Backchannelmedia

Response TV, October 1, 2003

Response Magazine’s Eighth Annual State of the Industry Report

By Thomas Haire

Heading into 2004, direct response television (DRTV) continues to baffle its critics by maintaining near industry-wide health. The industry remains on the verge of a series of revolutionary changes that will build its profitability as well as the reputation of its leaders. For decades, DRTV has been a strong niche in the advertising world, selling many successful goods and services via infomercials and short-form spots. Now, as traditional brand marketers begin to look even harder for ways to quantify success, and as interactive television (ITV) technology begins to enter American households, DRTV advertisers hold the answers these groups are looking for in trying to reach the widest audience.

Response asked members of its Editorial Advisory Board to analyze current trends and make predictions about the future of the DRTV space. Their thoughts represent a cross section of the industry: from DRTV legends to ITV experts; from the international perspective to that of Middle America. According to these leaders, this is the state of our industry.

What was the most significant accomplishment in the past year for the DRTV industry?

Hal Altman, Motivational Fulfillment & Packaging Services: I believe the renewed efforts of the Federal Trade Commission (FTC) in monitoring and, in some cases, closing down companies and campaigns that made outrageous claims and promises. The DR industry is being watched now more than ever, and it is our responsibility to clean up our act if we are to grow or even continue to exist.

Rick Petry, Euro RSCG Tyee MCM: It's the fact that, in spite of intensive government regulatory scrutiny, an anemic economy, threats of terrorism and disease, and a major war among other potentially limiting factors, the DRTV industry not only survived--it thrived!

Bob Greenstone, Permission Interactive Inc.: Adjusting to the more demanding regulatory climate. Federal agencies such as the FTC and Food & Drug Administration (FDA) and many state attorneys general finally put their collective feet down about product claims. The industry has finally adjusted, and things are better now both for consumers and in the long run for our industry.

Tim Hawthorne, Hawthorne Direct Inc.: The FTC's action against electronic ab belts, Super Blue Stuff, the Q-Ray magnetic bracelet, Coral Calcium, Ener-X male virility tablets, Bloussant breast enhancer and D-Snore. Our industry will never gain the respect it deserves unless unsubstantiated products are quickly removed from the airwaves. The FTC still needs to improve its speed at taking necessary action.

How are the FTC and Federal Communications Commission (FCC) rule changes on telemarketing and faxing affecting your business? Do you support expanded regulation in the face of apparently ineffectual self-regulation efforts in the industry?

Michael Medico, E&M Advertising: While our agency does not get involved with outbound telemarketing and faxing, we believe that the decrease in back-end revenues from these sources will impact gross margins and that will mean less to spend, per response, on media. I can't support more government interference, as it tends to paint all companies with the same broad stroke.

Jake Weisbarth, Content=Commerce: They have no effect on my business. I welcome solid protection for the consumer.

Hawthorne: The power of DRTV still rests on securing "up-front" customer orders or interest, which is not affected by new regulations. The Electronic Retailing Association (ERA) has a new initiative to strengthen self-regulation, which is much needed to more rapidly meet the reputation-damaging challenges of unsubstantiated DRTV products on air. If the ERA can't do it, I welcome even more intervention by the FTC.

Petry: The changes in telemarketing are limiting some outbound programs. The fax limitation is not relevant, because we don't employ it in our client's programs. I do not support expanded regulation simply because I believe the governing principle for consumers should be caveat emptor.

Can self-regulation work? Do you believe the ERA has positioned itself properly to lead on this issue? If not, why not?

David Savage, American Telecast: Self-regulation for our industry can only work to the extent that our peers are willing to market products in a fair and legal manner. I believe the ERA staff is willing to lead on this issue, but I'm afraid they are limited by what they can do when members of their own board and association seem content to push the envelope, and in some cases, go over the line.

Richard Stacey, Northern Response Intl. Ltd.: Self-regulation can work if there are clear procedures in place to report suspected violations and conduct proper investigations. You can't self-regulate if there is no system in place to get offending shows off the air. I think ERA has done a great job in positioning itself to lead this issue, and while more work is being done, there is a system in place that is working and ERA is continuously strengthening that system.

Altman: Self-regulation in the DR industry will never work because of the constant urge of companies to push the envelope in product claims, endorsements, testimonials and customer service. It is essential for an unrelated third party to be the watchdog--to try and prevent the obvious abuses and investigate and punish the continual offenders.

Medico: In its current form, self-regulation is not working. It seems to me that the ERA is not in the best position. I would rather see it being handled by the Direct Marketing Association (DMA). How do you believe the ERA could work more efficiently to benefit the majority of companies in the industry?

Digby Orsmond, ARM Direct Ltd.: I'd like to see the ERA's European Council become more visible by approaching the U.K.'s DMA to sponsor greater interest in both the short-and long-form DRTV sectors. Many large consumer companies simply do not appreciate the effectiveness of DRTV. The ERA, with its wealth of experience, could help to change this. Most ad agencies and clients involved in the U.K.'s direct marketing sector will already be members of the DMA.

Toni Erickson Knight, WorldLink: The ERA has always done a wonderful job in educating its global membership and keeping it informed of industry trends, as well as giving a clear outlook of what lies in the future. I'd like to see the ERA continue to provide the invaluable resources we look for during challenging times so that the direct response industry as a whole continues to grow.

Altman: I am still of the belief that ERA services the very few instead of the very many. The service industries (fulfillment, telemarketing and duplication) are barely represented at either the committee or board level, and can never generate the support to obtain one of these positions. Most decisions for shows or conferences are picked and priced for the larger budget rather than the average budget.

Medico: It seems the organization is too restrictive and should do far more outreach than they currently do. They should also look to lower the cost of membership to attract more companies and agencies.

What do you think of the DMA's efforts to reach out to the DRTV side of the direct marketing business? If the DMA continues to make positive steps toward the industry, what do you believe the ERA's best reaction to these efforts would be?

Norm Goldring, CPO Direct: I applaud it as a great opportunity for constructive dialog between successful direct mail, catalog and brand marketers and successful DRTV marketers. We all have much to learn from each other.

Greenstone: I think it is a positive step by the DMA to reach out to the DRTV industry. Competition is generally good and has the potential to improve the performance of ERA.

Weisbarth: All of us involved at the DMA are thrilled by the steady and progressive developments. If ERA were wise, they would learn from this.

Hawthorne: The DMA has tried to reach out for years to the DRTV industry, and never succeeded. I'm a member of its Broadcast Council, but I don't think it will ever be able to serve our industry as well as ERA. DMA is still mostly about print and direct mail. They've had 25 years to bring DRTV into the fold and never done it. Ultimately, DRTV is a small, underrepresented constituency in the DMA and will remain that way.

Savage: I think it makes sense for the DMA to reach out to DRTV marketers. If they can deliver value to these prospective members, more power to them. If ERA is able to continue to deliver value to its members, it need not fear the DMA's efforts.

Should the ERA consider combining with the DMA for an industry event in the near future?

Altman: The ERA should definitely pursue a relationship with the DMA. The ERA's annual Las Vegas conference is nothing but a rehash of the other ERA meetings, except you now have a collection of fulfillment companies, media buyers, duplicators, call centers and producers exhibiting to each other. Joining the DMA would bring in hundreds of new potential clients and vendors, and give current ERA members greater exposure to Fortune 500 companies.

Weisbarth: I think that is a little early given the ERA's history. I would like to see ERA continue to clean up its act.

Hawthorne: No. The ERA and its members would be swallowed whole and forgotten.

Stacey: Many times cooperation is a better strategy than competition. We're in an age of strategic partnerships and relationships, and if there are mutual benefits than these should be explored. Does this industry still serve the same audience as it did a few years ago? If not, how has it changed?

Erickson Knight: We're seeing more traditional advertisers, including a number of Fortune 1000 organizations, entering the direct response field. Moreover, with the increased diversification within the industry, there are more niche-oriented channels in the market that provide additional avenues for marketers to communicate with their audiences.

Weisbarth: The stakes seem to get higher every year, with more corporate and Fortune 500 presence.

Petry: There is still a core group devoted to the idea of DRTV as a primary marketing channel, but new players in the form of online marketers, brand advertisers and new vendors have expanded the group.

Goldring: The demographics of telephone responders appear to have aged slightly along with the general population, but we're seeing increased Web activity over time that suggests we're beginning to serve a broader, younger audience. DRTV is also beginning to emerge as a Hispanic marketing strategy.

Has your company had to change the way it does business in the past few years?

Michael Kokernak, Backchannelmedia Inc.: We've spent the past few years, on a full-time basis, exploring ways the Internet can be leveraged in order to handle back-office processes (credits, payments, affidavit reconciliation and more). We believe that as media continues to fragment, it will be critical that direct response agencies continue to lower their back-office transaction costs while also increasing reporting.

Greenstone: We used to be a media buying company, and now we have evolved into an Internet marketing company. We did that in response to the fact that the Internet is growing to represent up to 50 percent of DRTV sales. We have continued to evolve our business model as the wholesale b-to-b market is now moving online as well.

Hawthorne: No, we continue to focus on the essentials: good products, quality productions and excellent media buying. These are key to DRTV success.

Stacey: We have not changed the way we do business. We're always running a lean, mean machine. But we do spend a considerable amount of time these days in the retail side of the business dealing with Wal-Mart, Sears, Costco and others.

What role does/will DRTV play in modern integrated marketing campaigns for traditional marketers?

Greenstone: Modern integrated marketing plans are becoming ever-increasingly DR oriented by pushing consumers to Web sites. Eventually, almost all TV advertising will have some DR content.

Kokernak: We have found that when approached correctly, and with focus, the direct response component can really be the centerpiece of an integrated campaign that can extend the brand name far beyond a limited television campaign.

Medico: DRTV is taking on a much more prominent role among direct advertisers who are seeing declining response rates in direct mail, declining readership among many publications. Even on the Web, though the cost-per-thousand rates for E-mailing have come down dramatically, they are experiencing much lower response rates.

We've seen traditional consumer advertisers continue to move into DRTV. Although it seems to move in fits and starts, do you believe traditional advertisers are opening up to the possibilities of DR faster than before?

Petry: If, packaged goods advertisers such as Pepsico, Proctor & Gamble and Clorox, all of whom have employed DRTV in the past year, are using the medium, then the gates are wide open for any advertiser to use it.

Erickson Knight: Yes, increasingly, there is a very strong synergy between DR and traditional advertisers, who are realizing the value of DR. While DR will never take the place of general market advertising, it does offer a highly valuable and potentially profitable supplement to advertisers.

Kokernak: With so many new cable networks seeing first light, DR really has become the most effective vehicle in a fragmented environment for consumer advertisers to reach a new audience. These same advertisers can always keep buying Nielsen spot time, while rounding out their campaigns with direct response.

Savage: We've definitely seen an increase in traditional advertisers looking at the medium. We're working with several on the agency side, and we only see it increasing in the years to come. Our industry has gained a lot of ground in persuading brand marketers that they can sell product, generate a database, and build, enhance and protect the brand all at once.

What effect is the Internet having on the way you do business? How much are you integrating the Web into your plans?

Kokernak: In a different way, the Web really has become the centerpiece of our entire business. We have spent hundreds of thousands of dollars experimenting with different ways to handle media buys over the Internet. Not selling time or products, like other business models, but rather clearing the back-office transactions and reporting using the Web as the backbone. We think we are starting to get it right.

Greenstone: Our business has become the Internet! Even now, I don't think a company can survive without some Internet integration. Within the next year or two, companies will awaken to the fact that they need a fully integrated set of strategic Internet partnerships to be viable. A large part of the profit of the business will be in these relationships.

Altman: From the fulfillment side, almost every client now has a Web site to augment its television exposure. In some cases, the Web site is preceding their television spots and becomes the test module for the project. In reverse, we use our Web site as an information system for our clients, as we populate the site every night with updated information ranging from shipping, banking, tracking and sales.

When will the industry be ready for the convergence of DRTV and interactive TV (ITV)?

Orsmond: This is already happening in the United Kingdom, but until the technology is more widely available and easier to use, this will remain a fairly small part of any company's direct marketing budget. The early adopters are claiming interactive TV is a big success, but we are still not seeing much pick up.

Erickson Knight: Direct marketers are already poised to further move into this space because by nature, our business is interactive. What's different is that now new technology, the Internet and interactive television are additional levels through which to market to consumers. When ITV hardware and service become more affordable, accessible and easier to use, it will reach a critical mass and then become an even more powerful tool for advertisers.

Stacey: The industry is ready, but I don't see the convergence of DRTV and interactive TV on anybody's immediate radar screen these days. It was a sexy topic on the lecture circuit for a while. When I hear the term convergence today, it sounds like Wall Street lingo left over from the late '90s. Unfortunately, a lot of people bought into that hype and lost a lot of money.

What would you change about the current state of the DRTV industry?

Weisbarth: I would like the industry to continue to grow and attract more solid corporations to use DRTV. Savage: I wish that stations and networks would have higher standards in determining what kind of products they allow to be sold through their 30-minute avails.

Hawthorne: DRTV cannot survive with yearly 10-15 percent media rate increases. The economics don't work. Unrealistically high rates drive desperate marketers to bend the truth, creating illegal commercials consuming mass quantities of media at even more outrageous rates. It's becoming impossible to make "legal" DRTV commercials work.

Stacey: The major change would be a regulatory one with respect to access to airtime. The United States has just a handful of shopping channels and the United Kingdom has 30. What's up with that? I think there are a lot of vested interests and regulatory hurdles complicating access to airtime, and even technological advances, such as interactivity, that are necessary to help move our industry forward and grow.

Who are the most influential people/companies in the industry right now? What are they doing to have this impact?

Kokernak: I think RevShare and its pursuit of furthering the shared-revenue model, coupled with robust transaction reporting, is something refreshing and something we will see more of.

Savage: QVC's ability to sell unique products and items, as well as national brands, continues to impress me. Their product mix and selection and on-air presentation continues to be imitated by their competitors. Guthy-Renker's respective models for beauty continuity and video marketing have served them well and are watched closely by the rest of the industry. Fitness Quest's ability to utilize DRTV and retail marketing to maximize sales has benefited our company, and I'm sure that many in our business have tried to implement some of their strategies.

Petry: The following people and companies are my top 10 because they provide industry leadership by conducting business with integrity and being involved in industry trade groups, Response magazine and other outlets. People: Dan Danielson; Ed Garrubo; Tom Haire; Tony Kerry; Rick Petry; Steve Pittendrigh; Randy Ronning; David Savage; Barbara Tulipane; and Jake Weisbarth. Companies: American Telecast; Discovery Communications; Euro RSCG Tyee MCM; Guthy-Renker; HSN; InPulse; Mercury Media; QVC; Script to Screen; West Corp.

Are production and media costs rising? If so, does this pose a serious threat to the health of the industry?

Erickson Knight: Production and media costs are merely a reflection of the economy and the current state of the marketplace in general. Rising or decreasing costs are a function of the cycle of ups and downs all businesses experience and I don't think they pose a threat at all.

Medico: They are rising, and to that point it will eventually hurt the ability of a traditional DR product advertiser to make profit on the front end. With regard to profitability, so much will then have to depend on aftermarket revenue streams created through all other efforts, including retail.

Orsmond: Production costs for short form in the United Kingdom have dropped by around 30 percent during the past four years. More advertisers are now trying DRTV because of the drop. There are not many U.K. infomercial production companies so we are still experiencing unrealistic costs in this sector. It is still more cost effective to produce infomercials in the United States or South Africa. Media costs have been fairly stable in the United Kingdom throughout 2003, but there are still periods when the airtime costs are substantially affected by the high spending of the brands.

How did the Iraq war affect your business? Would you consider yourself more prepared for such events in the aftermath of 9/11?

Altman: The war in Iraq created a longer lasting, hard-hitting "trickle down" effect that will be felt for many more months. The clarity of the post-war business trauma for DR is now being felt in another sense, as escalating gasoline prices have stretched working families' budgets to new proportions. From the surface, all looks normal, but the lingering effect of war has tightened the budget of consumers and placed merchandisers in an overloaded inventory and cash-flow drain.

Orsmond: The Iraq war had no direct effect on the U.K. DRTV industry, as the British economy is the strongest within the European Union right now, enjoying very low inflation and unemployment. However, should a major event, such as 9/11, happen here then clearly it would affect consumer confidence across all sectors.

Petry: The war had a temporary negative impact on response. I think 9/11 has raised everyone's consciousness with regards to the possibility of disaster at any time and has certainly put things into perspective. But I don't believe there is any real way to prepare for anything as horrible as 9/11. If the World Trade Center can get dropped to the ground, what else is possible? Shudder at the thought.

Response would like to thank its Editorial Advisory Board members for all of their hard work throughout the year, but most especially for their pointed and varied responses to the questions posed in this article.

Copyright 2003 Gale Group Inc. All rights reserved.