fear of inventory disaggregation.
Jessica Reif Cohen is senior media and entertainment analyst at B of A Merrill Lynch Global Research.