OPINION: TV or not TV, that is the question



I managed to shock my 13-year-old son the other day, when explaining that the 40 days of music stored on my computer is all paid for (well nearly all). I estimate I’ve bought about 800 albums over 30 years. And yet my three sons, with a collective age of 57, have probably bought fewer than 20 combined. The internet and music piracy have certainly changed the industry forever, and more importantly altered an entire generation’s perception and expectation about what is fair, and what is free. Estimates place digital music piracy in China at 99 per cent of the market, with only US$67 million of legitimate music sales in 2011. Major record companies all over the world are consolidating and changing hands, and a majority of artists now have to make their living from touring and merchandising revenue instead of music sales.  



Music piracy services from Napster to the Pirate Bay have destroyed the foundations of an established business model. But there are signs that viable new models are emerging from the wreckage, and some of the strongest signs come from Asia. South Korea remains the most successful digital music market, with an estimated 3 million music subscribers to MelOn and MNET. Omusic, an ISP-bundled service, was recently launched in Taiwan. And KKBOX offers streaming and download services in both Hong Kong and Taiwan. South Korea illustrates how legal services, combined with strong local music culture and progressive digital laws, can lead to significant market growth. Korea has grown from the 33rd largest music market in 2005 to 11th today.



Music subscription is a fast-expanding business model, with the mass-market starting to see the huge benefits. ISPs and telcos are also starting to bundle digital music services, given they have the footprint and billing infrastructure to reach huge audiences. Even in China, Baidu Music and QQ Music have flagged their intent to move toward music subscriptions.



The TV industry, of course, is going through its own shake-up. But it seems to be going in the other direction. Free to Air (FTA) is suffering from the Internet generation’s unwillingness to watch according to a network’s schedule, with the exception of live sport. Catch-up services delivered over the Internet and mobile networks are increasingly popular. Pay TV, by contrast, has employed a predominantly subscription model since its inception, largely because it was positioned as a luxury for high-income audience segments. Competition between FTA and pay-TV services is now intensifying. With Apple TV finally launching in Hong Kong, consumers now have a wider choice of TV viewing without committing to a monthly subscription. Operators have been reluctant to shift to pay-per-view (PPV) models, because of both the billing complexity and uncertainty of future revenues. And yet, as a local operator told me recently, usage of their PPV product has increased tenfold in the last two years. 



Network ad revenues are under threat from new methods of delivering TV programming, be they legal services or pirated downloads. For a number of years, targeted TV advertising has been touted as a potential saviour for declining ad revenues. An ‘addressable ad’ is a TV commercial served specifically to a television or computer using data, such as income level, purchasing history or stage of life, to target the ad for an individual viewer or household. Going back to the original days of TV advertising, one of the fundamental objectives has been to target specific customer segments, such as those who control the domestic grocery budget. But as television is a mostly mass-market medium, many people who view a TV ad are not its main targets. Compared with the value of online display ads, TV advertising is often regarded as wasteful and inefficient. 



Addressable TV would enable ads to be selected for a specific viewer, using principles similar to online display ads. For example, luxury car ads would only be shown to viewers belonging to affluent segments; it also creates the opportunity for local businesses such as restaurants to target only those who live nearby. The technology to deliver targeted advertising improves every year, as does the availability of data with which to execute greater targeting. Publishers, ecommerce players and credit-card companies are all involved in initiatives that would enable their data to be monetised through addressable TV networks. 



And yet for all this promise, the market for addressable TV advertising appears to be very small. According to Deloitte, the market size in 2012 will likely represent less than one tenth of a percent of global television advertising revenues, which is less than $200 million out of a total market of $227 billion. Deloitte cites numerous reasons for the small uptake today, and likely into the future. These include:

• Increasing TVC production costs (more segments, more ads)
• Limited incremental benefits from the high cost of data aggregation and deep analytics required for precise targeting
• That shotgun ad delivery might be more effective for joint decision-making on large ticket items (cars, holidays)
• That joint viewing of television, particularly in the living room, might result in significant wastage of addressable ads when others in the room are not also targets for that campaign. 



TV is indeed a mass-market medium, and I agree with Deloitte that it is the most efficient way to deliver a message to as many people as possible as cheaply as possible. But we invariably underestimate technological change, convergence and its impact on traditional ways of living. More programming than ever is consumed by individuals watching shows on-demand on their computers, tablets or smartphones, which makes individual-level targeting more viable. Internet-enabled TVs will become two-way devices that can detect how many people are watching and insert the appropriate contextual ads on-the-fly.

Sound farfetched? Perhaps not. This month, Microsoft was granted a patent for a technology that would enable a camera-equipped device such as a TV or Xbox Kinect, to regulate content on a per-user-view basis. The technology could limit the number of people able to simultaneously watch, restrict content based on age or enforce limitations on the number of times that media can be viewed. This technology, should it ever materialise, has the potential to replace the current pay-per-view system with a pay-per-user-view model. You’ll need a multi-user licence to watch the World Cup final with your friends!

Where I think Deloitte has it wrong is understanding the real value proposition of addressable ads. Whilst it's true that TVCs are expensive to produce, the best targeted ads will be those with multiple variants, with content customised to specific audiences. Think of a targeted ad like a dynamic, personalised email. The major production expense lies in the development of the creative concept, templates and core media. Tags such as location, price, voice-over language and audience-specific calls to action can be easily customised to efficiently produce dozens of variants that will target specific consumer segments within that overall audience. More relevant ads resonate with individuals, as they do in email marketing. Data-driven targeting will result in more effective ads and ultimately driver higher conversion rates.



Free-to-air and pay-TV operators are understandably nervous about the disruptive potential that digital technologies will have on their business models. But they would do well to learn the salient lessons from the music industry. Shift your model, or prepare to have it shifted for you.

Follow John Merakovsky @ Experian twitter