Next.gen.tv.advertising

The Association of National Advertisers
November 7, 2003

Confronting The DVR:
Technology Offers New Solutions For TV
Advertising

Aditya Kishore
Senior Analyst, Media and Entertainment
The Yankee Group
617 880 0304
akishore@yankeegroup.com
© Copyright 2003, the Yankee Group. All rights reserved. 2003

Agenda

• Digital Video Recorders sluggish market performance picks up pace

• Future DVR consumers profiled

• Digital multichannel video platforms offer new advertising opportunities

– EnhancedTV

– Targeted & addressable advertising

– Video On Demand advertising

– DVR downloads

– Branded entertainment: Beyond product placement and sponsorship

• Evaluating the right approach

• Conclusions/Recommendations

© Copyright 2003, the Yankee Group. All rights reserved. ANA November 2003 2

DVR penetration will grow to 24.7 million homes by the end of 2007,
enabling one-fourth of all US homes to fast-forward commercials
Source: The Yankee Group, 2003

U.S. Households in millions
25 24.7

20
17.7

15

10.9
10

5.8
5
3.2
1.8
0
2002 2003 2004 2005 2006 2007

Total DBS Cable Other
Note 1: The total of all DVR households is NOT the Note 2: “Other” category consists of standalone
sum of the other three. Some households may have units and DVRs integrated into electronics devices
more than one type of DVR. such as TVs, game consoles and DVD players


DVR growth has very sluggish, leading many to dismiss it as a
threat to advertising

12,000,000
10,000,000
8,000,000
U.S. Households

6,000,000
4,000,000
2,000,000
0
One Year Two Years Three Years Four Years

Years Since Market Introduction

PVRs VCRs DVD Players
CD Players DBS Digital Cable
Residential Broadband Cellular Phones HDTV

Source: CEA, Company Reports, The Yankee Group

Interest is highest among typical TAF groups - early adopters of
technology comprised of attractive demographic segments

User/Interest Groups Age Income

50%
U.S. Multichannel Video Households

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%
Total Console Music Video 18-24 25-34 34-49 $75-$100K $100K- $150K+
Gamers dwnld. dwnld. $150K

DVR Interest

Source: The Yankee Group’s Digital Home Entertainment Survey, 2002


Initial interest in DVRs falls rapidly in the face of actual product
specifications - a market dynamic that favors the service provider

• A significant number of all multichannel video subscribers – 24% - are interested
in time-shifting television
• But interest declines substantially when specific products and prices are
discussed
• Gamers demonstrate higher interest in many interactive digital video services,
including DVRs

DVR/Game
Satellite PVR DVR/Cable Console/DVD Player
STB
Multichannel
Video HH 9% 8% 14%

Broadband HH 11% 12% 13%

Console 15% 16% 24%
Gamers
Source: 2002 Digital Home Entertainment Survey

DVRs integrated into satellite receivers have been the most successful
in the market to date

Standalone
ReplayTV Other
5% 2%
Standalone TiVo
17% Echostar/DISH
41%

Cable
16%
DIRECTV
19%

Integration with a satellite receiver and no monthly fee coupled with
regular promotion and communication have driven Echostar’s success

Note: Does not include PC-based DVR products


But integration into cable and DBS set-top boxes has already begun
to spur market growth

• 250,000 Explorer 8000 integrated DVR-STBs in the field for Time
Warner
• Promotions offering subscribers the first month free have helped
spur adoption
– But churn could be a factor once promotion ends
– Subscriber demographics broader than traditional TiVo adopters
• Advance Newhouse, Cox have deployed DVRs in multiple markets;
more to come in 2004
• Charter has ordered 100,000 Moxi units for deployment this year itself
• Comcast running advanced trials; expected to deploy before year-end
in multiple markets

The cable-DBS rivalry, thrown into high gear by Newscorp’s arrival and
Telco-DBS partnerships, will help drive DVR penetration in 2004

Source: Company Reports, the Yankee Group


A simple calculation delivers worrying results

TiVo: 80% of prime time broadcast network TV viewing in TiVo homes
was time-shifted during the fall 2002 season
Other research suggests that time-shifting is somewhat less
pervasive in DVR homes overall

Percent of U.S. Households with DVR 20%

Percent of programming that is viewed time-shifted in 40%
DVR households
Percent of advertising that is forwarded while viewing 70%
time shifted programming
Percent of all advertising that is forwarded in DVR 70% of 40% 28%
households
Percent of advertising that is forwarded in all US 28% of 20% 5.6%
households
Wasted revenue 5.6% of $50 billion $2.8 billion



All television programming is vulnerable to DVRs, but viewers
“value-stack” determines the most vulnerable content

“Event” Viewing • The Superbowl
• The Bachelor Finale

Archival Viewing • Discovery documentary
• Classic movie

Appointment • Season premieres and finales
Viewing • Special sweeps/stunting episodes

• The West Wing
Typical Viewing • Friends
• CSI:Miami
• 24

Uncommitted • Least uninteresting content
Viewing • Channel surfing

Source: The Yankee Group


Digital multichannel video homes offer a platform for emerging
advertising formats to combat DVR penetration

U.S. Households in millions 61 66.1

55.6
49.5

43.3
37.7
35.4 39
31.5 31.5
27.1
23.7 22.6 27.1
18.9 25.6
16.6
14.8 24.1
15 22.4
20.7
14.9 18.8
11.5
8.9
3.5
1999a 2000a 2001a 2002e 2003e 2004e 2005e 2006e 2007e

Digital Cable DBS* Total Digital

* DBS includes non-primary residences
Source: Company Reports, the Yankee Group DBS does not include suspended and commercial accounts for DirecTV


A number of technology vendors have solutions that leverage the
multichannel video providers digital TV platforms

While branded entertainment will be the most utilized approach initially,
advertisers need to explore technology based solutions as well

Targeted/ Interactive Virtual Product Advertising Advertising on
Addressable Advertising Placement Downloads Demand
Advertising
Solutions

Consumers can Digital images of Commercials TV commercials
Advertisers can interact with a the product can be can be can be delivered
target specific commercial or inserted into the TV downloaded to on-demand
commercials to directly programming itself a DVR
specific homes purchase products
Companies

• ACTV • Wink • Princeton Video • TiVo • nCUBE
Key

• Visible World • OpenTV Image • SeaChange
• Invidi • Concurrent

Advertisers must begin to explore new forms of advertising
today, even though current DVR penetration is not yet a significant threat



Consumer interest in interactive TV is moderate, but the technology
offers advertisers considerable value

• 1 in every 10 homes
can use single screen
% Interest in ITV applications among U.S. cable households enhanced TV; almost
all are DBS homes
Get info on a TV show 9% 14%
• Wink reports 70% of
Choose camera angle 13% 9% enabled homes use it
Play along w /game show 7% 8% once a month

7% 6% • Two-screen
In-show polling
interactivity reaches
E-mail 7% 6% even more homes; 1
Very Interested
Buy directly from commercial 4% 5% in every 6 consumers
Somewhat Interested surfs the web while
Get product info. from commercial 3% 5% watching TV
0% 5% 10% 15% 20% 25% • Viewers are twice as
likely to sit through a
commercial if there is
an interactive element
Source: 2002 Digital Home Entertainment Survey, DMA, Company Reports

Targeted advertising can leverage digital ad insertion infrastructure

ACTV’s Spot On technology trialed in Denver by Comcast; Visible World used by
Adlink for targeted advertising in Los Angeles region
Industry Trends

Comcast driving interconnects in 71 markets even as digital program insertion
technology starting to generate “buzz”
– Standards in place
– Digital penetration crossed 20% of US homes
– DPI technology lays foundation for addressable advertising
But privacy concerns will emerge; stake holders must proceed cautiously

1-800 Flowers.com on LA interconnect, Adlink
Case Study

– Offered arrangements priced from $29.99 to $500 simultaneously to viewers in
different demographic and economic segments over two and a half weeks
– Contact information etc. can be customized by zone/neighborhood
– 50% higher response rate than control ad without customization
– CPM premium between 5% to 40%, depending on the granularity and dynamics


Household penetration of VOD to grow steadily, driven by MSOs
need to differentiate from DBS and drive digital revenue

30.0% 29.0%

22.3%

20.0%
16.6%

10.5%
10.0%
6.4%
3.0%

0.0%
2001 2002 2003 2004 2005 2006

Percentage of U.S. HH with VOD available


Advertisers can use VOD to reach this rapidly growing segment of
households

Cox running “FreeZone – ad sponsored VOD service in San Diego
Industry Trends

– Experimenting with letting viewers choose to watch long form advertising
MicrosoftTV launches Foundation Edition, allowing Operator to build VOD
“Storefront”
Programmers exploring “Video Brochure” concept
– Tying VOD with text and graphics for sponsor microsite
Guide vendors integrating broadcast and on-demand on single seamless interface to
drive viewers

Cox San Diego and “FreeZone”
Case Study

– Ad-supported content such as short films, sports and interviews with local celebrities
– Includes permission-based follow-up interaction between advertisers and viewers
– 50% of digital subs ordered 2 million videos over 12 months
– Average of 3.76 videos accessed per viewer per week
– Each unique viewer spent approximately 25.5 minutes per week viewing advertiser
content


DVR downloads provide a partial solution for the DVRs impact on
television advertising

TiVo is the only DVR vendor who has been aggressively using downloaded advertising
so far
– But Echostar has crossed a million subscribers and cable is starting to explore DVR
Industry Trends

downloads too
Advertisers include retailers, automobile manufacturers, but are mostly film studios
– Format appears best suited for entertainment related advertising but could extend
to other products provided commercial is “entertaining”
DVR downloads can be targeted to suitable households
Advertisers can collect actual viewership data rather than estimates
– Interactive components and promotions can even generate direct responses
But DVR will allow only for a limited amount of advertising

TiVo downloaded nine promotional video segments promoting Austin
Case Study

Powers In Goldmember
– Included full-length theatrical movie trailer, additional movie footage, a music video
and a message from actor Mike Myers
– 2/3 of TiVo households viewed the showcase over the two week campaign
– Viewers spent an average of 6 minutes interacting with the video


Branded entertainment opportunities stretch beyond product
placement and sponsorship

Also developing additional content and linking it to TV commercial
– Contest/Promotion
Industry Trends

– Online Movies: BMW Films.com
– Standalone DVDs
Ford and ’24’ present an interesting model for the future, particularly on-demand
advertising
– Single, long form commercial directly related to programming
– Less likely to be skipped
– Less likely to be resented if offered on VOD without Ffwd capability

Barbie and the Nutcracker: Mattel’s holiday movie turns a profit!
Case Study

– Standalone video featuring computer generated Barbie created by advertising
consultancy Science+Fiction
– Sold at retail outlets such as Wal-Mart and Toys R’ us between Thanksgiving and
Christmas 2002
– Mattel subsequently purchased broadcast slot on CBS for video
– Sold $3.4 million videos and generated $65 million in revenue


The Format Evaluation Matrix: Advertisers must develop analytical tools
to select appropriate approaches and formats moving forward

Scale: 0-100
Form at
Penetration
Scale: 1-5
Quotient
Assigned Product Show Enhanced PVR Targeted Broadcast
Objective
Weight Placem ent Sponsorship TV Dow nload Advertising Advertising

Brand Building
4 5 2 2 4 5

Prom otion
2 2 5 4 4 2
Closed Loop
/Direct Response 1 1 5 4 4 1
Targeted
Segm ent
Marketing 2 2 3 5 5 2
Im pulse
Purchase 1 1 5 3 1 1
Total Value Per
Form at
Adjusted Total
Value



The Format Evaluation Matrix (continued)

Scale: 0-100
Form at
Penetration
Scale: 1-5
Quotient 100 100 10 2 0 99
Assigned Product Show Enhanced PVR Targeted Broadcast
Objective
Weight Placem ent Sponsorship TV Dow nload Advertising Advertising

Brand Building
4 16 20 8 8 16 20
Prom otion
2 4 4 10 8 8 4
Closed Loop
0 /Direct Response 0 0 0 0 0 0
Targeted
Segm ent
3 Marketing 6 6 9 15 15 6
Im pulse
0 Purchase 0 0 0 0 0 0
Total Value Per
Form at 26 30 27 31 39 30
Adjusted Total
Value 2600 3000 270 62 0 2970



Conclusions/Recommendations

• One in four US homes will have a DVR in five years
• There will be no single replacement for the 30-second spot
– It will remain a widely used advertising format
• Advertisers must familiarize themselves with new techniques for reaching the
consumer
– The next three years must be a period of intense experimentation and trial
• Advertisers should demand expertise in new advertising approaches from
agencies
• Anticipate that advertising will resemble guerilla battles more than structured,
strategic wars
– Opportunistic initiatives could reap great rewards
• Cross functional expertise will be required as previously discrete roles merge
• New metrics and analytical tools will be critical to evaluate multiplying strategic
and tactical options

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