Backchannelmedia

Jack Myers Media Business Report, July 17, 2006

VOD Models Emerging for Top Rated TV Content & Ad Growth

By Jack Myres

In the next several months, there will be a significant break in video-on-demand negotiations between cable operators and network programmers, resulting in a dramatic flow of the most popular television programs, including broadcast network primetime programs, into the on-demand world. At least that's the scenario envisioned by industry veteran Denny Wilkinson, CEO of BlackArrow Inc., a New York based company that has developed a management system for buying, selling and placing the new inventory being made available in on-demand content across all digital platforms. Other companies are exploring similar territory.

Wilkinson believes the economics of on-demand advertising are about to undergo a dramatic shift, leading to exponential increases in advertising availabilities built into on-demand programming. "If I'm a programmer, and a distributor wants to take my content from my normal linear channel and put it into an on-demand model without compensation, it's a problem," he explains, outlining the impasse that's prevented networks from including their premium programs in the on-demand offerings of Comcast, Time Warner and other cable operators.

Further, Wilkinson outlines, "the average revenue-per-home for a linear show is 50 cents per viewing session. They're not going to generate that with one pre-roll video ad. What programmers are saying is you need a VOD advertising model that will compensate them for lost revenue when viewers watch a program on-demand rather than live. The change we sense," Wilkinson advises, "is operators now recognize this and national programmers understand they need to engage in interactive on-demand TV. If an operator can provide programmers with ways to monetize their programming through on-demand, programmers will provide operators with blockbuster high demand content. Both parties recognize that because the cable operator has created the infrastructure, the operator also needs to be compensated for use of that infrastructure. So it appears the sides are coming together with advertising as the solution."

Essentially, Comcast, Time Warner and other cable and satellite distributors air billions of dollars in broadcast network and station commercials each year and receive limited value in return. Conversely, broadcasters, most notably CBS, believe they should receive compensation from operators in return for carriage rights. In the new on-demand world, broadcasters must use the cable operator's infrastructure outside of regulated requirements. While operators have wanted quality content without paying incremental fees, and their programming partners in general have refused to provide their best programs, Wilkinson believes "there's a break in that dam, and an opportunity for an advertising system that enables five to ten ads per hour to run in on-demand content." These ads, he suggests, will generate sufficient revenues for both the operator and programmers, replacing revenues lost as audiences move from linear to non-linear viewing options.

BlackArrow is in discussions with several distributors, advertisers, networks and agencies, although no specific agreements have been defined to date. The company also says it is exploring partnerships with Invidi, Tandberg Television and others.

Wilkinson joined BlackArrow one year ago after it had received venture funding from the Mayfield Fund, Polaris and Intel Capital. BlackArrow was founded byDiMA Group partners Tom Morgan and Pat Dunbar, who are responsible for the AdLab program and Innovation in Digital Advertising (ID!A) Program. The AdLab program has involved Publicis media agencies Starcom, MediaVest and GMPlanworks in a collaborative research and development initiative with eleven of their advertisers and several networks, including MTV Networks, USA, Scripps, and TV Guide. Out of that initiative, BlackArrow emerged as an ad management system specifically for the on-demand world. Tim Hanlon of Publicis' Denuo Group is on BlackArrow's Board of Advisors.

Wilkinson acknowledges there are not yet established standards for on-demand advertising beyond the :30-second pre roll commercials. The current models for on-demand advertising will need to be disrupted and replaced if Wilkinson's vision is to be realized. Before VOD revenues can grow exponentially, ads need to be targeted based on the time they are actually viewed and household demographics. Advertisers need to be able to review available inventory and place messages without sustained delays between order and air dates, regularly change ad copy, and place ads across a spectrum of programs rather than locking them into a long-term pre-roll commitment with selected programs.

In the digital environment, viewing data can be far more specific than currently available through Nielsen and advanced reporting and ROI systems are being developed by companies such as Backchannelmedia and others. Operators and programmers are studying alternative technologies and systems that are in varying stages of development by a handful of companies.

Wilkinson believes interstitials, telescoping to long-form messages, and other forms of engaging formats will evolve that reflect the shift to consumer control of the viewing experience across multiple digital platforms. He points out national advertisers and programmers cannot reach critical mass distribution through a single cable or satellite operator and the industry needs a third party agnostic provider that aggregates distribution across multiple platforms to achieve advertisers' national goals. "We believe the operator world will see the value of a system that aggregates VOD distribution across multiple companies and platforms," he comments.

Wilkinson believes advertisers' focus on on-demand advertising opportunities will escalate as the growing impact of DVR usage is realized. "We think the decline in Upfront spending is just the beginning of the challenges companies will have," he argues. "We're looking at 21 to 23 percent of TV households enabled this time next year with DVR technology. We estimate it's 15 percent today and by following the reports of the set-top manufacturers and the cable and satellite companies, it's clear the number will soon surpass 20 percent. People who acquire DVRs typically take four to six months to become fully capable of using the functionality. The more advanced users and younger users skip a high percentage of commercials. If 25 percent of homes are enabled and if even 50 percent of the viewers skip commercials [which is a conservative estimate based on Myers data from our Emotional Connections™ research], that's 12.5 percent of all commercials skipped. That's a fundamental shift in how advertisers reach audiences," Wilkinson adds.

"The most important opportunity for the industry is for operators to enable national advertisers to engage in on-demand TV with the most popular programming and open new ways for advertisers to reach consumers," he comments.