Werner's Blog — Opinion, Analysis, Commentary
Will streaming television transform the TV advertising industry?

The world of television is changing rapidly—not so much what we watch but how we watch. Technology has changed my own viewing habits dramatically: services such as Netflix and Apple TV have untethered me from the constraints of broadcast television. Virtually all my TV time is spent watching productions when I want to watch them. More importantly, my TV consumption is free of any advertisements. Technology has liberated us. That is good news for television viewers, but quite possibly bad news for advertisers.

Streaming Television, licensed by iStockphoto

Image licensed from iStockphoto.

As broadcast TV is giving way increasingly to streaming TV, the market for TV advertisement, worth an estimated $80 billion in the US alone, will need to adapt—or wither as reach and effectiveness drop. The number of Netflix subscribers worldwide is rising steadily and is set to surpass the 100-million mark in 2017. The benefits of streaming television are simply overwhelming compared to traditional broadcast or live television:

  • You can stream TV whenever you want. Gone is "appointment television" where broadcast schedules govern your viewing times.
  • You can watch episodes of a television season back-to-back if you want to, known as binge watching.
  • Streaming TV is affordable. At typical rates of about ten dollars per month, streaming TV does not burn a hole in your pocket. And if a movie or television program is not yet available on Netflix, it is likely that you can buy or rent it on Apple iTunes or Amazon Video for a reasonable price.
  • There are no ads on streaming TV. You can enjoy your favourite movies and TV uninterrupted by commercials.
  • Streaming television increasingly provides access to high-quality programming from around the world. I can watch some excellent television series productions from Sweden, Denmark, Iceland, France, and Great Britain—and more to come.
  • You can take your viewing on the road more easily, as streaming video works on your mobile device as well as on your big-screen TV at home.
  • Streaming TV is bandwidth friendly: you can subscribe to regular (HD) or premium (4K) service, while the provider can adjust the resolution downwards to match your available bandwidth.

With streaming television, the business model that ruled TV for decades is ready for a major overhaul. People are increasingly "cutting the cord" to cable and satellite TV, which should not be at all surprising when you consider the high prices charged by our oligopolistic service providers in North America. Young people grow up and will wonder what broadcast television was all about, and they will probably feel just like the generation that grew up with colour TV instead of black-and-white, or HD-TV instead of analog TV. Once liberated from the nuisance of advertisement breaks that interrupt TV programming, these viewers will be reluctant to accept advertisements in other places as well. Ad-blockers (e.g., AdBlock, Adblock Plus) are increasingly popular to stop advertising on the web. A recent report in Newsweek suggested that already two in five internet users deploy ad-blockers of some kind. Content providers such as Facebook have started blocking the ad blockers, as The New Yorker magazine reported recently. The media arms race is on: adblockers against advertisers. Nevertheless, there is research from market analytics firm MarketShare that suggests that TV advertising, even under threat, remains highly effective. Broadcast TV still reaches vast numbers of consumers. The question then is: which consumers will desert broadcast TV quicker than others, and will it get harder for advertiser to reach, say, young audiences or affluent audiences?

As viewers are switching to streaming television, the business model for TV networks—advertisements paying for the cost of producing content—is under threat and may eventually become obsolete. Advertisers are therefore trying to find novel ways of reaching consumers digitally. Google, Facebook, and others are already tracking us when we visit web pages and deliver customized advertising based on our online profiles. But few of these digital ads deliver the scope for emotional connections that can be had with TV advertisements that hold the viewer's attention for thirty seconds. Advertisers will struggle to find a comparable replacement. With the decline of broadcast TV, with the notable exception of sports programming and an assortment of popular live events, the business model of advertisement needs to evolve. Even without the rise of TV streaming, TV commercials are already under threat. Digital personal video recorders allow viewers to record programming and skip through commercial breaks. Increasingly, commercials find their way into alternative venues with a captive audience.

If you have gone to a movie theater recently, you may have noticed that there are more and more trailers for other new movies before you get to see your main feature. You may have also seen commercials making their way into that "pre-show" line-up; fortunately, many of them seem to be of higher quality than what you see on TV. However, by the time your main feature starts, you have already seen twenty minutes of commercials. To see the movie you paid for, you are force-fed advertisement that you didn't pay for. Cinema chains are running the risk of alienating their viewers—and driving them even more to streaming television where viewers are in full control. Airlines have started emulating this model. Before you can watch a movie on the in-flight entertainment system, you are forced to watch a commercial. Unsurprisingly, more and more passengers bring along their own content on their mobile devices.

If the business model of the TV advertisement industry needs to evolve, then how? I argue that the TV advertisement industry has to start respecting consumers more: their informational self-determination and their privacy—which includes the right to be left alone from commercials. I advocate a model of consensual advertisement where the intended targets of advertisement provide explicit or tacit approval of receiving advertisement messages. This is tantamount to "opt-in" advertising, although today's consumers have difficulties even to "opt-out" and instead need to rely on ad-blockers and other technical solutions. Consensual advertisement trades off high-value targeting against low-value scattering. Ultimately, it may make advertisement cheaper and more effective. That outcome would be pleasing to producers who need advertisement to reach consumers, and for consumers who need information about products and services through advertisements, but do not want to get inundated with too many marketing messages.

The saturation of our environment with ads is a problem: Anywhere the Eye Can See, It's Likely to See and Ad, the New York Times reported in 2007. We are exposed to literally hundreds of marketing messages each day (MediaDynamics 2014 report). The problem for marketers is that few messages are noted, and most are ignored. The sheer magnitude of advertisments that we are exposed to renders most of them ineffective. Too much noise, too little signal.

Broadcast advertisement is crude because it reaches both the intended audience of potential buyers and the unintended audience of unlikely buyers. It is scatter advertising: it hits everyone regardless of interest, buying preference, let alone consent. Ideally, advertisers only want to reach the target audience, which is why they choose slots for their ads carefully. In the past, the crudeness of the targeting was compensated by reaching millions of viewers at once, but not anymore. Nielsen ratings provide advertisers with information on audience sizes, and viewer demographics help select the particular program. With shrinking audiences overall, better targeting is becoming ever more important—a lesson already well learned by Google and Facebook. Better targeting starts with knowing more about your targets. Facebook knows a lot about your preferences and friends, and Google can use your search history to tell advertisers if you are looking for a particular product. Providers of video clips such as YouTube (but also newspaper sites) increasingly rely on in-stream advertising. Before you can watch the main clip, you are forced to watch an ad at least for a few seconds. Is there a better way to keep TV ads alive? I think there is, based on consensual advertising.

Advertisement is about connecting producers and consumers effectively, and about distinguishing one company's products from those of other companies. For many products and companies, switching from an opt-out model (where people tune out from what they don't want to see) to a consensual opt-in model (where people choose to watch the advertisements explicitly), may provide benefits in terms of superior targeting. But why would anyone choose to opt-in and watch? The answer is: provide an incentive. Rather than gaining our attention for free and on the sly, advertisers should pay for the privilege of gaining our attention in a much more direct and individual way.

With broadcast TV the monetary benefit was indirect: advertisers pay the networks, who in turn deliver programming that is free for viewers. With streaming TV, the streaming operator could of course decide to insert ads into their streams and then offer their streaming service at a lower price, reminiscent of traditional TV. However, with free entry into the market for streaming services, there would be at least some services that offered ad-free streaming. This would simply segment the market, with advertisers not being able to reach some of the desired audiences.

Instead of alienating their customers by force-feeding them ads, streaming services such as Netflix could offer an explicit deal: watch a few commercials voluntarily and get a 50-cent credit on your monthly bill for each commercial watched, paid for by the advertisers, up to the maximum of your monthly bill. The advertisers would be allowed to bid for your time: those wishing to gain more of your attention could bid a higher price, say $1 instead of 50 cents. Ads targeted at niche audiences would offer a lower price, say 5 cents or 10 cents. If you value your time highly, you may never watch a commercial at all. On the other hand, high-quality commercials can be funny and entertaining, and well-targeted commercials can be highly informative. Streaming service could offer search filters for ads: by descending bid, by subject area, by manufacturer, by recently-added, by "most viewed by others", or even—after collecting information about your viewing habits—by "suggested for you". As viewing habits may be a poor indicator of purchase preferences, a streaming operator simply needs a viewer-approved connection to Google or Facebook, and presto, their data opens the door to customizing ads. This model may not be as far-fetched as it may sound. It relies on consensual advertisement: explicit consent from viewers. The monetary benefit would accrue mostly to consumers, while streaming service providers would receive some compensation for use of their infrastructure. Smart advertisers would strive to provide ads that people actually want to watch. Advertisers would compete on quality, not quantity. Already, many good ads continue a life on YouTube much beyond their short shelf-life on TV.

‘Technology may usher in an era of consensual advertising in which audience attention is no longer free for all.’

Technological progress will induce major adjustments in the advertisement industry. I have little doubt that advertisers will continue to reach their intended audiences effectively. However, technological progress may help induce a change in advertisers' attitude that treats our time and attentions no longer as free and disposable. Whereas in the past advertisers could rely on a scattering approach (just saturate the airwaves), technology has enabled consumers to filter out unwanted ads: ad-blockers, spam filters, PVRs, and now TV streaming. Perhaps technology may help usher in a new era of consensual advertising that is based on tacit or explicit consent of audiences and where audience attention is no longer free for all. The business model should be simple enough: if you want to influence my purchasing decisions, pay me directly for my time to tune in to your message rather than indirectly through some ancillary free service.

Concluding thoughts of an economist: is there an economic rationale for supporting scatter advertisement when such ads pay for creating a public good? Arguably, revenue from advertisers not only pays for soap operas (the quintessential vehicle for TV ads) but also for news coverage. Ads in newspapers also help reduce the cost of subscriptions. But there are other ways to provision public goods, namely through other funding models. Public broadcasters (for example, the CBC in Canada and PBS in the U.S.) can be financed publicly. Arguably, their continued existence should not depend on the vagaries of advertisement revenue.

Will the world of advertisement change for the better? I hope so. Technology can empower consumers. It is for the consumers to decide whether they want to exercise that new power.

Posted on Tuesday, January 31, 2017 at 07:45 — #Business | #Innovation
© 2024  Prof. Werner Antweiler, University of British Columbia.
[Sauder School of Business] [The University of British Columbia]