Tuesday, July 19, 2005

Digital Television Industry

A few weeks back, I wrote about how technology looks likely to revolutionize the music industry by weakening the record companies who control distribution. The winners are likely to be the artists themselves who are able keep a larger percentage of the sales of their work and consumers who will have a much wider selection of artists available to them. I think that something similar will happen to the television industry as the distribution of content passes out of control of the broadcast networks and even the cable networks.

Clearly the average American, who subscribes to cable, has a much greater selection of programming available to him than twenty or even ten years ago. In addition digital video recording devices (like TiVo) allow viewers to watch programs at a more convenient time or even store those programs indefinitely. In the process consumers who use DVRs typically skip most of the commercial messages from the companies who paid to subsidize the program. The economics of the model are beginning to break down and the industry needs to create a new business model to survive.

Today, television programs are created by studios who are either a part of television networks or contract with television networks to air their programs. Studios pay all of the actors, writers, producers, and crew associated with the program. Television networks choose the shows they want to air at a particular time based on which programs they think will draw the most viewers. The reason that the networks want to draw the most viewers is so that they can sell commercial air time to advertisers at a higher price. Advertisers use the commercial air time to send a message to consumers about their products and services - usually to raise awareness of a product/service and to convince a customer to make a purchase. So fundamentally businesses fund television programming and networks in order to send a message to their customers and potential customers.

The current advertising environment is one of increasing audience fragmentation, which increases the complexity of identifying the programs that a target audience plans to watch. Then even if advertisers can identify the most desirable programs many members of the target audience may just skip the commercials with a DVR, which defeats the purpose of funding the program.

Technology is clearly changing the dynamics of the television industry, but the changes are not necessarily negative. In fact the technology that has thrown the profitability of the industry into question also creates new opportunities to create value. Advertisers still want to send a message with their customers - so much so that they are willing to pay dearly to do it. Consumers still want to watch television programs for entertainment and are even somewhat interested in learning about new products and services. All the television studios, actors, producers and other staff still enjoy making television programs and being paid to do it. All that is really needed is a new model to transfer value between all of these players, which will likely be driven by the firms that control the access to viewers and have relationships with studios and advertisers.

I can see two ways for this to play out. The first is for viewers simply to pay their service providers (cable companies or Bells in the future) for the programs that they want to watch. Many cable companies currently offer commercial free video on demand for certain programs so many consumers are already doing this. This model cuts out advertisers and likely results in a suboptimal solution i.e less value is created for everyone - specifically advertisers.

A superior solution would combine the benefits of video on demand with a targeted approach to advertising. The mechanism to offer video on demand is that a customer requests that their service provider send a particular program to their television. The service provider then sends that program. By definition, the service provider knows which viewer plans to watch the program. Assuming that they know something about that particular viewer, they will be in the perfect position to target specific advertisements that the viewer may be particularly interested in seeing.

The benefits for both the consumer and the advertiser are enormous. Advertisers spend countless resources trying to determine what kind of people are most likely to purchase their product and how they can find them to raise awareness. Instead of playing averages, they can just send their message directly to the type of people that they want. Instead of sponsoring a particular program, the advertiser can send a message to a particular person.

Two examples illustrate this point. Producers of feminine hygiene products waste huge sums of money buying air time for their commercials that are ultimately viewed by men. Although in many cases men and women watch television together, there are certainly plenty men watching television alone who will never purchase these products. The air time would be better spent advertising anything else, but since their target market is so large, fertile women, the companies do not mind paying extra money to reach them. The second example deals with the problem of a target market being too small for television. There are countless examples, but ski and snowboard equipment is a good one. There are essentially no commercials for ski equipment on television, although there are plenty of commercials for other products that feature skiing. The reason is that too few people purchase ski equipment to make it worthwhile for the companies to purchase commercial air time. They cannot have any assurance that they will be able to reach a large percentage of their target market regardless of which programs they sponsor.

The likely solution to both of these problems is for consumers to indicate not only who they are but which products and services they would like to learn more about. Then service providers and advertisers can target commercial messages directly at individuals instead of at groups. In fact if an advertiser can know that they are talking to a current customer, they may have a different message than if they are talking to a potential customer or a competitors customers. The ability to target an audience down to the individual level coupled with data mining and feedback from the viewers will make the investments that advertisers are making yield above average returns. Service providers will become an even more integral partner in business/consumer communications. Programming will improve to fit viewers tastes based on the actual decisions of consumers about what to watch. Technology posses significant challenges to this important industry, but it also allows the possibility to enhance value for all players involved.

1 comment:

Travis said...

Good points. A possible problem with the personalized advertising that would be so beneficial for both consumer and provider is that privacy nags are butting in, just like they did with gmail's email adverstisement. This will become a problem if they attempt to use government to prevent such inovations from occurring. (Google had to beat back a California bill)

We can guess that privacy advocates will team up with those that will be hurt by the measure.