2013/08/12 Connected TV: what are the TV advertising developments and the policy challenges?

By Lluís Borrell, Partner and Head of Media, and Niko Muñoz, Head of Global Corporate Development at Havas Media

This article follows our series on the debate on connected TV and the policy debate, and the consultation green paper from the European Commission (EC).

Traditional linear TV and the pillars of 'demand market' TV advertising

Free-to-air (FTA) broadcasters have developed a healthy advertising business over linear TV viewing. Three key pillars support the business of TV advertising, which relies on a standard and well-accepted TV advertising product based on the 30-second spot and associated gross rating points (GRPs) that qualify the advertising opportunity.

• Building and controlling the TV audience: Mass-market audiences initially developed around terrestrial TV channels via regulated scarce resources (TV spectrum licences). TV advertising has also developed on other linear TV platforms, such as cable, satellite and IPTV, with wider supply but still limited and regulated in a similar way to terrestrial TV (minutes of advertising per hour, for example). Broadcasters' main focus is on producing or acquiring the content that will build and develop their TV audiences. This is a complex and risky business that requires financial capacity and tactical strategies to maximise audiences in an increasingly competitive market.
• Managing TV advertising inventory in a really efficient way: Advertising inventory on linear TV is limited by regulation. This limitation to protect citizens has a positive externality for the broadcasting business. Advertising inventory is turned into a scarce resource, which converts the TV advertising market into a demand market in which advertisers compete to have their advertising aired in front of millions of viewers (mass market) in a short and scarce time. Broadcasters have therefore developed an impressive capability to effectively manage scarce TV spots. If the limitations on air advertising were removed, advertising spaces might increase and the industry would change to a market of supply.
• Controlling the commercial value chain to offer those spots: Commercialisation of advertising inventory is done through owned or third-party sales houses that deal with media planning and buying agencies that represent the advertisers. Sales houses manage GRP prices based on the client, what the client wants in terms of qualitative profile of viewers or commercial target and the characteristics of the product the advertiser sells. A 30-second spot might be seen as a commodity because they all look equal, but in reality each slot is completely different and therefore controlling the commercial value chain allows revenue to be maximised.
• Linear TV advertising currency – 30-second spots and GRPs: 30-second spots are associated with standardised audiometry measurement systems (BARB in UK, Kantar Media in Spain) and are traded based on a sophisticated as well as simple trading coin, the GRP. GRPs differ depending on the client's interest and audience, so there is not a unique definition of GRP. 30-second spots have different prices depending on the composition of the audience they reach, and how that audience is related to advertisers' core target.

Linear TV has achieved success as a mass-market advertising vehicle by having a single accepted measurer and an adaptable trading coin (GRPs), providing the advertising industry with a flexible and homogeneous way to articulate a market of scarce resources.

The challenges of non-linear TV – the way towards a 'supply market' for TV advertising?

Adoption and rapid growth of non-linear TV and connected TV are challenging this successful TV advertising ecosystem in several ways.

• Building alternative 'TV' audiences: All types of content providers or even end users distribute their TV and content productions over the top (OTT) via the Internet without any licence limitation comparable to linear TV. These new players are rapidly building their audiences, which are often transnational.
• Managing non-linear TV advertising inventory becomes inefficient and, eventually, abusive to consumers: As non-linear players increase their audiences the advertising inventory grows, and the industry might move from a demand market to a supply market because inventories are not limited by regulation (advertising is no longer limited by the time of day, proportion aired in an hour, restricted types of advert), and 'spots' become over-abundant.
• Disruption to the control of the commercial value chain to offer TV spots: Advertising via OTT video is no longer an exclusive asset to be commercialised through broadcasters and their third-party sales-houses. A myriad of players has arisen in the commercialisation of spaces on the Internet. Niche and long-tail Internet players that do not have enough volume are giving their inventories to advertising networks to aggregate them and become attractive to advertisers and media agency buyers. Over-abundance of inventory is also helping the automation of selling and trading spaces through ad-exchanges and trading platforms.
• Non-linear TV standard advertising currency does not yet exist: Compared with well-established GRPs, online TV advertising is generally traded on a cost-per-thousand basis, or the amount that it costs to impact one thousand users. Furthermore, by means of the complexity of the new non-linear TV value chain, fueled by over-abundance of services and advertising inventories coming from different players, pieces of advertising are not regular products anymore. Measurement systems and tools have become varied and diverse compared with linear TV. Therefore, differences between audience systems can be up to 20% or 25% for the same measured publisher, which provides uncertainty to advertiser buyers.

Commercial developments and policy debate – levelling up or levelling down

Traditional broadcasters are trying to compete effectively with new players, offering media agencies and advertisers a similar well-accepted TV advertising product in both linear and non-linear TV ecosystems. This involves trying to homogenise and define a GRP for non-linear consumption. For example, Nielsen and BARB have already presented a combined measurement system in UK. This is a work in progress towards the unification of trading coins. Some have voiced concerns about the asymmetry of TV advertising regulation. Therefore policymakers and regulators are looking at these asymmetries to decide whether or not to intervene and, if so, whether it is best to level up (increasing regulation of non-linear TV ) or to level down (reducing regulation of linear TV) regulation.

Source: Analysys Mason