The Future of TV
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About Kara NortmanCurrent Areas of Interest:New Media, Consumer Internet, Software as a Service, Wireless Current Investments:
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Email“Here we are face to face, a couple of silver spoons. Hopin’ to find, we’re two of a kind, making a go, making it grow…” Sing it with me. “Together, we’re going to find our way. Together, taking the time each daaaaay...” Twenty years ago, I worshiped Ricky Schroeder on my walls, wore his signature crisscrossed jelly bracelets, and never missed my weekly 30 minutes of Silver Spoons.
If you are Gen X — my people, the remote control generation and ex-lovers of acid wash — rock on, hit the fast forward button three times and skip ahead two sentences!
If you are a baby boomer and know how to use a DVR, pause, rewind, insert theme song from The Andy Griffith Show and say “Now I get it.”
If you are wondering why I was praying to a washed up NYPD Blue actor, grab your iPod, buddy list and use the last fraction of your attention span to play The OC theme song (does it have one?).
Just how big is that gap between TV generations? It’s big and it keeps growing. This could give you a clue: I was speaking to a venerable PR executive recently who relayed a story about a disagreement he had with his teenage daughter. Mid-way through the argument, his daughter said, “Dad, pause, and let’s rewind, I would like to start this conversation again.” Kids today only know a world where they can “start-over.” The way teenagers interact with video through DVRs and Windows Media Players/Flash is influencing the way they argue with their fathers. And it’s a pretty clear signal that the world of TV has changed forever.
The changed — make that changing world — presents enormous opportunity for the consuming public to get what they want, when, where, how and how often they want it. It also presents unbelievable opportunities for entrepreneurs to break out of the ordinary and reach consumers in targeted and better ways.
Let’s take a look at the trends afoot in TV Land and what they all mean.
TV is No Longer on a Television Set
We are in the midst of the second great TV realignment. The emergence of cable back in the 1970s marked the first realignment. Gradually, over the last 30+ years, cable has disrupted the Big Three’s (CBS, NBC, ABC) dominance and shifted viewers’ time to hundreds of large and small cable stations. With the advent of on-demand applications, we are seeing the viewership of linear/broadcast programming steadily decline. The next paradigm is linear vs. on-demand, not broadcast vs. cable.
Television is no longer a linear analog signal delivered over coaxable cable to a 32-inch boob tube. It is now digital, includes 600 stations, can be time-shifted either from a set-top box DVR or served on-demand by a central office server over hybrid cable, satellite or pure IP. And if you miss your favorite show on TV, you may be able to download it online or on a mobile phone for a fee or watch it for free, supported by car and soap ads.
Categories such as TV vs. PC give way to entertainment vs. productivity. What do I mean? We want to watch different types of content on our PCs vs. our TVs. Even with Yahoo’s GoTV, Sling Media boxes, Orb Networks, Media Centers, DivX, and Internet- connected game consoles, it is still hard (or at least too hard for most) to move content from a PC to a TV. We interact with content differently on each medium. Content on TV is typically discovered casually vs. content on your TV, which is actively acquired. This will change as consumers become comfortable with the programming choices of their favorite Internet sites, which will act like “channels.”
Major TV Trends
While TV is changing dramatically — new applications, delivery mechanisms and functionality, shifting viewing patterns and advertising opportunities — it still captures 4 hours of the average US family’s attention each day. So how can we make sense of this new world, and what kinds of opportunities for new businesses are there?
TV is Not Going Away Anytime Soon
Until end users can easily move content from the PC to the TV, the PC will still primarily be used for short-form content and the occasional, can’t miss Lost episode not recorded on DVR. I believe the psychological distinction between the passive TV device and the active monitor will hold for some time even as technologies make media transfer easier. A recent study reported by The Wall Street Journal found that a third of children under the age of six live in a home where the TV is on during all waking hours; almost 1 in 5 have TVs in their bedrooms. Children are developing their passive TV behavior early, seeding a new generation of TV watchers.
New Compelling TV Applications Emerge
TV has historically held a monopoly on video viewing time. As MSOs are faced with competition and are learning from the web, they are starting to innovate to defend TV’s historical hegemony.
Recent applications include cheap monthly plans for private label DVRs, DVRless central office time-shifting, and interactive content.
- DVRless time-shifting: Time Warner is clearly excited about
their South Carolina and San Antonio trials for their VOD “Start
Over” program. Start Over enables subs to start a program any
time during the program and watch it in full. You could turn on 24 at
9:59 and watch the entire show. It started with five channels
to TWC employees and friends in South Carolina, and moved to 60 channels
late last year. Something like 70% of their users are using this
feature and using it multiple times a day. Time Warner has deployed technology
that prevents ad fast forwarding in conjunction with the service. The
success of these trials proves consumers are willing to watch ads if they
can mandate when and where they can access their favorite content. Liberate
us from the 9 PM start to 24 (my viewing preferences are becoming
clearer)!
- The long-awaited arrival of Interactive TV: While more prominent in Europe, recently MLB and The NFL have committed to developing interactive, fantasy sports-laden viewing in the next year. It has taken worlds colliding to deliver the promise of interactive TV: MSOs and set-top box providers supporting the interactive platforms, content producers and agencies authoring on the platforms, and consumers becoming facile enough with buttonous remote controls to navigate the interactive content. Companies like Portland-based Ensequence are making Interactive TV a reality in the U.S. promoting a platform that enables end-to-end Interactive TV applications.
Cable and Local TV Advertising Prevail Over National and Broadcast Advertising
TV advertising dollars tend to trail end user behavior. Cable continues to steal share from the networks, and we are starting to see ad dollars shift from broadcast to cable, and from national to local.
Television advertising can be broken down into four different types:
(1) National Broadcast (ABC, NBC, CBS) - National footprint
(2) National Cable Network (ESPN, MTV, CNN) - National footprint
(3) Local Broadcast (WNBC, KTLA, KNTV) - Local metro (SF Bay Area, metro
NYC)
(4) Local Cable (Comcast, Time Warner, Cox) - Sold at the head-end level
Cable currently enjoys a ~70% penetration nationwide and over 80% penetration in urban areas. Cable advertising is increasingly attractive as consolidated MSOs offer a wider selection of viable channels and ratings continue to improve. For the first time this year, TV viewers are spending just as many hours watching cable as they are watching broadcast. In 1987, 75% of Americans were watching ABC, NBC, or CBS during prime time, according to Nielsen. Right now, only about 36% are watching the Big Three, 45% if you add in Fox.
According to CSFB and the NCTA, last year, gross TV ad revenue was ~$70B and gross cable ad revenue was ~$24B. Conversely, local cable ad revenue stood at $5.6B and is currently poised for strong growth of ~10% a year, as compared with 9% for national cable, 4% for national broadcast and 1.5% for local broadcast.
Why is this happening? As digital cable channels proliferate, the amount of available ad space grows significantly. Moreover, local cable ads are particularly attractive to businesses that have been trained by their online advertising experience to look for a targeted (demographic and geographic) advertising channel.
In addition, in the past year, Nielsen has rolled out local people meters to provide more accurate ratings for cable channels. This enables businesses to target ads even more effectively than they can today (e.g., by interest, show, time, demographic, etc.).
Position of Local Affiliates Diminishes
Local affiliates are getting squeezed on a number of fronts. As cable’s daily viewer hours grow, networks and their affiliates lose ad dollars — as advertisers are moving dollars away from broadcast to cable. In addition, the highest rated network shows are found to be the most highly correlated with DVR usage (Fox’s 24 leads the pack). Most importantly, as the number of avenues for content distribution increases (on-demand TV, web, mobile), the major networks are less dependent on their broadcast affiliates’ distribution signal to get programming out to local markets.
The most aggressive local affiliates will fight back by focusing on developing unique local content and creating loyalty around their local news, weather and sports. These affiliates will be in the strongest position to negotiate a share of the networks ads rights online.
HDTV Penetration Grows
In addition to increasing the number of picture lines from 480 to 1,080, HDTVs are digital. HDTVs are no longer mindless tubes dependent on broadcast signals and a back-end mainframe. Today’s high-definition TVs boast computing power capable of handling multiple video formats and dynamically updating its software packs. As prices continue to fall, the penetration of HDTVs is expected to rise to 40% of U.S. households over the next three years. HD content should continue to proliferate, forcing Discovery to give up the premium price for its HD station (anecdotally the most viewed station for a new HD household).
IPTV Services Roll Out
Telcos have been spending billions of dollars to build high-speed networks that use Internet protocol to deliver video over broadband. Over 100 Regional Telcos, like SureWest in the Sacramento area, already feature IPTV. Big telcos like AT&T and Verizon are just now turning up IPTV over newly built-out fiber networks. AT&T is spending $5B to upgrade its plant to serve 19 million homes with connections as speedy as 20 MBPS or 39 MBPS depending on the location. Compare the $5B to Verizon’s $15B. AT&T is picking and choosing the best demo neighborhoods, while Verizon is building out with less discretion.
It will take the IPTV carriers some time to build enough scale to negotiate programming agreements similar to those signed by the MSOs. Competition is good for the consumer as Telcos will finally be able to offer the compelling triple play.
Local Advertising Grows as a Revenue Stream
MSOs have historically focused on subscriber revenue, with ads as a secondary revenue stream. With subscriber growth slowing/flat, MSOs are focusing on alternative revenue streams and monetizing their perishable local ad inventory (big opportunity and high margins). According to PWC, MSO ad revenues are expected to increase 35% over the next 3 years.
DVRs Impact TV Ad Spend
According to In-Stat, 87% of folks who own DVRs fast forward through the commercials. DVR penetration is currently estimated to be around 10%. Nielsen, which began tracking DVR usage at the end of 2005, recently reported that about 2% of American Idol’s audience, 2% of Grey’s Anatomy’s audience and 4% of 24’s audience watched the show on a DVR. With DVR meters in only 1/3rd of Nielsen’s 1,200 homes, many believe they are under-reporting DVR usage. Networks and advertisers have begun to fight over how to calculate the “M” in CPM. Prior to upfronts last month, ABC has announced they will only sell ads to those who count all viewers, both DVR and linear.
With ad-skipping a reality, advertisers are looking to product placement. While we have not seen a major decline in traditional spot CPMs, companies have begun experimenting with more frequent product placements, ranging from a secret santa gift of a video iPod on NBC’s The Office (later offered as a download on iTunes), to the weekly product placements on The Apprentice. Product placements are up 84% in the last year and writers are feeling pressure to write product placements into their storylines.
In addition, new on-demand ad units will emerge for time-shifted television. The mind can race thinking of possibilities — the ticker, the pause ad, the interactive opt-in ad, or the prevent-viewers-from-skipping-old-school ad.
Carriage Fees Shrink
MSOs are running into bandwidth issues as subs request more and triple play takes off. The MSOs told Wall Street that they were fully upgraded and would not require additional cap ex upgrade dollars, and are reluctant to go back and change their tune. As such, the biggest operational priority for MSOs is network optimization. They are thinking about doing things like only serving their top 20 channels linearly and serving up the remaining 500 on-demand. This would enable tremendous bandwidth savings. As a side benefit, MSOs could go back to smaller cable channels and reduce carriage fees based on the number of VOD streams served. Network optimization vendors, are you listening?
The Innovators
Clearly, this is not your father’s TV market. The boundaries between TV and other IP-connected devices are blurring, ad dollars are shifting, content owners and distributors are both experimenting and bickering. Smart start-ups are exploiting this time of confusion and opportunity with more new technology and business model innovation than we have seen since TV went color.
Arms dealers like Broadbus (a Battery portfolio company), SeaChange and Concurrent are serving up simultaneous video streams on-demand from central head-ends. Interactive TV vendors like Ensequence and GoldPocket are bringing Barry Bonds up-to-the-minute stats to a remote control near you. The likes of Decisionmark and Quova have developed technology to manage content rights distribution online. Finally, companies like Black Arrow and Invidi are creating a platform and marketplace for time-shifted ad units.
Spot Runner: A Recent Investment Spotlight
Battery made an investment in Spot Runner in early 2005, fortunate to find fantastic founders with a concept and a company set to exploit many of these TV trends.
Spot Runner is an Internet-based ad agency that makes it affordable for local businesses to advertise on local TV. Spot Runner has a library of professionally produced ads, and gives businesses a simple online process to customize the ad and place it on local cable and broadcast.
The company reaches the type of advertiser that has not historically had access to TV advertising, and creates additional demand for perishable cable spots. Each national cable network (e.g., ESPN, CNN, Bravo, etc.) gives its local cable affiliates (e.g., Comcast, Time Warner, Cox, etc.) two minutes of advertising an hour to be sold at the local head-end level. More than 70% of this local cable ad space sits unsold, largely because (i) local ads do not meet the needs of large national advertisers focused on broad campaign reach (ii) it’s too expensive for MSOs to market to small businesses directly and (iii) it’s too expensive for local businesses to produce and place a cable ad. Additionally, this local cable ad inventory is expanding rapidly as the number of digital cable channels proliferate and MSOs continue to upgrade their networks to be fully digital.
On the demand side, local businesses are looking for targeted sales/marketing channels to grow, but their ad budgets are small and require small, adjustable buys. Traditionally, ad production and cable TV spot buys have been prohibitively expensive for local businesses.
Spot Runner is solving the supply/demand problem by providing an online service to local businessess for automating the ad creation, media planning, media placement and measurement process.
Spot Runner is now working with a variety of national brands to create a distributed marketing platform — creating professional localized content. In particular, they are having great success selling national brands a marketing platform where they can control the creative nationally and then provide local franchises or other co-op relationships the flexibility to customize for their particular store/area.
As an example, Spot Runner recently announced an agreement with Cendant Real Estate Services to offer advertising services to its 260,000+ agents and brokers in 9,000 brokerage offices in the U.S. Cendant is the largest franchisor of real estate brokerages in the country and their brands include Century 21, Coldwell Banker, Coldwell Banker Commercial, ERA and Sotheby’s. This partnership presents the opportunity to reach hundreds of thousands of individual businesses with Spot Runner’s self-serve advertising platform and create an entirely new category of local television advertisers.
TV Rolls On
Television — the word may become passé as the distinction blurs between an IP-enabled device with a big plasma HD screen but without a keyboard, and an IP device with a slightly smaller plasma HD screen with a keyboard. And as iPods, mobile phones, even your clock radio sport a screen and a data connection, consumers will have multiple options for watching video. As experiments putting premium content on the web prove successful, more and more production companies/studios/networks/syndication/DVD rights owners will find a way to sort out our content rights to make video available on many devices.
While TV must now innovate to keep pace with alternative distribution channels, remember that the average household still watches 4 hours of TV a day. Longer term this number may decline and ad dollars may continue to shift to other media. But a $70B industry still has a lot of legs.
If you have an idea or a business plan that exploits the ever-changing world of TV, I’d love to hear it. Contact me at kara@battery.com.
© 2006 Battery Ventures. All rights reserved.