Video Advertising: The Incredible Disappearing Audience

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SEE LAST PAGE OF THIS REPORT Paul Sagawa / Artur Pylak


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May 29, 2012

Video Advertising: The Incredible Disappearing Audience

  • Advertisers turn to broadcast TV to get to a big audience fast, but this selling point is quickly deteriorating. Top programs are drawing fewer viewers every year as the audience is spread over a wider range of choices, and those viewers increasingly avoid advertising via DVRs and by multi-tasking on portable devices. Meanwhile, the rise of these devices and of connected TVs are fueling big growth in web-based video, which has begun compete for advertising dollars with more precise audience targeting and increasingly sophisticated ad placement packages. These opposing trends portend pressure on TV ad spending within 2 years, and increase focus on alternatives to traditional 30/60 second spots. We believe this is favorable to on-line video providers, ad agencies, and web-savvy networks, and unfavorable for multichannel network operators and overly cautious networks.
  • Advertisers still favor TV advertising, largely due to its perceived ability to deliver a large national audience in a short window of time. TV execs stress the ability of their networks to reach many millions of viewers at one time, concentrating the advertising message in a narrow time window. This has been a key factor in TV sustaining its share of ad spending, despite the rapid growth of internet advertising, which has crushed newspapers and the yellow pages.
  • However, this advantage is rapidly deteriorating with audience diffusion, time shifting, and multi-screen viewing. In 2001-2, 6 TV shows averaged better than 20 million viewers per week. By 2007, that number had fallen to 3, and for this season, thus far, no program has achieved that threshold. With overall TV viewership is shrinking and split amongst a growing roster of broadcast and cable networks, we expect audiences to decline even further. Moreover, the rise of time shifting and the distraction of the internet on portable devices means that TV spots are increasingly skipped or ignored, blunting their impact.
  • Rise of tablets and connected TV increase the reach and appeal of web video for advertisers. The explosive growth of tablets and connected TV sets over the past 2 years sets the stage for Internet video purveyors to take a meaningful share of the primetime audience, exacerbating the problem for the TV networks. While advertisers still appreciate the reach of TV, they are willing to pay a 40% premium for on-line video impressions due to their superior targeting and interactivity.
  • Increasingly sophisticated web-based video providers packaging ad placement to meet advertiser audience and timing needs. Earlier this month, 6 on-line video sites, led by Google’s YouTube, crashed the network upfronts for the first time to present their own cases for advertisers. Armed with rapidly rising viewership, sophisticated audience analysis tools, flexible ad placement packages, and the support of new 3rd party ratings metrics, these upfront presentations are emblematic of a more organized and appealing pitch to advertisers, who appear to be growing ever more comfortable with increasing web video in their budgets.
  • Alternatives to 30/60 second spots gaining traction – sponsorship, product placement, quick hits, and “advertainment”. In response to the changing environment, advertisers have begun to change their approach. Traditional 30 and 60 second spots now feature popular music direct from the charts, a function of both the need to capture attention and the need of artists to monetize their work now that the record industry has collapsed. Importantly, alternative ad formats are also emerging. Advertisers are increasingly sponsoring programs directly or embedding their message through product placements. On-line, advertisers are buying 15 second quick hits to fit viewer tolerance for disruption. Very sophisticated advertisers are also producing long form ads that can attract web viewers on their own merits as entertainment. In this vein, several of this year’s Superbowl ads were first launched in long form on-line.
  • These trends suggest serious pressure on television ad market within 2 years. Stable TV ad spending over the past few years gives television analysts false hope that the situation is sustainable. More than 5% of US video advertising spending is already going to on-line, with the total spend up 50% YoY. With falling overall viewership, rapidly shrinking audiences for top shows, increasing time shifting/ad skipping, more multi-screen distractions, improving internet content, better access to internet content and an advertising community growing comfortable with the advantages of on-line video, we believe that the impact on television advertising will be apparent once the Olympics and the presidential election advertising bumps are over.
  • Internet video platforms, web savvy networks, and ad agencies will benefit, cable/satellite operators and cautious networks will not. The biggest beneficiaries of shifting ad spending will be internet video services. Of these, we believe the major platforms – Google, Apple and Amazon – and network-owned Hulu are best positioned. Broadcast and cable networks face both a threat and an opportunity. Those that best manage the transition stand to prosper – CBS and NewsCorp’s FOX come to mind – while those that are overly loyal to the channelized model could suffer. Advertising agencies should play a key role in helping their clients adjust to the shifting media landscape, while multichannel distributers- i.e. cable and satellite – bear significant long term risks.

Cut to the Chase

The number of television households and the number of hours that the average American watches have begun to shrink for the first time in history (Exhibit 1-2). At the same time, this shrinking pool of viewers is being diffused over a broader set of quality programming options. As such, the top network shows are no longer able to command audiences of more than 20 million viewers each week. Moreover, a significant and growing percentage of these viewers are using DVRs to watch programming out of schedule, and fast forwarding through the commercials in the process. Of the viewers watching in real time, many are multitasking with their smartphones and tablets, checking the internet and ignoring the broadcast advertising. For advertisers, who have long valued television for its ability to reach a huge audience in a short time, these trends are forcing hard reflection.

Exh 1: US TV Households

Exh 2: Monthly Time Spent in Minutes by Medium, persons aged 2+

On-line video is a real alternative. Already, on-line offers the advantages of precise audience targeting based on extensive user data, audience interaction and tracking, and an ability to block fast forwarding. Because of this, advertisers are paying 30-40% higher CPMs for internet video ads, but web video providers have yet to demonstrate the ability to deliver the big audiences that the advertisers crave (Exhibit 3). This may be changing.

Exh 3: Advertisement CPM Ranges by Media, 2011-2012

On-line viewership is growing at a better than 100% annual clip, abetted by the now two year old iPad and the recent boom in connected TVs (Exhibit 4). At the same time, web video purveyors have grown more sophisticated in packaging ad placements, and are beginning to demonstrate that to the advertising community. This year, for the first time, YouTube, Hulu, AOL and Yahoo made large-scale presentations to advertisers as part of the “upfronts” process used by traditional television networks to presell commercials for their next season. This is supported by new analytical tools from the likes of Nielsen that let advertisers and their agencies better compare efficacy across traditional tv and on-line. We believe the net will be on-line taking a far bigger bite of video advertising than the 5% it currently commands.

This will hurt for the channelized video industry. Advertising currently contributes more than 50% of industry revenues – the rest coming from subscriber fees (Exhibit 5). While strong upfront sales and a bump from the Olympics and the election may mask an underlying shift toward on-line through the rest of the year, the change could become very apparent in 2013. We favor Internet platform leaders (i.e. Apple, Google, Amazon, and Microsoft), advertising agencies (e.g. Omnicom, Interpublic, WPP), and networks that are aggressive in pursuing their own on-line opportunities (e.g. CBS, Newscorp).

Exh 4: Total Monthly Minutes Spent Watching Online Video in the US

Exh 5: Channelized Video Industry Revenues – Advertising versus Affiliate Revenue and Advertising as % Total Revenue

The Way We Were

For more than 60 years, advertising agencies have been buying television spots for their clients. Television has been the ne plus ultra of the ad game for most of that time, unmatched in its ability to deliver a high impact message to tens of millions of US households in one fell swoop. Over the years, television viewership has trended ever higher, aided by growth in the number of television households and by growth in the number of televisions per household. By 2010, the total number of active televisions in American homes was over 336 million, and the average American was estimated to be watching more than 5.1 hours of television every day. Against this, television rose to capture roughly half of the measured media ad spend in the country by 2010, with total outlays of more than $65B, an increase of 39% vs. a decade earlier (Exhibit 6).

Exh 6: US Ad Spend by Major Media Type, Measured Media 2000 vs. 2010

Of course, television broadcasters have faced obstacles along the way. The biggest of these were the rise of cable networks in the wake of the Cable Act of 1984 and the launch of the FOX network two years later. With this, the big three broadcast networks faced new competition for viewers. In 1986, seven broadcast network shows were able to average more than 20 million viewers per week, led by the Cosby Show, which pulled an astounding 30 million households, nearly 35% of all television equipped homes. The 25th highest rated show, Dynasty, averaged more than 15 million viewers weekly, a number that would have ranked in the top 10 in 2011 (Exhibit 7).

By 1991, the number of shows pulling 20 million viewers per week had dropped to one, despite a 5% increase in the number of television households vs. 1986 (Exhibit 8). Increasing the number of channels showing original programming had diluted audiences. Nonetheless, the expansion in the number of television households marched ever onward, growing 14% from 1981 to 1991, 10% from 1991 to 2001, and 13.2% between 2001 and 2011. This strong undercurrent allowed the audiences for top broadcast programming to return to growth by 2001, even though dilution showed through tepid percentage ratings. By 2003, the number of shows able to top the 20 million average viewers mark was back up to 7 and by 2006, American Idol finally took down “The Cosby Show” by averaging more than 31 million viewers for the season.

Exh 7: 2012 versus 1986 Top Shows and Estimated Audiences

Exh 8: Shows with average viewership over 20M viewers, by season, 1980-2011

Meanwhile, Over in Newspaper Land …

While television executives basked in their newfound mojo, the story was different in other corners of the advertising world. From an all time peak of nearly $48.6B in 200 to 2011, newspaper advertising revenue dropped nearly 70% to $20.7B, roughly the same level as it had been in 1951, adjusted for inflation (Exhibit 9). The result has been widespread industry suffering and an epidemic of newspaper closings. US Yellow Pages advertising peaked in 2006 at more than $14B, but has fallen since to less than $9B in 2011 and many publishers have begun to discontinue the distribution of physical books.

Exh 9: Annual Newspaper Advertising Expenditures, 1950-2011

The Internet is the scourge of these businesses. US on-line advertising hit $31B in 2011, up from just over nothing a decade ago, almost half of it from search ads and most of the rest from display ads, most of which was carved from the hides of the newspaper and yellow pages publishers (Exhibit 10). The Internet offers huge advantages to the sorts of advertisers that have typically used newspapers and yellow pages – ads can be targeted to specific users, users can click through to the merchant, and the efficacy of the ad can be closely tracked. Based on the fairly grave recent trends, it would seem likely that the remaining advertising revenues for these publishers are far from secure.

Exh 10: US Online Advertising Revenue Forecast 2010-2015

Now Back to Our Regularly Scheduled Program

Audiences for top television programs have been trending sharply downward (Exhibit 11). 2012 looks to be the first television season in more than a decade without a single non-sports program averaging more than 20 million viewers per week. The top 7 shows of 2011, lost an average of 2.7M weekly viewers in 2012, down -13.1%. This dovetails with the first decline in total television households reported by Nielsen, since a US census adjustment to the count of total households triggered a drop in 1990. Frighteningly for network suits, it also dovetails with signs of a drop in the number of hours that Americans spend watching TV. The result? Fewer viewers spending less time spread over a longer list of programming options.

Exh 11: Network Season Average Total Viewership, 2011-12 versus 2010-11

In 1986, the big three broadcast networks accounted for more than 90% of prime time viewing. By 1987, ESPN had wrangled a package of Sunday night football games. A year later, HBO won its first prime time Emmy for the writing on Jackie Mason’s comedy special, the first of 400 Emmys that it has won in its history. FOX lured the NFL away from CBS in 1993 and rose to become the highest rated network overall by 2005. Today, the former big three account for less than 25% of total TV viewership (Exhibit 12). This audience dilution, combined with the overall slide in television viewership, serves to seriously erode the ability of television advertising to deliver that coveted advertising punch.

Exh 12: Network versus Basic Cable Primetime HH Viewership

If an Ad Runs and No One Pays Attention, Should it Count?

The DVR was a revolution for viewers when it was introduced by TiVo in 1999. A massive improvement in convenience and functionality vs. video tape recorders, TiVo threatened to upset Cable Industry hegemony over the way consumers managed their TV viewing, until the set-top-box makers co-opted the functionality and cable operators embraced time shifting as a virtue rather than a sin. Users have embraced the technology wholeheartedly. From a negligible share a decade ago, time shifted DVR viewing has risen to almost 8% of total TV viewing, contributing to the growth in the hours spent watching TV and buttressing the audience for leading programs.

However, the DVR has an ugly dark side for television networks. First, the punch of reaching millions of viewers at once is diluted if many of them are actually watching the show later in the week. Second and more importantly, time shifted viewers fast forward through commercials, and as the percentage of the audience taking advantage of the technology continues to rise, the value of television to advertisers is sharply diminished.

Exh 13: TV Households by Number of Televisions

We also note that the Nielsen ratings, on which estimated audience sizes and ad rates re built, are far from a perfect measure of viewership. With more than 3 televisions per household, it is likely that ambient viewership – a TV is on but no one is paying attention – is on the rise and contributing to increasingly generous estimates of the number of viewers (Exhibit 13). This phenomenon is greatly exacerbated by the rapid adoption of smartphones and tablets. 65% of portable platform owners report that they multitask – accessing their device while they are watching television (Exhibit 14). While some of this is complementary to the TV experience – e.g. social networking with other viewers – much of it is a distraction. It seems reasonable to assume that a lot of the multitasking involves checking the Internet during the breaks, willfully ignoring the commercials along the way.

Exh 14: Consumers Likelihood of Using Another Device While Watching Television

Taken together, DVRs and iPads have given consumers a lot of firepower to zap away ads, and they are using it with ever greater frequency. If 8% of viewing is timeshifted, and 65% of the remainder is multitasked, as many as 68% of television advertising impressions may be badly compromised. This will not go unrecognized by advertisers (Exhibit 15).

Exh 15: Advertising Spend Outlook by Format

Cut to the Internet

Meanwhile, viewership of video on the Internet has been growing at a triple digit pace and attracting advertising. Despite the reticence of television networks to make their most popular programming available over the web on equal terms as their channelized distributers, on-line is quietly taking 5% of the total US video advertising spend and is growing its ad revenues at a 50% annual pace. Note that most of that growth was driven on the clunky and inconvenient desktop PC access paradigm. Given that tablets are a very recent phenomenon – the iPad was launched in April 2010 – and that web-connected TVs, game consoles and Blu-Ray players are quickly becoming commonplace, we expect on-line viewership to continue its robust growth just on the factor of convenience (Exhibits 16-17).

On-line has further advantages for advertisers. Web video providers have comprehensive demographic data on viewers and can target different ads to different viewers of the same content based on those detailed demographics. On-line video can also block fast forwarding through advertisements. On-line is also interactive, allowing greater engagement, impulse transaction and immediate feedback. Given these advantages, advertisers have been willing to pay 40% higher CPM (cost per million impressions) for web based video than for broadcast TV.

Exh 16: Global Shipments of Internet Enabled TVs, 2010-2014

Exh 17: Global Media Tablet Shipment Forecast, Worldwide, 2010-2015

We’re Movin’ On Up to the East Side

Despite impressive progress, on-line advertising is still small potatoes next to traditional TV, which still boasts a considerable reach advantage. However, on-line video players are looking to close the gap in several important ways. First, the top platforms – Google’s YouTube, NetFlix, Hulu and Amazon Prime – are investing to develop exclusive original programming. While it is popular to scoff at these efforts, it is useful to recall that similar scoffing was aimed at FOX and the many now popular cable networks when they began investing in original programming back in the ‘80’S. Even one relative hit from one of these platforms could be a considerable lever to wrest audience and advertising from traditional TV.

Second, on-line platforms are getting more sophisticated in their pitches to advertisers. This year, YouTube, Hulu, Yahoo and AOL made their first presentations to advertisers as a part of the annual “upfronts” used by networks to pitch their next-season’s schedule. These presentations not only gave these platforms a forum to lay out their advantages, tout their increasing reach and introduce their new programs, but also lent an important air of legitimacy as on-line video moves to compete directly with broadcast TV for advertising dollars. This is aided by new metrics offered by Nielsen and others to compare audiences more directly between broadcast and on-line channels.

That’s Not Just Advertising, It’s New and Improved Advertising!

Advertisers have also fought against the twin scourges of time shifting and multi-tasking by making their ads more difficult to ignore. One way to do that is via product placements and program sponsorship. For example, Ford has contracted with FOX to produce a weekly ad featuring the contestants on “American Idol” and then show the spot as a segment within the show. In a programming environment dominated by reality shows and contests, this has become nearly ubiquitous. Another way is to make the ads compelling to viewers in their own right. At the most basic, this may be licensing a currently popular song as the background for an ad, or more elaborately, producing advertising that captures attention on the basis of its humor or artistry. The biggest showcase for these sort of ads is the Superbowl, where previewing and reviewing the

Of course, all of these techniques play well on web based video, which is an inherently more flexible medium. Sponsorship opportunities abound as content creators look for ways to fund and/or monetize their web presence. Long form advertising has become an on-line art form, as the most ambitious broadcast ads now look to break expended play versions as viral videos. We note that the most acclaimed ads shown during this year’s Superbowl actually premiered on-line weeks before the game. Finally, the web has given birth to a range of short form spots designed to grab attention in 15 seconds or less, slipping in under the impatience threshold for most surfers. As advertisers and agencies increasingly look at creative advertising strategies, we believe the appeal of on-line video will rise accordingly.

Something’s Gotta Give

If overall ad budgets grow with the economy, the share of video in the mix remains fairly stable, and internet advertising continues to take share, all give or take a little, the outcome is not likely to be attractive for traditional television advertising, but there are important short term mitigating factors. First, a lot of TV ads are sold in advance – remember the “upfronts” process mentioned earlier? – and major advertisers can be conservative (Exhibit 18). As such, the impact of the forces noted in this piece of research will have a necessary lag. Second, 2012 has the Olympics in July and a hotly contested Presidential election in November, both big spending events in television advertising land. It may be difficult to cull out the impact of growing on-line video advertising while the beneficial effects of these quadrennial events play out.

However, we see these events as a stay rather than a pardon, and fully expect to see a meaningful disappointment in traditional television advertising come 2013, coupled with continued upward momentum for on-line spending, which could be pushing 10% of the total US video ad market by then.

Exh 18: Cable Network Upfront Advertising Commitments

Who Wins? Who Loses?

In the long run, we believe that the Internet platform owners – Apple, Google, Amazon and maybe, Microsoft – are greatly advantaged by their ability to integrate streaming media into a broader user experience/advertising vehicle and should be able to parlay that advantage into leadership in on-line video. Of the standalone streaming vehicles, Hulu stands out due to its privileged access to programming from its parents, suggesting that it could sustain a brand longer term (Exhibit 19). We also believe that networks that aggressively embrace on-line and establish brand leadership – e.g. CBS and Newscorp – will move decisively past more conservative traditional rivals. Finally, we expect advertising agencies – Omnicom, Interpublic, WPP – to play a major role in navigating the shift to the new medium for their clients.

Exh 19: Winners and Losers

To the downside, we remain concerned over the ability of multichannel TV distributers – i.e. cable MSOs, and satellite – to sustain pricing and subscribership as advertising flows toward on-line. We are skeptical that on-line video distributers that do not control an integrated user platform – e.g. Netflix, and Yahoo – will be able to sustain their brands as Internet video goes mainstream. We are also skeptical that networks that remain steadfastly loyal to the channelized model will be able to shift their focus effectively as a migration of advertising becomes apparent.

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