Five years ago the world's biggest media companies believed they were on the brink of a digital revolution. Fretful at the possibility of being left on the analogue shelf, they squandered vast amounts of shareholder money on a digital landgrab that proved, for a time, to be a new media mirage.
Now it finally looks as though digital has truly broken through to the mainstream. By the end of 2005, 15m UK homes will be connected to either Sky Digital, digital terrestrial platform Freeview or digital cable services.
That makes the prospect of complete switchover from analogue to digital TV by 2012 increasingly likely. What's more, broadband and 3G mobile are at last winning widespread consumer support.
All of this is great news for viewers, but unnerving for commercial broadcasters and advertisers. Sky managing director Dawn Airey, for example, suggests that 'commercial terrestrial television may be sleep-walking its way to oblivion'. Broadcasters have also heard Ofcom chairman Lord Currie warn that they are standing 'one mile from Mount St Helens. When it blows, that will be too close and it will be too late to run.'
There are two reasons for this surge in digital doom-mongering. The first is that extra choice is eroding mainstream audiences at such a rate that it calls into question the sustainability of the 30-second spot advertising model. Channel 4, for example, takes a 13% share of viewing in non-multichannel homes, but just 6% in Sky/cable homes. It is a similar story for ITV1, which expects commercial audience share to drop from 40.5% to 32%-33% by the time digital switchover takes place.
The second key shift is that digital broadcasting gives viewers greater control. While many are already trigger-happy converts to the remote control and electronic programme guide (EPG), more serious is the arrival of personalised video recorders (PVRs), which allow users to record content for playback when it suits them.
The UK's most high-profile example is Sky+, a PVR-enabled digital set-top box with enough space to store up to 30 hours of programmes, which is now in 474,000 homes. With Sky+ getting rave reviews from users and DVD-PVR hybrids also joining the market, media agencies predict that there will be between 7m and 8m PVRs in use in the UK by 2010.
For advertisers, the widespread use of PVRs carries two key threats.
The first is that increased viewing of recorded content diminishes the impact of time-sensitive ads such as sales or launches. The second is that PVR users are showing a tendency to skip spot ads.
'PVR viewers get a lot more satisfaction because they can match programmes to their mood,' says Basis Research director Andy Jameson, who recently conducted a qualitative study into Sky+ homes. 'The downside is that they have very little compunction about skipping spot advertising.' This is also the conclusion of media agency Starcom Mediavest, which recently found that 77% of PVR users skip ads. Based on its own projections for PVR growth in the UK, it says this could lead to a 6% reduction in commercial impacts by 2008.
The PVR threat is only part of the problem, however. Also rolling out are on-demand services such as those offered by HomeChoice - a digital TV platform that pipes a la carte content down broadband phone lines.
Currently, 1.25m homes can access the service, but that figure could rise as high as 10m by the end of the decade.
HomeChoice chief executive Roger Lynch says the ability to download entertainment, kids' programmes, music and films dramatically changes viewing patterns. 'Over the next 10 years we will move to a situation where half of viewing is on-demand,' he says. This has serious implications for marketers, because HomeChoice is currently subscription-based, with no advertising. The broadcaster is about to begin the UK's biggest trial of video-on-demand advertising, enabling brands to tailor ads to viewers. It has linked up with Brand New TV to recruit brands that could benefit from the interactivity. 'As on-demand develops, we might see efforts to link ads to programming,' Lynch says. 'However, there will be problems for companies that continue to rely heavily on 30-second spot ads.'
It is not just developments in home-based viewing that are changing the traditional model. With 3G phones and Apple iPods revolutionising the text, still image and music markets, Jameson believes the next few years could also see rapid uptake of portable pocket-sized video devices. 'I can envisage people using their TV for appointment-to-view events and mobiles for short-form shows,' he says. An early example of this is cjaq - a thriller in 10 two-minute instalments that was recently produced for playback on i-mate mobile devices.
While the major broadcast players recognise the issues posed by digital, they reject suggestions of a TV advertising Armageddon. 'Can TV reach 30m people in one hit anymore? No,' says Channel 4 sales director Andy Barnes. 'But can you use a combination of TV options to reach big audiences?
Yes. Shows with a buzz, such as Big Brother and I'm a Celebrity, will continue to play a key role, as the latter has for its sponsor First Choice.'
For Barnes, the threat of eroding audiences is offset by the promise of improved targeting. 'We think we will have the same share of commercial audience at digital switchover as we do now. But it won't just be on C4, it will be across a multichannel proposition that also includes E4, Film4 and channels such as More4, which launches next year. Audience segmentation is a chance to reach key demographics with less waste.'
ITV has taken a two-pronged approach to the digital issue, according to director of broadcasting Mick Desmond. The first is to cushion audience losses on ITV1 by growing niche digital channels such as ITV2 and ITV3. The second is to support shows with activities across mobile, online and off-screen promotions.
'Programming concepts are evolving so it's possible to engage audiences and interact with them across platforms,' says Desmond. 'As we produce a lot of shows in-house, we can talk to clients early on about their design.'
This holistic strategy is more akin to the way thematic channels such as CNN and MTV do business, according to CNN International ad sales chief Kevin Razvi. 'For the past few years we've been extending into new media,' he says. 'The key shift has been to stop thinking in terms of media silos and focus on delivering advertisers a CNN-style audience, regardless of platform.' This shift towards media-neutral or 360 deg planning can help combat fragmentation.
It will not necessarily stop ad-skipping, though. So what are the best ways to minimise the impact of PVRs? One option is to schedule event-based TV that people feel compelled to watch live, says Desmond. 'TV will need to be more interactive, more of the moment, because viewers are more likely to watch it live if there are time sensitivities.' This applies to news, sport and big entertainment events. But for genres vulnerable to PVRs, such as drama, Starcom Mediavest group strategy director Nigel Foote believes the first line of defence will be to make it harder for viewers to dodge commercial messages.
PVR users skip ads, but use sponsorship bumpers as markers to rejoin a show - a pattern that is likely to inflate sponsorship prices. Ad-skipping could also be minimised by flexible breaks with fewer ads, or more emphasis on showcase work.
Mark Cullen, chief executive of branded content specialist Enteraction TV, also predicts that channels will make more of an effort to incentivise viewers to sit through breaks. 'Subject to the way regulation in the UK develops, programmers could create interactive games that link shows to ads or require you to stay through a break to keep your score. There is also scope for ad campaigns to be linked to mobile promotions offering discounts or prizes.' He also predicts more innovation: 'TV advertising has been pretty lazy over the past few decades. But we will see growth in the use of product placement and virtual ads, as seen on football pitches.' Cullen also foresees a growing role for branded channels. 'There is pressure on clients to sustain a dialogue with consumers and this is a low-cost way to do it.'
MindShare takes a similar line, but points out that some sectors, such as financial services, are more vulnerable to ad-skipping than others - notably, alcohol - due to their entertainment value. As a result, it argues traditional TV advertising will consolidate in fewer sectors, while others will switch to product placement, sponsorship or alternative media.
The good news is that the PVR sector seems keen to meet advertisers halfway. In the US, TiVo allows advertisers to purchase a billboard that pops up when a user fast-forwards through an ad. This will allow advertisers to make offers and link to long-form ads stored elsewhere on the TiVo hard drive.
If a viewer opts in to the ad, their personal information will be sent to the advertiser, enabling them to make a direct approach. This point is critical, since the likelihood of viewers interacting with ads depends entirely on the reward offered.
Efforts to integrate traditional TV strengths with direct marketing are also evident closer to home, with Sky working on ways to make ads more relevant (see box above). While this does not prevent ad-skipping, more compelling messages may lock in viewers. 'Advertisers that rely solely on big-event TV are shortsighted - scarcity value will make that strategy extremely expensive,' says Lynch. 'Services such as HomeChoice can build detailed user profiles, which will be a real benefit to advertisers.'
Another positive for advertisers is that agencies seem upbeat. Starcom Mediavest's Foote says the combination of targeting plus usage data will be 'a great opportunity to break the log-jam caused in TV by high creative and media costs'.
ZenithOptimedia chief executive Anthony Young goes even further, arguing that PVRs are a necessity. 'There is so much choice that the medium is becoming inaccessible,' he says. 'Anything that helps viewers locate what they want to watch and boosts audiences is great.'
Young predicts the rise of the TV super-planner. 'The 30-second spot will just be one of many formats clients can use,' he says. 'Viewed positively, it is a chance to get away from blunt tools such as awareness and start measuring TV in terms of the ROI it delivers to a client's business.'
TIMELINE DIGITAL TV
1998: BSkyB launches Sky Digital, heralding the start of the digital TV
2001: Sky+, the set-top box giving viewers the ability to record and
store up to 30 hours of TV programmes, launches to rave reviews.
2002: BBC-backed digital terrestrial platform Freeview debuts in
October. It quickly emerges as a cheap, popular alternative to Sky
2004: Fast-growing Freeview reaches 4m homes - prompting Sky Digital to
embark on an aggressive marketing drive to sign up 8m homes by the end
of 2005. PVR technology becomes available through DVD systems. Analysts
predict it will hit 30%-40% penetration by 2010. Agency Zip Television
unveils an ad format created for Honda that allows viewers who press
their remote's red button to talk to a Honda sales executive about the
Civic Type-R model using video, audio and graphics on screen.
2005: Video-on-demand service HomeChoice to be available to 2.5m homes
via broadband phone lines. Broadband starts the year with more than 5m
customers, making the UK its biggest market in Europe.
ESSENTIALS - What's on offer?
The broadcaster provides a news service for Java-enabled mobile phones, funded by Xerox. The service, which delivers the top 10 global news stories, is CNN's first mobile service supported solely by an advertiser. The service is independent of operators and manufacturers, so users don't pay an extra subscription. Xerox branding appears as the application starts, on the home page and across the service.
The company is exploring ways of linking its ads to follow-ups via mobile devices. From March, some on-screen ads will include a text number with a call-to-action mechanism. A viewer could respond to a car ad by texting an on-screen number. A few minutes later, an ad would be downloaded to their mobile offering a test-drive at a local garage - a national execution backed by local reward.
Flextech and UKTV joint sales house IDS is developing a slate of primetime half-hour advertiser-funded programmes for channels including Living, Trouble, UKTV Food and UKTV Style. Funding brands get sponsor credits, a role in shaping the show and the chance to devise a targeted editorial platform that can be leveraged in stores and elsewhere. Deals are expected within the next six months.
The big emphasis is on beyond-the-spot deals. First Choice's sponsorship of I'm a Celebrity incorporated spot ads, sponsorship, exposure on ITV1 and ITV2, online and interactive activity. There were also prizes for competition winners and programme-related activities in First Choice Shops. Nokia made a similar use of its deal with The X Factor, offering mobile-based activities ranging from voting to ringtones.
The latest version of the Sky+ personal video recorder/set-top box has capacity on its hard disk to accommodate interactive advertising. Ads can be targeted by postcode or viewer preference and there may be room for ads with promotion or competition mechanics. Like TiVo, Sky is looking at short ads that can act as gateways to longer ads that can be recorded and watched later.
- UK becomes a fully digital society as government gives the green light for analogue switch-off - expected in 2010 or 2012.
- Emergence of a strong secondary market in video content delivered via mobile devices.
- NTL and Telewest merge to create a sustainable digital cable business.
- Calls from broadcasters and advertisers for Ofcom to review its ads and sponsorship codes to reflect digital developments.
- Freeview investigates leveraging its brand/penetration strengths with a partner to make a set-top box with broadband services.