TV advertising - the stalwart of American marketing for the last 50 years - is going through a radical transformation. Driven by innovations in how advertisers measure and buy advertising and by changes in the way ad inventory is sold, the future of TV advertising will include many advertisers not a few large brands, media buys driven by data not ego, and relevant sponsored content instead of commercials.
The State of the State: Declining Viewership
- Broadcast TV is Less Dominant. In 1980, the Big Three Networks - ABC, CBS, and NBC - had a combined 50% share of household audiences in the US. As of 2011, that number had plummeted to close to 10%.
- Cord Cutting is Here. 23% of homes won't even have a cable subscription by 2019. Even stalwart cable channels like sports juggernaut ESPN are seeing subscription declines.
By contrast, new entrants are gaining rapidly:
- Subscription Over-the-Top is Growing. Ad-free "over-the-top" (OTT) services like Netflix are exploding. Netflix now has more than 42 million subscribers in the US. Amazon, HBO, and Hulu Plus are also showing strong OTT growth.
- Online Video is Growing. YouTube, the leader in the space, now reaches more 18-49 year olds than any US cable network. And while TV revenue flatlines or declines, YouTube's revenue is expected to increase from1.6B in 2011 to12.8B in 2017.
To Save TV, Make Ads More Relevant
So far, despite declines in viewership, TV ad revenue has not cratered to the same degree as other analog advertising mediums like newspaper and yellow pages. As Mary Meeker notes in her annual Internet trends report, US advertisers over-indexed 45% of media spend to TV in 2013, while only 38% of consumers' media consumption was spent on TV. But after a few years of tepid growth (but overall market share decline), Magna Global forecasts 2015 as the first year where US TV ad revenue will actually decline year-over-year.
TV has always been bought and sold based on one factor: which advertiser will pay the most for a given spot. With no regard for relevancy, the invention and proliferation of DVRs like TiVo to skip ads should have come as no surprise to anyone. Indeed, sixty-six percent of households with income over $75,000 a year have a DVR. A CBS executive recently admitted that 50% of DVR owners skipped ads, but bragged that this number was declining "because [people are] too busy on their phones to fast-forward through the ads."
To save TV advertising, commercials must become part of the viewing experience, instead of a distraction to be skipped. Online publishers have proven that this strategy works. Google and Facebook are poised to dominant online advertising, accounting for approximately 50% of US online ad revenue in 2014. Both companies run real-time auctions to determine which advertiser will win a given spot. Importantly, these auctions determine winners based not just on the highest bidder, but on a combination of bid and click-through rate (CTR), that is, the percentage of people who actually click on an advertisement. As a result, only advertisers relevant to a specific query or set of consumers will actually win the auction.
Google has actually taken this concept one step further by introducing Quality Score. Quality Score not only factors in CTR, but also the relevancy of an advertiser's landing page - evaluated in part by human reviewers and in part by data Google collects on how people interact with that page. Put another way, Google rewards advertisers for both creating ads that consumers like and creating Web sites that drive positive consumer experiences. As one senior Google product manager told me, Google is optimizing not just for a single click, but to ensure that consumers will find enough relevancy in Google ads that they will click on ads in the future.
As consumers become conditioned to relevant online ads, the tolerance for irrelevant ads on other mediums will only decline. Google and Facebook see advertising as part of the overall consumer experience; TV networks see advertisements purely as a revenue source. Relevant online ads drive greater engagement; irrelevant TV ads sell more TiVos.
To Save TV, Make Buying Quantifiable and Democratic
At some point in the next three to five years, online advertising spend will surpass TV spend in the US. One obvious reason for this shift is the consumer migration from TV to online - advertisers have to follow consumers, after all. Online advertising, however, is also attractive to advertisers because it is so quantifiable; online marketing campaigns provide advertisers with highly actionable data.
This measurability works equally well for both direct response advertisers (trying to sell a product or service immediately to the consumer) and brand advertisers (trying to generate awareness and consideration). Unlike TV campaigns that have traditionally relied on survey data to determine who and how many people watched a given show, online publishers can quantifiably show advertisers who saw their ads, whether they interacted with the company, and how this influenced consumers' perceptions of their brand. Online branding campaigns can be optimized with near-real-time data, TV campaigns can take months to fully evaluate.
The TV networks are trying to respond. Earlier this year, for example, Time Warner "offered new technology that would let advertisers forecast sales results based on how they deploy advertising on the company's various outlets." Similarly, an executive at Turner Broadcasting recently complained: "I need campaigns measured and integrated all the time so I can normalize. We need 'provable ROI' for guaranteeing sales. I don't care about age and sex."
There are two technologies that might create parity with the measurability and real-time optimization of online advertising: addressable TV and programmatic TV buying. Cable companies, for example, collect plenty of information about consumers, including what shows a user is watching, home address, automobile data and credit card info. In the future, an advertiser could theoretically use all of this behavioral data to create highly-targeted, personalized ads, known as addressable TV.
Programmatic TV buying, that is, TV buys transacted through a technical platform instead of negotiated with a sales team, is also on the rise, with Magna Global suggesting that $2.5 billion (4%) of TV buying in 2015 will be sold programmatically. This number could rise to 17% of the market by 2019.
So in the future, it's conceivable that TV advertising will compete with online advertising in three key ways: first, by optimizing ads not just on revenue, but on relevancy; second, by providing user-level targeting through addressable TV; and third, by democratizing media buying through programmatic exchanges. As a result, consumers would watch more commercials, TV networks would be able to increase their cost per thousand impressions (CPMs) as a result of better targeting of consumers and less commercial-skipping, and advertisers would get access to better data and would be able to make smarter decisions about their TV media buys and overall media allocation.
The TV Industrial Complex Re-Imagined
Measurable, relevant, and market-based TV advertising may save TV, but what emerges on the other side will look nothing like the TV industrial complex we know today. The TV networks may end up doing fine financially, despite having to completely rejigger the way they sell ad inventory. As noted, CPMs could actually increase substantially with better targeting, lower skip-rates, and more advertisers participating in the ecosystem.
For big brands, the shift from slow-moving, difficult-to-measure, massive branding campaigns designed to reach an entire demographic to pinpointed, real-time, data-driven targeting of individuals will hasten the rise of the data-driven CMO. Many commentators simply note that CMOs who do not embrace data will have limited tenures going forward. CMO who base success on how many awards their creative wins, or fuzzy goals like "lift" will struggle to remain relevant.
Big agencies will need to pivot to continue to lead in this new world order. To date, digital acquisitions have driven continued growth for large agencies, as this revenue was largely supplemental to traditional advertising budgets, and largely judged on branding-based metrics. CMOs - now accountable to data-driven KPIs - are starting to demand equal accountability from their agencies. As a result, agencies that could once bill millions on large branding campaigns (such as a TV placement) are now being asked to justify every dollar spent.
In a "zero-based budgeting" world, TV advertising is just one of many channels against which an agency must optimize. Media efficiency may be better for advertisers, but it may also drive "a secular and downward shift in spending by the [large agencies'] biggest clients."
After the battle of Ben Tre in the Vietnam War, a US army officer famously quipped "It became necessary to destroy the town to save it." Such is the state of the TV industrial complex today; a future exists for TV advertising, but the foundations upon which the industry is built may need to be torn down and rebuilt to ensure survival.