The US TV market is at the forefront of some key technological forces reshaping the TV advertising market. Globally, industry research indicates that at least 22 percent of TV advertisements are being skipped in homes equipped with PVR/DVR technology. In US homes with PVR/DVRs, the proportion of ads skipped is as high as 50 percent. This makes the US an ideal testing ground for the effect that these disruptive technologies will eventually have globally, and for the strategies that companies should pursue to ensure sustainable high performance . The current industry consensus is that the cost per thousand viewers (CPM) rate in the US TV advertising market will rise by an average of 6 percent compounded annually through to 2010. Accenture’s analysis suggests that this estimate is far too optimisticWe believe a combination of three factors—continued fragmentation of the viewing audience combined with additional competition for viewer share from the top cable/satellite channels; increasing available options for advertisers; and greater demand for accountability for the results of TV ad campaigns from advertisers—will restrict the compound annual increase to just 3 percent. However, an important counter-view expressed at the 2005 Accenture Global Convergence Forum was that the eventual solution the industry develops will, by definition, engage and target viewers more effectively. This being the case, the effect would actually push growth in average CPM significantly higher. The key issue is the difference between a straight-line projection of the industry and an inflexion point that changes its course more dramatically. Our contention is that all parties need to plan for both scenarios. Analysis Accenture analysis of third-party primary research underlines the potential impact of ad skipping on TV advertising. As Figure 2Figure 2 shows, the 8 percent penetration of PVR/DVR homes in 2004 results in just 2 percent of ads being skipped, hardly commercially significant. But, using the conservative assumption that ad skipping will continue at the same rate in PVR/DVR homes, the 40 percent penetration expected in 2009 will mean close to 10 percent of ads being skipped. Advertisers may be able to live with 2 percent, but 10 percent is something else. A further complication is that skipping relates closely to time-shifting and the propensity for viewers to time-shift varies by type of content. While they are highly likely to time-shift movies, drama or kids’ programming, they are far less likely to do so with live sporting events or news, where real-time viewing is a key part of the experience. Already, different players are applying various tactics to stop or neutralize the effect of skipping, ranging from changes in the programming schedule to product placement to providing true live video on demand (VoD). But addressing ad skipping by restricting viewer behavior can only be a short-term solution. Our analysis and industry experience suggest that the only way to get people to watch ads in the long term will be to make them want to watch them. This means blending compelling creativity from the content side with tighter targeting through new technologies, and being able to monetize the resulting “eyeballs” by understanding what interactive ads do best: generating cost-effective sales leads for bigger-ticket, relatively complex and/or programming-related products. Recommendations The TV advertising value chain is at an inflection point—one that is overturning long-standing economic assumptions and breaking down the formerly clear-cut divisions between the roles and skill-sets of the key players. We believe that platform/access providers and broadcasters facing these challenges need to keep three behavioral characteristics in view to maximize their chances of success: - Manage the business against parallel models and scenarios—Accenture’s current view is that CPM could, in the medium term, continue in a relatively straight line. But the TV ad market is entering uncharted waters. Given the dynamic, fast-changing and unpredictable period the industry is now entering, companies cannot discount the emergence of far more dramatic scenarios. So it will be crucial to maintain agility and flexibility and plan at least two scenarios for the business - Adjust more readily and responsively to the emerging needs of advertisers—A key success factor will be the ability to move to meet the real needs of advertisers. This goes far beyond simply selling them airtime. It involves focusing more holistically on the return on objectives that advertisers actually get for their ad dollars, and on what they are trying to achieve commercially. Ultimately, advertisers want to sell their product and new technologies mean they are inevitably reconsidering the role TV advertising plays in this. - Co-operate, co-operate, co-operate—No-one has a “silver bullet.” To succeed, broadcasters, access providers and advertisers all need to be ready to work together, share ideas and see things from each other’s point of view. This collaboration must crucially include the creation of agreed technical standards and of objective third-party measurement systems at a granular level. No single industry grouping can do all this on its own. In the post-PVR/DVR TV advertising industry now emerging, the only certainty is that new models and techniques will emerge—and the provider that can think from its own customer’s point of view will immediately be one step ahead. The TV advertising industry has always thrived on change and creativity. While the technology may have changed, those two touchstones will continue to determine the difference between success and failure. For more information, please contact Accenture at 1 (312) 737-8842.