TiVo, Part the Second: TiVo Shakes Up The Advertising Industry (But More Importantly, How?)

****NOTE: THIS ARTICLE WAS ORIGINALLY PUBLISHED ON AUG 23, 2003 ON OUR OLD WEBLOG, HTTP://P9THINK.BLOGSPOT.COM.*****

Here’s how in love we are with Tivo: not only is it impossible for me to stop telling (boring) my friends with tales of its coolness, but we feel compelled to write a second blog about it, a scant two days after our first TiVo-related story!

After finishing our last blog regarding how TiVo will do in the face of new competition, we started wondering what effect TiVo would really have on advertising. Does TiVo spell the end of television advertising as we know it? Will TiVo and PVRs be subjected to a dozens of legal challenges from advertising agencies and television networks, eager to protect their advertising revenue streams, in a situation which resembles the Recording Industry Association of America’s current war on file-sharing? Or is the issue more complicated—and potentially more interesting or lucrative—for advertising agencies? After thinking the issue through, we’re convinced that TiVo may ultimately prove to be a financial boon for advertising agencies, particularly great ones. (We’ll get to exactly what constitutes a great advertising agency in a few paragraphs.)

The conventional wisdom suggests that advertising agencies are in pretty tough against a machine that enables the viewer to skip the product (tv advertising) they sell to their clients (marketers). Usually, when TiVo’s effects are discussed in the annals of business, it’s positioned as a doomsday device that will (almost certainly) pose the end of the advertising agency as we know it. This perspective is best-summed up by a recent article in BusinessWeek, which declared in the overly-dramatic and over-hyped fashion that’s a hallmark of that magazine: “Coming Soon: A Horror Show For TV Ads.” . The article goes on to describe that thanks to TiVo’s ability to collect highly precise information on the television watching habits of its viewers, it’s becoming apparent that (surprise!) most viewers skip through ads, particularly on the most popular shows:

TiVo's initial data reveal some trends that ad agencies and networks might prefer to bury…On April 11, 2002, ABC's popular TV drama The Practice drew a TiVo rating of 8.9, meaning 8.9% of TiVo owners watched the show live or recorded it and watched it later. But those viewers watched just 30% of the ads shown.

In other words, the early data from TiVo suggests that advertisers face a big dilemma: it’s exceptionally hard to get large amounts of viewers to turn into an ad, as viewers of popular shows (like the Practice) will tend to skip ads altogether.

An additional finding of note from TiVo’s data is that “event” programming (e.g. sports, reality TV, awards ceremonies) has a much higher percentage of viewers who watch ads than “episodic” television content (e.g. narrative tv shows like Friends, The O.C., or our personal favorite, Diff’rent Strokes.) Here’s BusinessWeek on the subject:

Certain genres are "stickier" than others, TiVo's research shows. Big-budget situation comedies and dramas tend to have the lowest retention and commercial-viewing rate because couch potatoes tend to record them and skip through the commercials rather than watch them live. Reality TV, news, and "event" programming such as the Oscars do significantly better at getting viewers to see the commercials. Just 39% of viewers watched ads during the highest-rated network TV show, Friends, vs. 75% for the 45th Annual Grammy Awards and 58% for Fox reality show Fear Factor.

This finding suggests that its much better to spend advertising dollars on “event” programming than it is on Friends, as marketers can be more assured that the eyeballs they’re paying for are more likely to actually watch the ads. Of course, this discovery—assuming its corroborated over time with more data—will also significantly increase the price that networks charge for advertising slots on these programs, making them inherently riskier (due to the need to justify the larger initial investment) for marketers buying spots on these channels. In turn, this places a greater burden on the advertising agency to show that the expensive spot delivered at this time actually delivered what it was supposed to (awareness, recall, and ultimately, sales and loyalty). The bad news here is that as of yet, nobody’s been able to develop an industry standard of actually measuring what constitutes ROI for an advertising campaign.

So are advertising agencies up the creek without a paddle? A particularly ominous prediction from the usually-reliable Wall Street Journal about a PVR study from Forrester Research says that they are. (Unfortunately, the complete Wall Street Journal article is only available in the WSJ archive, for the princely sum of $2.95. The complete citation of the article is at the end of this blog.) Last year, Forrester polled 112 marketing execs (including the heads of marketing at P&G, General Motors, and Coca-Cola), and learned that 76% of them planned on reducing TV outlays “significantly” when PVRs reached 30 million US homes. Although there are only about 3m PVRs currently in US homes, that number is increasing quickly, thanks to cable companies eager to bundle them into set-top boxes, and Forrester projects that we will reach the 30 million number before 2007. We’d also be willing to bet that as more data about how the relatively scant attention viewers pay to (most) TV advertising begins to filter out from the good folks at TiVo, the more likely it is that marketers start paying much closer attention to their TV advertising budgets.

It’s our perspective that although TiVo poses a significant challenge to the advertising industry, the increased prevalence of TiVo and PVR’s will likely result in a culling of the herd of advertising agencies, rather than resulting in the extinction of all television advertising as we know it. Moreover, we strongly believe that for some advertising agencies—even some agencies that concentrate exclusively on producing tv advertising—will actually see their profitability increase over the long run because of TiVo.

Why do we feel so strongly that the threat of TiVo is a little bit overstated? First, let’s examine the facts: although many TiVo users (ourselves included) utilize TiVo to fast-forward through ads, it’s important to note that we don’t fast-forward through all ads. The data BusinessWeek cites bears this out, too: even if only 39% of viewers watching Friends on their TiVo aren’t skipping through ads, that’s 39% of viewers who are actually choosing to watch ads (or choosing to watch the ads that they like). Secondly, people were skipping through ads long before TiVo, either by channel surfing through commercial breaks or by simply leaving the room to pursue alternative activities (making a snack, using the phone, going to the bathroom, etc). The difference was that in the pre-TiVo days, the existing ratings systems (Nielsen) had no way of capturing or measuring this viewer behavior. Consequently, when marketers purchased television advertising, they were essentially making a leap of faith and hoping that television audiences stayed tuned in during the advertising slots that they had bought. The only difference in TV advertising in a pre-TiVo and a post-TiVo world is that now marketers can better determine whether or not the ads that they’re buying are being tuned out, or listened to.

TiVo’s ability to measure and report (with a greater degree of accuracy) whether or not audiences actually watch commercials is what makes it as much of an opportunity for ad agencies as it is a threat to them. With TiVo, it suddenly becomes possible to accurately measure how good an agency really is: can an agency or specific creative team consistently deliver advertising that viewers want to watch, or does an agency consistently create advertising that viewers choose to ignore (fast-forwarding through it, skipping it, etc)? In such a world, advertising agencies will be priced by the marketplace in a different fashion: good agencies will receive top dollar, and average ones will receive less, and bad ones…well, bad agencies probably won’t be long for the world. It should also be noted that since TiVo and PVRs makes it harder to create audiences for commercials (by allowing people to opt-out of advertising more effectively than ever before), the price of good advertising that can deliver an audience should also increase (as a function of scarcity and the law of supply/demand). In other words, agencies that excel at create advertising that “works” (e.g. advertising that people tune in to) will not only be able to charge more than their competitors, they should see their ability to generate revenues soar. Much as television stars that could “guarantee” a big national audience saw their value skyrocket through the 1990s as it became harder to assemble such an audience due to the proliferation of cable channels and other media—consider the ever-increasing salaries of the cast of Friends, top-flight agencies will be able to extract significantly greater value from their buyers than in previous eras.

There are two catches with the scenario outlined above. First, there will be a lot of bloodshed in the advertising industry over the next five to ten years, particularly for agencies that specialize in television advertising. This is largely because of the fact that the market for quality in the advertising world is uneven—while all agencies are created equally, not all agencies are equal in terms of their ability to create advertising viewers want to watch. At a certain level, the buyers of television advertising services seem to have realized this, and the rumblings of a shakeout can already be heard. Consider Coca-Cola’s decision to shift its TV advertising from McCann-Erickson to the reputedly more creative, and much smaller, boutique agency Berlin Cameron/Red Cell agency last November. Obviously, we’re hypothesizing that a “more creative” agency might be better at creating “more interesting” ads that are consequently less likely to be fast-forwarded through by viewers. Regardless, however, Coca-Cola’s decision to go with a smaller, “edgier” agency has recently been mirrored by several large firms—such as Sun and Coca-Cola’s own Sprite division—who’ve sought to relocate their creative work to other such stylish boutiques. At the very least, the growing trend to go with shops that look more “creative” signifies growing client dissatisfaction with the current status quo of agencies and a desire for more effective television advertising.

The second catch is that while advertising that can deliver an audience to marketers will dramatically grow in value, it is less clear as to who will ultimately capture that increased wealth within an agency. Although agencies would ideally like it ensure that they increased ad spending, the real question at hand is, who is ultimately responsible for creating consistently great advertising: the entire agency, a creative team, an individual within the creative team (a great copywriter like Bill Bernbach, for example), a savvy account planner, or another party altogether? If great advertising is the product of an entire agency, than the agency will get to receive the spoils of client spending. If, however, it becomes apparent that such advertising is more the result of one part of an agency than another—a great copywriter, or a planner who can consistently intuit what a customer segment needs, and how to best reach that segment—than the pay scales of advertising agencies will change significantly. In this scenario, since such talented individuals will be able to move quickly between agencies, or simply sell their services directly to clients, they will capture virtually all of the value of increased client spending on advertising.

In closing, TiVo doesn’t portend the end of advertising as we know it. What it does portend, however, is a fascinating shift in the economics of advertising itself. Most importantly, TiVo will ensure a Darwinian shake-out amongst advertising firms that choose to specialize in selling television advertising itself, with the best firms surviving, and the worst dying out. In short, it’s clear that the advertising world is going to get much more competitive in coming years.

(The citation for the Wall Street Journal article mentioned in this article is as follows:
Vranica, Suzanne. “Technology Confronts TV Marketers—Economics May Change As Consumers Use Devices To Shift Time and Skip Ads,” The Wall Street Journal, November 26, 2002. You can find the archives for the Wall Street Journal here.