Television Gets Targeted

American Demographics, Sept 1, 2002

Byline: PAMELA PAUL

Television has traditionally been a mass marketing medium, but targeted TV advertisements may be the wave of the future. New efforts underway could enable video-on-demand (VOD) to carry ads tailored to specific audiences, providing fine-tuned marketing opportunities that transcend what television has been able to offer.

An array of new technologies now in the testing phase could provide advertisers with an unprecedented ability to gear TV ads to specific demographic groups - and even to individuals. For example, by merging ZIP code data with user patterns - such as whether a household subscribes to HBO or frequents home shopping channels - cable operators would be able to serve up different commercials to appeal to different audiences. An upscale ZIP code might see an ad for a luxury spa, while a middle-income market would view promotions for discounted cruises. Companies could go one step further, merging a third-party database overlay with user data to drill down to the household level. An unmarried woman could hear about a singles' resort special, while a family of five could view an ad about hotel discounts for kids. VOD viewers could also choose to provide data about their needs and preferences, such as letting their cable operator know they are shopping for a car.

The interactive nature of VOD has the potential to create a two-way stream of information between consumer and advertiser, allowing an ad to be customized for a consumer. And though VOD has not caught on as quickly as some advocates predicted, developments in technology and workable subscription models place VOD at a crossroads: It is now poised to gain traction among viewers, possibly in late 2002 or early 2003, according to industry estimates.

The recent flurry of activity surrounding VOD is promising for the industry, and reflects the potential riches offered by the now $53 billion market for TV advertising. However, numerous technological, legal and business questions must be answered before VOD advertising can take off.

"The holy grail of advertising is knowing exactly who's sitting in front of the television at any moment in time and what they're interested in," says Ken Ripley, vice president of advertising sales and digital networks for Discovery Kids at Bethesda, Md.-based Discovery Communications. "We're still in the early developmental stages, but [VOD] technology is a step toward getting there."

With VOD, instead of having network and cable programmers decide what the audience can watch on TV and when, viewers can choose programs to suit their own schedule. Rather than drive to the nearest Blockbuster, they can "rent" a movie on TV. Here's how it works: A viewer who has a specially enabled digital set-top box can, with a remote control, select and access movies listed on a VOD channel. Cable companies update each digital box with their latest offerings via fiber-optic lines. So when a viewer chooses a movie, the cable operator's servers stream video into that specific digital cable box.

Although far from a mass phenomenon, an increasing number of homes are opting to try VOD technology. By the start of 2002, about 2.5 million homes - slightly more than 2 percent of the 105.5 million TV households in the U.S. - were able to receive video-on-demand from their cable company via subscription. However, only one-third of those households, or approximately 833,000 subscribers, elected to use the service. That's up from 300,000 households that used VOD technology in 2001, according to New York-based research firm Jupiter Media Metrix.

Several roadblocks have slowed the adoption of VOD. First, VOD requires digital cable, which hasn't spread as quickly as expected; it is in only 14 million homes nationwide. Time Warner Cable, one of the most active operators in the digital field, has penetrated no more than 26 percent of its 12.7 million basic cable subscriber base with digital subscriptions. Second, delays have been caused by unwieldy negotiations aimed at determining how to make the system profitable for all involved - cable operators, VOD distributors and, especially, movie studios. Third, the number of movies available to consumers is not yet substantial. Most cable systems offer a selection of fewer than 200 films - because studios have been reluctant to give up rights and because many releases are tied up in licensing arrangements that preclude a VOD run.

It looks like things are about to change. With companies developing workable business models, primarily based on subscription revenue, 8 percent to 10 percent of the nation's television homes - or about 8 million to 10 million households - are expected to have access to VOD by the end of this year. And by 2006, according to Jupiter Media Metrix, 5.3 million people are expected to use VOD to watch movies, spending $642 million.

"It seems like this will really be the year that VOD rolls out aggressively," says Matthew Strauss, executive vice president of New York City-based Mag Rack, an online content provider and subsidiary of Rainbow Media in Jericho, N.Y.