Andrew Frank

The past few weeks have revealed a sharp acceleration in the disruption of the TV business by new technology. Forces set into motion will play out over the next six months with far-reaching consequences for the medium that, more than any other, has shaped our culture for the last half century.

So far the Internet has not been kind to incumbent media businesses: it’s taken down directory publishers, music labels, and newspapers. But the story of Internet-driven disruption is largely a tale of unintended consequences. Google certainly didn’t set out to disrupt newspapers, it just happened to be a side-effect of its mission to index all the world’s information. Nor was Craig of Craigslist out to kill the classified ad business. Similarly, I don’t think Cablevision intends for Network DVR to disrupt TV broadcasting. But…

There are four events of the past four weeks that look to be harbingers of end of TV as we know it. These are U.S.-centric developments, but, when it comes to the TV business, America holds disproportionate sway. (In fact, some have argued that America’s domination of television bears a direct connection to its global dominance in other areas; see Erik Barnouw’s highly recommended Tube of Plenty: The Evolution of American Television for a discussion of this and other issues.)

The four events are:

• The Digital Transition, which officially shut off analog broadcasting in the U.S. on June 12, which has left broadcasters scratching their heads about what to do with all their new digital transmission capacity
• The “TV Everywhere” announcement by Time Warner and Comcast, who plan to have the service extend subscription-based access control to online TV viewing based on industry-defined authentication techniques
• Canoe Ventures’ suspension of plans to roll out addressable TV advertising on cable TV anytime soon. The plan, called “Community Addressable Marketing” (CAM), would have given broadcasters the ability to offer ads targeted and displayed selectively to different viewer segments on cable TV. The abandonment of the plan illustrates the magnitude of the challenge presented by dependencies on legacy technology in the highly dispersed operations of the cable industry.
• The Network DVR decision, appeal of which was rejected by the U.S. Supreme Court, leaving broadcasters who were trying to stop Cablevision’s plans to allow consumers to “record” shows on virtual storage devices located in the cable cloud instead of their homes without legal recourse. (See Mike McGuire’s post here.)

Any of these taken individually would be pretty major news, but taken together, they point to some major instability in the ecosystem. The Network DVR decision, in particular, seems to be a fundamental game-changer for the economics of video-on-demand services (the line between VOD and Network DVR being increasingly hard to draw the more you think about it), as well as the economics of advertising, given the well-established tendency of home DVR users to skip ads. Of course Network DVR doesn’t have to allow ad skipping – online video services have clearly demonstrated the feasibility of making ads non-skippable even in on-demand content – but these features now appear to be a matter of negotiation rather than legal mandate.

So what do all of these have in common? Try this: they all indicate an increasing need for decision-makers at the highest levels to confront and understand the low level details of how technology is affecting every aspect the TV experience. High-level guiding principles no longer hold – we need storyboards and detailed flow charts to plan and negotiate business policies.

I once took a sales training class in which it was asserted that business executives spoke three different languages (and that the key to selling to them was to first determine which language they spoke). The three languages were: the language of CXOs, which speaks in terms of market-size and market-share, the language of VPs and Line Managers, which speaks in terms of revenues and costs, and the language of Directors, Designers, and Developers, which speaks in terms of features and functions. In general, the idea is that people turn off pretty quickly when you speak to them in the wrong language.

From this perspective, you could argue that the secret of the technology’s most successful leaders – Bill Gates, Steve Jobs, perhaps Eric Schmidt – was their ability to speak all three languages fluently, but mostly to see and exploit the subtle connections between feature-function thinking in the design details of products and the resulting major shifts they can produce in market share. Whether it’s tying the browser to the operating system, tying the device to the store, or – well, I don’t have one for Google yet, but you get the idea.

So, TV executives take note. You need to spend more time talking with your engineers (and analysts who can translate what they’re saying). In the words of Bob Dylan, “you better start swimming or you’ll sink like a stone, the times they are a changin’.”

The Green Room was closed for renovations, so I waited in a make-shift area outside the control room of the Fox Business News studio in New York while Dave Asman went one-on-one with Monica Crowley over the latest outrages issuing from the White House. Fox Tonight had invited me, about an hour earlier, to come and talk about the Internet on TV. “We’re discussing digital media and sites that are profitable – ie Facebook getting a $200 million investment yesterday,” read the e-mail (sic). Last-minute cancellation maybe?

As I waited, I could see from the teasers the angle that was being developed on the Internet segment: Facebook’s $10B valuation is an indication that we’re in a repeat of the dotcom bubble (smirk knowingly). I contemplated my options for key points to break out of this and came up with a plan. Something simple but pointy enough to break the monotony of condescending skepticism.

So, here’s how it went.

As you might have guessed, Live TV is not a medium I’ve mastered, so my plan was thwarted. Perhaps Dave Asman sensed where I was going when he cut to another guest. Fortunately, unlike Live TV, on the web there’s always a second chance. Here’s what I’d planned to say on this topic.

Asman: …but how will sites like Twitter make any money?

Me (second take): With respect, Dave, I think you might be missing the big picture here. Sure, some social networks might not survive and others might barely break even (or maybe get acquired by companies like Fox) and some investors will no doubt be disappointed because they were hoping for the next Google. But a lot of social sites will survive because they don’t need to make billions to fund their operations, which are steadily declining in cost. So maybe the question you should be asking is, assuming that some of them do survive, what’s going to happen to TV shows like this one when your sponsors discover they can reach your audience for a lot less money than they’re paying you? Social media means disruption – it’s hit the music business, it’s hit the newspaper business, and it looks like TV could be next in line. Think of people like Scott Monty, the head of social media at Ford, who’s able to broadcast his messages whenever he likes directly to over 22,000 followers, for free. Do you think Ford will be eager to continue paying millions of dollars to reach an undifferentiated TV audience with its commercials when Scott can put a link to a YouTube video in a Tweet and get massive exposure online for almost nothing? That kind of communication might not make Twitter wealthy – they’ll have to think of subtler ideas like selling marketing intelligence, or consumer data, or specialized applications – but it sure could change the economics of TV journalism.

May 21, 2009, NYC – Bluewolf, a SaaS-oriented consultancy with a specialty in helping media companies, hosted an event at the Bryant Park Screening Room yesterday evening. With no free WiFi or 3G penetration in the room, the two-hour session held the attention of its audience, which consisted mostly of media company IT and business executives who were clients of Bluewolf.

The first half of the event was given over to Clay Shirky, who presented his characteristic big-picture assessment of historic sea-change in the nature of media. While the key messages, consistent with Bluewolf’s credo, were innovate, iterate, and be prepared to fail, the talk also had the effect of shining a spotlight on the elephant in the room of every Big Media gathering of late: once again, the Internet is messing with their business, intellectuals like Clay insist the changes are permanent and irreversible, and no one knows where this disruption will eventually lead for professional content.

With the crowd thus stirred, vendors took the stage to talk about how cloud computing could help. Representatives from Salesforce.com, Google Apps, and Zuora presented some compelling cases to illustrate how cloud computing not only cuts IT costs but can also create the right environment for rapid low-cost innovation and experimentation. It seemed as though Bluewolf may have gotten things back on message.

Google makes its case for Apps in media, photo by author

But then came the industry representatives: Dave Fox, VP, Commercial Services for Time Warner Cable, Mike Stoeckel, who had recently left his post as VP, Digital Products at Fox to join a media ad-ops platform start-up called Invision, Dottie Gallagher-Cohen, VP Marketing for The Buffalo News, and Daniel Hart, whose title, “formerly of MTV,” seemed to hint at some discord to follow.

Note to event organizers: be careful with panelists who no longer work for companies in the industry you’re targeting, especially if it’s media. Stoeckel laid into the media industry for its complacency following the Internet bubble which he pointed to as the main reason Google and ad networks have marginalized them online despite being initially inept at ad sales. Gallagher-Cohen, as the token newspaper representative, did not try to hide the stress and frustration surrounding her business, although she did claim that her paper’s innovative strategies were paying off as they were seeing CPMs rise (mostly due to the paper’s introduction of behavioral targeting) even as industry-wide rates were falling sharply. Hart, surprised to hear of rising rates in Buffalo, spoke wistfully of some of the great social gaming work MTV had done online with its sort-of-hit TV show The Hills, and suggested that someday media might understand how to monetize the passion of its fans, but today agencies and networks were still mostly locked in the outdated mass-media mindset of valuing reach far above audience dedication.

Things came to a head when Clay Shirky fielded a question about what kinds of business models he believed could sustain content production businesses in the future, given his points about the publishing’s catastrophic loss of scarcity. He pointed to examples like Cook’s Illustrated and Consumer Reports, which he described as successful “because consumers pay them not to take advertising.”  The audience flushed.

Afterwards, blue margaritas were served al fresco on the roof of the Bryant Park Grill under a warm, clear spring sky.

It’s safe to say that, of all the disruptive technologies to assault the media industry lately, DVR-enabled ad-skipping is one of the most potentially destructive. There are plenty of debates about how rapid or pervasive the problem is, but it’s clearly eating away at the staple of the TV business, the 30-second spot.

The reason the problem’s so deadly is that there are few practical suggestions for how to fix it. TiVo has introduced new formats to try to entice users to view ads, while agencies have tried to design formats that can message through the fast-forward blur, including use of still images. “Bottom third” ads have become more prevalent, despite creative objections from content providers. Some countries (such as Australia) have taken steps to suppress ad zapping technology in the interests of commerce. Others propose that the use of better targeting will help by showing people ads they’re more interested in and therefore less likely to skip.

All of this, however, amounts to another dimes-for-dollars proposition for content side of the TV business which, at the end of the day, really needs people to watch 30-second spots – or something very much like them – and not only watch commercials for brands they already like.

At NAB last month we explored the topic of social media on the TV screen with Integra5, an innovative developer of convergence applications for telco and cable providers. Among other things, they’ve developed an application to allow participating TV viewers to set up on-the-fly chat rooms on TV, integrating with any existing messaging system, from Facebook to AIM to SMS. (Participants can interact with non-participants, who will just experience this as a normal chat in whatever environment they’re in, alleviating the adoption problem. The chat room is assigned a temporary phone number for those using SMS. The app is based on EBIF, which will soon be deployed on tens of millions of set-tops in the US.)

Now here’s one of those ideas that seems cool enough to peek the interest of TV service providers. But, to hear Integra5 executives describe it, the lightbulb really went off when they demonstrated this for agency executives at Publicis who instantly realized the implications of this for TV advertising. Basically, when you’re engaged in a chat while watching, not only is ad zapping no longer an interesting option, but lots of other exciting things happen for advertisers: the viewers’ eyes are pointed at the screen! …and we can see when they’re actually engaged! …and (shh) we can even sample some of what they’re saying about our advertising! …anonymously of course….

Well, what about that? What if they’re trash talking the ads? Or what if they’re seeing different ads, as is bound to happen more and more frequently, and it’s making them paranoid? Worst of all, what if they’re ignoring the ads and just jabbering instead? For advertisers and broadcasters, all of this would be a substantial improvement. Perhaps this is what will make social media the killer app for TV.

The race to claim the future of television continued to play out at the National Association of Broadcasters annual event in Las Vegas.

This year much of the focus moved upstream, away from last-mile issues and toward services for content providers looking to simplify management multiplatform distribution, as many vendors focused on cloud service solutions for video-specific point problems like transcoding, large-file transfer, and metadata management and extraction. (A key exception on the last-mile front was mobile TV, but that’s a story for another post.)

At the same time, many vendors, some new and some well-known, were also attacking much bigger problems, like offering comprehensive multiplatform video management, rethinking the way video advertising works, and redefining what TV might mean to consumers. As suggested in a recent research note (Two Roads to TV 2.0, subscription required), the Internet (bitheads) and TV industry (tubeheads) have differing visions for how things should play out.

Of course it’s an oversimplification to group competitors into those who assume the Internet is the prevailing model for the future of video distribution and user experience, while traditional TV is going the way of the dinosaur (bitheads) vs. those who assume that television is and always will be a fundamentally different animal than the Internet, in experience, technology, and economics (tubeheads). Nonetheless, it was surprising how frequently these positions were articulated in briefings at NAB.

The credo of bitheads, as we all know, is “bits are bits.” In other words, it doesn’t matter what the bits represent, once something’s been digitized, it can be stored and transferred using the common protocols and infrastructure of the global Internet. In this way of thinking, there are virtually no problems that can’t be solved with some combination of ingenious software and more IP bandwidth. Cisco is one company that articulates this view pretty clearly.

The credo of tubeheads, in contrast, is “video is different.” Video has real-time qualities that can’t be fully addressed by thinking of it as just another packet stream. In this way of thinking, the challenges of video are best met with specialized hardware and more-sophisticated network management techniques. 3D is a major focus of this group. Harris and Tandberg TV were among the vendors showing impressive video-centric technology solutions at NAB.

One area on which both sides currently agree is that the key video battleground today is at the edge of cloud: the cable headends and telco COs just before the last mile, where CDNs have planted caching servers. Now companies like Move Networks and ZillionTV are racing to stake out rack space in this increasingly high-value real estate. Watch this space.

Another interesting observation from NAB about bitheads and tubeheads is, with few exceptions, this is not a competition between companies that are generally aligned with one view or the other. Instead, the most interesting conflicts are playing out within companies, where digital groups and traditional groups, running separate profit centers, are competing for resources and increasingly undercutting one another’s businesses. Over and over we heard stories from vendors of the challenges of intra-corporate misalignment at content providers, MSOs, telcos, and ad agencies that was complicating all negotiations. In this environment, alignment and governance that accelerates strategic decision making will be a key competitive advantage for incumbents negotiating disruptive digital transformations.

Google’s 1Q09 earnings presentation left little doubt about where the company’s headed for the next year or so, and it’s in the direction of optimizing its role as the world’s most efficient marketing and sales channel. Google executives repeated the mantra that a key reason Google was able to outperform most advertising-supported businesses was that its customers saw it as “a sales channel, rather than a marketing expense,” making it much more resistant to marketing spending cuts typical of recession behavior.

This positioning is about to take a leap forward as Google rolls out support for a technology known as ShopAds from Adgregate Markets (see Mediapost coverage). Ecommerce banners have been a long-sought Holy Grail of Internet entrepreneurs, but have generally been stymied by security issues. (For one thing, phishing attacks become much more effective when the perp’s URL doesn’t appear in the browser’s protected address field.) VeriSign has added its imprimatur to the transactions, but it’s probably safe to say that the security issue has not been laid to rest.

At the same time, Google CEO Eric Schmidt suggested during the earnings call that YouTube was looking at transactions as well, although he was a bit contradictory about timing: "We do expect over time to see micropayments and other forms of subscription models coming as well, but our initial focus is on advertising…we’ll be announcing additional things in that area literally very, very soon." Signing up studios such as Sony Pictures, CBS, MGM, and others to YouTube distribution will clearly bring pressure to accelerate viewer-paid models for long-form video content.

Then there’s the rising chorus of voices from the publishing world calling for the reconstitution of the “pay wall” around online news content (see, for example, Washington Post coverage). In his speech to the Newspaper Association of America last week, Eric Schmidt downplayed the idea that a micropayment solution for publishers was around the corner due to prohibitively high transaction fees, but said that “much work was being done on that technology to bring costs down.”

Right now, embedded transactions in standard display banners looks like the best bet. Simple back-of-the-envelope calculations suggest the yields on such units could dwarf today’s sinking display CPMs. Publishers need to resist the urge to gripe about Google or fret about pay walls and focus on how they can maximize their piece of that pie.

While much of the punditry surrounding Tim Armstrong’s appointment to the CEO post at AOL has focused on what it might mean for the beleaguered Time Warner unit, at least as big a question is what it means for Google. Tim Armstrong was Google’s main link with the advertising world, a Madison Ave guy in an archetypal Silicon Valley culture who just happened to bring in about 97% of the revenue.

Advertising was an accidental discovery at Google, which has always seen itself as a technology company focused on search. With cloud services looming as the Next Big Thing in IT, will Tim’s departure accelerate Google’s shift from advertising to cloud services as the primary focus of its business?

There are some faint indications this might be the case. For one thing, CEO Eric Schmidt has indicated that Google seeks to replace Tim with “an internal candidate.” That could be a tall order, given Armstrong’s deep media connections, although former Doubleclick CEO David Rosenblatt looks like a strong possibility. For another, Eric Schmidt clearly prefers talking about the cloud to talking about advertising. "Cloud computing is one of those changes that’s going to happen regardless of whether companies that are participating in the ecosystem allow it, because the technology will make it happen," he said recently at the Morgan Stanley Technology Conference in San Francisco. That says a lot.

On the other hand, Google is a highly analytic organization that knows how to protect its revenue.  And if it needs to hire more Madison Avenue types to do that, I expect they won’t be too hard to find.

And what’s next for AOL? Tim Armstrong knows what he’s walking into – he was instrumental in putting together Google’s ill-fated $1B investment for 5% of AOL in 2005 – and his decision to join portends big changes for the organization, which has been searching for a new course for over two years.

AOL is an entity whose whole is worth less than the sum of its parts. It’s Platform-A suite consists of a number of strong ad platforms, such as ADTECH, Tacoda, advertising.com, Third Screen Media…all of which were leading products in their time. And the AOL network of consumer portals, tarnished as it may seem, continues to draw more visitors and minutes (271 million and 45 billion respectively in January according to Comscore) than Facebook, MySpace (or FIM), Twitter, or any other consumer portal with the exceptions of Google, Yahoo, and Microsoft. Still, all of these pieces never quite seemed to fit together right.

With the right kind of re-structuring, which is likely to involve major spin-offs to at least one of the aforementioned companies, perhaps Tim Armstrong could unlock the potential of these assets. But it’s going to take some challenging new relationships.

With the pool of revenue for online display advertising finally shrinking again, consolidation looks likely. Perhaps there’s something new for Google in there.

The tension and speculation over Google’s anticipated entry into the hazardous world of behavioral targeting has been growing since its acquisition of DoubleClick, much of whose value lies in its visibility of consumer activity across a vast array of websites. Now, the curtain has been lifted, in characteristic Google style, in a blog post not-so-subtly titled, Making ads more interesting.

Google’s sensitivity to the volatility of privacy issues has prompted it to support its entrance into BT with actions that extend beyond public posturing to the deployment of a unique tool it calls Ads Preferences Manager, where users can control interest category membership and opt-outs, as well as a browser plug-in that addresses the principle limitation of current cookie-based opt-out systems, which is their vulnerability to cookie deletion. Google also indicates it will provide more transparent information around the ads themselves by including links that lead to details about the program. (The Wall Street Journal offers additional coverage.)

This is an important step, both for Google and the online advertising industry at large. Google’s actions clearly raise the bar on transparency and user-control over BT, and will likely force Yahoo!, Microsoft, and others to respond by offering similar more-granular control of ad preferences, which is likely to have an overall effect of drawing more attention to the practice in general. BT is already under growing scrutiny by the FTC (which recently stopped short of new regulations) although it has yet to penetrate public awareness in a meaningful way.

It’s hard to predict the magnitude of public response to innovations in targeted advertising and privacy issues in general, which is why Google needs to be so cautious here. On the one hand, Facebook has repeatedly drawn fire for perceived privacy issues practically every time it tries something new; on the other hand, when Yahoo! announced search retargeting two weeks ago, the response was much more muted than many – including myself – expected. The beauty of Google’s approach is, whatever happens, it looks like they can’t really lose.

If Google’s push into BT does force its competitors to offer similar transparency and control, and if this in turn raises the profile of BT and causes the public to take more notice and increase use of opt-outs while demanding more control, then the overall effect will be to weaken the effectiveness of BT as a targeting mechanism, just as increased cookie deletion and browser privacy settings have done in the past. Google wins because most of its advertising uses contextual targeting, rather than behavioral. True, there’s some vulnerability to a widespread backlash and a retreat would have costs, but ultimately Google has the least to lose if BT gets busted.

On the other hand, if consumers remain relatively indifferent, or even bother to improve and cultivate their Google-based interest profiles, then Google wins because it’s able to make good on the promised synergy with DoubleClick as a premier platform for display and cookies, along with its superior capabilities to analyze pages to correlate them not just with keyword targeting, but with highly valued behavioral categories as well. And it gets to offer a new one-stop shop through AdWords that leverages the promised ability to bring “the science of search to the art of display,” as Eric Schmidt recently put it.

While there will no doubt be critics who single out Google as a privacy risk whose scale puts it in its own class, they seem to have thought this one through.

Folks, it’s been over five weeks since I lambasted the big Superbowl ad spenders at companies like – oh, let’s see, what was the name of that advertiser’s brand? Oh, yeah, – E*Trade, for failing (or letting its agency fail) to support its very clever, and very costly, Golf Baby commercial with even a single organic search listing for the memorable and highly original coinage, “Shankapotamus” (as in “why don’t you try reading the rules, Shankapotamus?” – you might notice I’m using the word “shankapotamus” a lot in this post).

Since that post, searches for the term “shankapotamus” have generated over three hundred visits to my blog, which maintains the number four spot in Google’s organic rankings for the term, “shankapotamus.” In fact, I’m embarrassed to reveal that “shankapotamus” is by far the most common search term sending traffic to this page. I hope the shankapotamus seekers are happy with what they find.

E*Trade, which dutifully buys expensive keywords like “online trading” and “investment services,” is nowhere to be found in those search listings on Google, MSN, and Yahoo. The number one listing on Google as of this writing is for a girl’s golf blog that’s running a Try Reading the Rules Shankapotamus! T-Shirt Giveaway. No mention of E*trade there. I wonder how much traffic they’ve gotten?

Wake up, creatives! SEM branding is about controlling namespaces. It’s not just direct marketing tactics. If I can be a shankapotamus, so can you.

Last June, Yahoo!’s CEO Jerry Yang announced, "We believe that the convergence of search and display is the next major development in the evolution of the rapidly changing online advertising industry.” More recently, Google CEO Eric Schmidt echoed this notion when he indicated his company would focus on "bringing the science of search to the art of display."

Yahoo! has not been idle on this front, and last week they put some meat on the bones by announcing Rich Ads in Search, which brings more art and interactivity into the search results picture, which will appeal to brands, and probably to some consumers as well. The only folks who will take exception are those for whom the utilitarian serenity of search results pages is sacrosanct. Anyway, this is one half of the convergence story: bringing display branding quality to the search environment.

Today (Thursday) at the IAB annual leadership meeting in Orlando, Yahoo! gave form to the other half when it announced “search retargeting,” which gives it the ability to allow advertisers to target display advertising based on a user’s search behavior. In Yahoo!’s words:

…for example, if you searched for “Toyota Prius” Yahoo! will be able to serve display ads for Toyota Prius to that user across the Yahoo! network

Actually, search retargeting is one of three new ad products announced, but to my mind, by far the boldest and most potentially controversial.

First, the upside: there’s little doubt that search retargeting could significantly raise the yields on a lot of long-tail display ads across Yahoo!’s network, where CPMs have been melting in the heat of a bad economy. At the same time, it could raise the quality and relevance of those ads as established brands take notice, making for a better consumer experience, and the brands themselves could get much better value out of targeting based on search-powered relevance. A win for everyone.

Now for the hard part. As of this writing, we’re probably hours away from a response from privacy advocates that’s unlikely to be warm.

The FTC recently seemed to hand marketers and portals a victory over privacy advocates by backing self-regulation for targeted online advertising, which has raised hackles and perhaps primed them for a fight. For its part, Yahoo! has taken great care in the past to burnish its privacy credentials and certainly needs to avoid a privacy flare-up at all costs, but privacy reassurances were surprisingly absent from this announcement, as were implementation details that might enable one to form one’s own conclusions. It must have been a difficult public relations decision whether to call out the issue or not.

So, if you’re searching for a divorce lawyer on Yahoo!, will your spouse get tipped off the next he uses the PC and notices his Yahoo pages are plastered with divorce lawyer ads? Not likely: Yahoo! is bound to be very selective of categories for this kind of targeting, and offer clear opt-out mechanisms if you don’t want your search to be targetable. But will this create a new cache of retained search data, prized by thieves and despots? No, I’m certain Yahoo! will correlate search terms with behavioral categories on they fly without retaining anything specific, just as Phorm does, and head off this objection from the start.

What’s more, Yahoo! is not the first display advertising network to offer search retargeting. AOL’s Advertising.com, WPP’s 24/7 Real Media, Microsoft’s DrivePM, AudienceScience, even Yahoo’s own BlueLithium network have all offered some variation on this for at least two years, although none with scope of Yahoo!’s new offering. Only Google, it seems, has for now avoided this form of search/display convergence. Perhaps they’ll wait to see how Yahoo!’s effort plays out first.

Nevertheless, I think this will be worth watching closely.