The advertising industry is in the middle of a transition that will determine its future. To many in the business, awareness of this transition is still non-existent. To others, there is a feeling that something is amiss, but they are not sure what.
The transition that is taking place has to do with a fundamental change in the way that advertising media and creative is bought and sold. When a change of this magnitude hits an industry that is $18 billion strong, the results can be debilitating.
Andy Grove, in his book Only the Paranoid Survive, called these magnitude changes "inflection points." In business, an "inflection point is when the old strategic picture dissolves and gives way to the new, allowing the business to ascend to new heights."
Why is this one of those points? Start with advertisers. If you ask them what their two largest concerns are today, their answer will be one, media inflation—for the same money they’re getting less audience. And two, lack of accountability. Advertisers today are demanding performance-based metrics, which is why CPM-based deals are being evaluated on the backend, using cost-per-sale (CPS) metrics.
Above the line and below the line has given way to the bottom line.
The first casualty has been the agency-of-record model. Major marketers have recently dropped large, integrated agencies for smaller two-, three-, four-person shops. These small shops claim that technological advances now make the cost of doing business on a larger scale affordable for companies of their size. Yet to suggest that compensation is not the driving force behind this change would be naïve at best.
In general, advertisers are frustrated, and rightly so. In the last five-year period, prime-time ratings fell by a third, media costs rose by a third and commercial clutter is up 20 percent. As for the light at the end of the tunnel, it is dim and getting dimmer. The reason? As ratings continue to fall, and the demand for any remaining programs with high ratings stays strong, the pressure on the networks will intensify to raise the number of ad minutes, increasing clutter even more.
Adding to advertisers’ angst are the technological advances that have increasingly put the viewer in control, allowing them to decide what they want to watch and when they want to watch it. Digital Video Recorders (DVRs) are currently in 1.7 million homes and TiVo (the leading brand) is growing at 70 percent a year.
Although the base is still small, the consensus of those in the know (led by Forrester Research) is that 30 million homes will have DVR technology by 2006. This projection is based on the fact that both the cable industry (50 million subscribers), and the satellite industry (20 million subscribers), are embedding DVRs into their systems.
When 30 to 40 million homes have the ability to "opt out" of a commercial, there will not be a regular program left on TV where an advertiser can reach more than 10 percent of the population with a single spot.
At that time, mass media will cease to exist. What are the chances of this happening? Fairly high, considering that 98 percent of TiVo users say that TiVo is the most important device in their homes. The attraction is the control that TiVo gives the viewer. Not unlike heroin, control becomes addictive once the fix is in.
This "control addiction" is supported by the numbers. TiVo users watch TV in a time-shifted mode up to 80 percent of the time. The programs that they time shift are some of the highest rated. Case in point is that four-fifths of TiVo users watch Friends in a time-shifted mode. Considering that up to 70 percent of those that time shift skip the commercials, Friends goes from a 12-network rating to a 5.3.
While the current DVR penetration rate is too small for agencies to lose sleep over, advertisers are less blasé. Bill Lamar Jr., senior VP of marketing for McDonald’s recently put it quite succinctly: "The days of spending hundreds of millions of dollars on TV advertising is over. Reaching consumers is no longer TV driven."
Agency reaction has been interesting. At the recent AICP show in New York, Bartle Bogle Hegarty (BBH) chairman John Hegarty chided clients and their agencies for not jumping blindly into branded entertainment and abandoning the comfort of the ROI model.
According to Mr. Hegarty, clients need to understand that "they are entering into a New World" that can’t rely on measurement metrics like the CPM-based Gross Ratings Point Model that they comfortable with.
Is the chairman of BBH right? Yes, a New World is coming. And yes, the CPM model should be abandoned. But no, not for something that requires a blind leap of faith. Rather, it should be replaced by an even more accurate ROI measurement.
Ironically, that’s what advertisers will get with Viewer-Controlled Media. Besides giving viewers control, DVRs also give advertisers the exact knowledge as to how many watched their commercials and for exactly how long. Instead of paying for a thousand in the hope that some watch (the current CPM model), advertisers will pay only for those that actually watch.
Media inflation, their number one concern, vanishes.
Furthermore, if an advertiser knows how long somebody watched their spot for, it can be argued that they will want to pay their agency accordingly. The more involving the spot, i.e. the longer somebody watches, the more valuable it is to the advertiser, and the more they should be willing to pay the agency. If zero watch, that’s what the agency makes.
Lack of accountability, the number two concern, gone.
The bottom line is that Viewer-Controlled Media delivers the ROI that advertisers have been asking for in a system that viewers are becoming addicted to. Clearly, it is not going to go away.
That agencies haven’t yet owned up to this fact shouldn’t be too surprising. After all, for them the risk increases. To have your revenue determined by how long someone watches raises some soul-searching questions. How good are we really? Does our work actually work? How do we staff if we’re paid after the fact?
A new operating system needs to be installed. Not so much into the payroll and accounting infrastructures of agencies, as into the mindsets of their executives. Mental maps need to be redrawn as to how agencies can make money.
In the viewer-controlled world, hourly time-schedules and labor-based fees will be replaced by results-based metrics. Worth will be determined by viewers. Failure will no longer be lucrative. Success will be rewarded. Advertisers will pay less over all, and agencies will have the chance to make more.
If their work is good. Apparently, a big "if" for many.
Throughout history, the impetus to change has been economic gain or economic pain. Agencies can choose to change now or change later, but change they must. Driven by viewers and supported by advertisers, a New World is coming. If the experts are right, we have three years to get ready.
