It Can Control Madison Avenue

American Demographics, Feb 1, 2004

Byline: SUSAN THEA POSNOCK

New Yorker Paul Ella unwinds from a long day at work, settling down on his couch in front of the television. But he isn't about to veg out, passively watching whatever happens to be on, especially not the endless commercials. No, Ella is taking charge of his television. With a super remote device that controls everything from the TV set to his DVD player and stereo, the 33-year-old project manager switches on his Replay TV, going into a menu of recorded programs. Regardless of when the show aired, Replay TV allows him to watch it when he wants, and how he wants, on his own time and without commercials. "I don't have to wade through hundreds of channels," he says.

But the key to Ella's newfound power is more than scheduling - it's being able to eliminate advertising from his evening TV viewing ritual. "The ability to skip through commercials makes the experience more seamless," Ella says. "You get product bombardment every day. It's on the subways, on the billboards, on the radio and television. So, when you go home and you want to watch a program like CSI, it's quite an intense storyline and I don't want it broken up every 10 minutes by five minutes worth of advertisements. It just doesn't make sense."

Even though he'd rather just zap them all, advertisers and commercial TV programmers and distributors have become keenly aware that they need to pay attention to Ella: he's one of an increasing number of viewers. While the penetration of digital video recorders, also known as DVRs, is still low - about 2 percent of U.S. homes have them - the growth rates are expected to explode in the next few years. Right now, industry experts say anecdotal evidence indicates that DVR users are primarily young males with high discretionary incomes.

But that will all change - and rapidly - in the near future. DVRs will be in almost 25 million homes, or 20 percent of U.S. households, by 2008, based on projections in a study conducted by The Yankee Group, a Boston communications and networking research firm. Recording devices are expected to become more common as satellite TV and cable companies offer them to their subscribers and as consumer electronics manufacturers integrate the technology into set-top boxes.

Aditya Kishore, Yankee Group's media and entertainment strategies analyst, says the prevalence of DVRs in the next few years will alter the television industry's business model. "Between 65 percent and 75 percent of DVR households fast-forward through commercials," he says. "Media buyers and planners have to stop thinking about the 30-second commercial, and they will have to be more opportunistic. If [a 30-second commercial] is all you have in your arsenal, you're at a disadvantage from advertisers who have been experimenting with new technologies and trying new things."

By 2007, Yankee Group projects advertisers will spend $5.5 billion on TV advertising that viewers with DVRs will never see. Forrester Research, a technology research firm in Boston forecasts that DVRs will cause an $8 billion drop in TV ad dollars between 2006 and 2008. "From a consumer standpoint it is a wonderful machine and I'm surprised it hasn't caught on more rapidly in the U.S.," says Steve Grubbs, CEO of PHD USA, the media buying division of Omnicom and a TiVo owner. "From an advertiser standpoint it scares the heck out of me."

Damage Control

Grubbs and others are not panicking - at least, not yet. Instead, they are looking at how DVRs will change the way people watch television and receive ads and how to adjust to the shift. "It's forcing us to look at other touchpoints to reach the consumer," he says. Already some major advertisers like Ford Motor Co., The Coca-Cola Co. and Gap Inc.'s Old Navy are experimenting with ways to reach consumers beyond the 30-second ad. As a result, the line between entertainment and advertising is becoming blurred.

"We're going to see advertising on television become closer to entertainment and entertainment becoming more like advertising," says Alex de Havenon, VP of display marketing for X3D Technologies Inc., a company based in New York that produces three-dimensional ads. The technology works by having in-store advertising video clips float inside and up to three feet in the air outside the screen.

Nowhere is that blurring more evident than in the partnership between ABC, a unit of Walt Disney Co., and MindShare, the media-buying unit of WPP Group PLC, a worldwide advertising corporation, to develop television shows together. MindShare's clients include Sears, Roebuck & Co. and Unilever. If it goes according to plan, these clients will advertise on the shows created and produced by the partnership as well as promote their products and services in the programs.

While that deal was inked in early December, other TV programs already have integrated advertising in profound ways. The Fox series 24, starring Kiefer Sutherland, premiered in the fall with a single sponsor, the Ford-150 truck. A three-minute short film featuring Ford's pick-up was shown before the show and another one aired after. There were no commercial interruptions in between. Further straddling the line between the series and its commercial sponsor, Sutherland's character drives a Ford Explorer in the show. Grubbs says the carmaker's promotion was smartly done. "They created a short film that was very similar to the style and form of the series itself, yet the hero of the short film was the car," he says.