Sunday, June 22, 2008

Product Placement - Lost Opportunity for UK TV

Product placement, or embedded marketing, is a type of advertising, in which promotional advertisements are placed by marketers using real commercial products and services in media, where the presence of a particular brand is the result of an economic exchange. The most common form is movie and television placements and more recently computer and video games. Web publishers are also experimenting with in-site product placement as a revenue model.

According to research conducted by PQ Media, global paid product placement market size was $3.36 billion in 2006, and $4.38 billion in 2007. While the United States remains the largest global market for product placement, accounting for two-thirds of spending, growth is expected to decelerate over the next four years, although remaining in the double-digits. Meanwhile, growth in the European and Asian placement markets is expected to accelerate going forward, as legal restraints are loosened and global brand marketers move to capitalize on emerging opportunities in these regions, claims PQ Media. Countries with significant market opportunities include The United States, Brazil, Mexico, Australia, Japan, China, the EU, India and Canada.

However, despite the global phenomena, the UK seems determined to buck the trend, when Culture Secretary Andy Burnham declared that the UK Government would not accept the EU Directive allowing product placement on TV. The Government’s surprise opposition to product placement represents a lost opportunity for UK broadcasters, particularly for ITV. Ofcom estimates that product placement would contribute £25m a year to UK broadcasters. However, some media buyers suggest that this number could be significantly higher. Assuming a similar growth rate to the US product placement market, the estimated benefit to UK broadcasters could rise to as high as £150m in 3-4 years. Growth in the market has been driven by the increasing use of personal video recorders (PVRs), which has encouraged the use of ad skipping between advertising breaks.

Power of European Broadcasters & CRR in UK

The television advertising market in Europe is heavily concentrated at the top, with market leaders in the UK, France, Italy and Spain enjoying significant market share. As per Nielsen data at end of December 2007, market leader ITV had a 42% share of the UK TV advertising market. In France, market leader TF1 garnered a 61% share of TV ad market. In Italy, Mediaset enjoyed a 64% share of the TV ad market; while in Spain, Telecinco commanded a 31% share of TV market.

Despite a seemingly monopolistic structure, however, it is interesting to note that ITV in UK is the only player in Europe that is subject to price regulation by the UK Competition Commission through a mechanism called the Contracts Rights Renewal (CRR).

ITV plc was formed post the merger of Carlton and Granada in 2003. Recognising the concerns of the advertising community about the extent of market power ITV plc could have post merger, the Competition Commission put in place the CRR remedy, overseen by an independent Adjudicator (currently Robert Ditcham).

CRR is intended to protect the advertising market: a) by guaranteeing that advertisers and media buyers are no worse off following the merger of Carlton and Granada; and b) by putting in place an automatic ‘ratchet’ which reduces the amount advertisers have to commit if ITV’s audience shrinks. The CRR sets out a number of rights that advertisers and media buyers have when buying advertising time from Carlton/Granada, and in particular, gives advertisers and media buyers the right to renew their contracts on a rolling annual basis, adjusted for changes in ITV’s audiences, with no reduction in the discounts they receive. Until the remedy is no longer necessary, the share of revenue committed by advertisers/media buyers on television advertising to Carlton/Granda need not increase above 2003 levels.

The Office of Fair Trading (OFT) is responsible for the CRR remedy, supported by Ofcom. Ofcom proposed a review of the TV ad market in its 2005/06 annual plan, but after undertaking preliminary analysis concluded that the case supporting the need for a full review of the entire market had not been made. Ofcom has not communicated any plans to conduct a review of this market.

Thursday, June 19, 2008

The Changing Media Landscape

What the heck is happening to the media landscape? According to my friends at Bernstein Research, three factors are driving fundamental changes within media – 1) Price Erosion; 2) Increased Complexity; and 3) Declining value of traditional mass reach

The authors argue that as the barriers to content distribution fall, consumers have increasing access to the long tail of content that – in a pre-digital world – they could not access. As a result, the old oligopoly structure of the industry is eroded away. In addition, lower content production and distribution costs and the proliferation of legally questionable consumer practices are further creating downward expectations on pricing.

The proliferation of distribution channels and formats increases complexity, as all elements of content, from length to pricing to revenue model, have to be adapted to multiple channels. Case in point is Free-to-Air TV program, which can also be viewed online, albeit with a pre-roll ad. The same can also be sold on iTunes or viewed as a short clip of a key moment that is streamed on YouTube. Monetization of content across platforms (and cost control across distribution channels) will be increasingly challenging.

Historically, mass media has been successful in delivering the largest possible audience at the lowest possible cost. However, today the marketing community is increasingly embracing narrower and more sophisticated segmentation of advertising and promotional messages. While there are technology innovations that could help traditional media companies to adapt to this environment, their adoption will be very slow. As a result, the value proposition of traditional mass media is becomingly increasingly irrelevant.

Technology is changing the European TV industry landscape by fragmenting distribution platforms, altering viewing behavior and proliferating new economic models. Given the pressures that the two primary business models, Free to Air broadcasting and Subscription Pay TV, are facing in this world of fragmentation, the only way to sustain growth is to acquire premium content and/or access to new distribution channels to ensure content reaches consumers anywhere and anytime. In this contest, most broadcasters have started experimenting with online transmission by repurposing some of their programs to suit the online platform. However, the authors contend that one of the key underlying concerns of posting TV content online is that it can simply add costs without winning any incremental viewership, as audiences fragment across distribution channels.

Media is truly in a transition phase – where producers are embracing multiple delivery platforms in response to changing consumption patterns; and marketers are increasingly struggling to reach relevant critical mass. While we navigate through this turbulent phase, one thing is for sure - only the most efficient players are going to survive to see the light of day in a post-apocalyptic media world.

Thursday, June 12, 2008

ITV Turnaround Strategy

The new management (initiated in September 2007) at European media giant ITV Plc has adopted a three-pronged approach to turnaround the fortunes of the company. The three primary area of focus are: 1) Broadcasting; 2) Production; and 3) Online. I have summarized the approach below with action points against each of them that the company has published for the benefit of its shareholders.

ITV’s turnaround strategy for broadcasting is: 1) achieve family share of commercial impacts (SOCI) of 38.5% in 2012 (including GMTV). This was a target first laid out by Charles Allen; 2) accelerate ITV1 SOCI recovery; and 3) invest in ITV2 to make it become the No.3 commercial network for 16-34 year olds behind ITV and Channel4.
There are eight actions associated with this plan: 1) Launch a new successful schedule at 9pm; 2) increase the ITV1 budget by only 1-2% pa, less than inflation; 3) work on Public Service Broadcasting (PSB-ongoing); 4) work to replace contract rights renewal (CRR); 5) invest in ITV2; 6) take share of advertiser budgets via advertiser-funded programming and product placement (ongoing); 7) take high-definition (HD) onto Freeview (joint plan in place), launch Freesat (achieved); and 8) launch ITV1 HDTV channel (achieved on Freesat and ITV refused to put it on Sky).

ITV’s strategy for production includes a plan to 1) double content revenue from £600m to £1.2bn by 2012, this is a CAGR of just over 16% pa; and 2) grow ITV Production’s share of the ITV1 programming schedule.

The key actions associated with this strategy are: 1) create a single division with a talented creative leader (Dawn Airey); 2) move into high value genres. Here the plan is to accelerate long-running drama, factual and entertainment formats and comedy. It is also to do more documentaries, lifestyle, game shows and quiz shows, and content for new media. Lastly, it is to reduce one-off drama; 3) increase UK development spend; 4) introduce a more flexible strategy to attract talent, including co-production and part-ownership of independent producers; 4) expand international sales, building on the success of Hell’s Kitchen in the US and Dancing on Ice in Europe; and 5) spend up to £200m on acquisitions. The £200m is to be funded by disposals of existing businesses. Target size is businesses with sales of £10m-50m.

ITV’s online strategy is to 1) achieve £150m of online revenue in 2010; and 2) make into a top-10 UK entertainment site by 2010.

This comes with four action points: 1) grow viewing of ITV on-demand content; 2) develop specialist online sites around key programme brands and communities; 3) build online advertising sales excellence; and 4) explore adjacent digital businesses.

According to comscore (April 2008) is now thirteenth in the UK, having been twelfth in September 2007. The company may look at acquisitions (ad network, for example) to approach its targets.

ITV’s new initiatives include Gaming Sites and Kangaroo.

Gaming sites
ITV is producing gaming sites for “soft-gaming” based around program brands such as Emmerdale (bingo), Countdown and Family Fortunes. The company has struck a deal on soft-gaming with Party Gaming.

The BBC, ITV and Channel4 have formed a JV with the working title Kangaroo to be a showcase for their content online, in addition to their own websites and in addition to their syndication agreements. Kangaroo is an interesting response to the dominance of US internet companies of online video consumption, specifically YouTube. In the US, the share of videos viewed taken by Google, which owns YouTube, is increasing rapidly, whereas the share taken by the traditional companies is languishing or declining, with the exception of ABC, which is still very small. It was also formed with the decline of the sales of the traditional record labels in mind and the rise of pirate music services and the domination of the legal download market by Apple and iTunes. The UK broadcasters did not and do not want to be beholden to YouTube for the distribution of their precious content online – they need to have their own shop window and their own route to the consumer. This idea was also behind Hulu, a JV between US broadcasters.

According to Mediaweek, ITV is reportedly readying a price comparison site called

Wednesday, June 4, 2008

Phorm OIX & UK Display Advertising

Open Internet Exchange (OIX) is a new online advertising platform powered by a combination of Phorm’s technology and anonymous behavioural data from the UK’s top three internet service providers - BT, TalkTalk and Virgin Media – representing a combined user base of over eight million households.

OIX has the potential to transform the way that display advertising is sold on the internet, enabling advertisers to target campaigns directly at relevant users, regardless of which site individual banner ads appear on. The ability to target ad campaigns based on an unparalleled realtime analysis of users browsing activity is likely to lead to a very substantial improvement in campaign performance, and therefore attract a substantial proportion of the online advertising market.

Phorm has stated that its technology complies with the Data Protection Act, RIPA and other applicable UK laws. This assertion is based on both a (written) legal opinion and consultations with a variety of organisations such as Ernst & Young, 80/20 Thinking, The Home Office, OFCOM, and the Information Commisioner’s Office.

Phorm’s technology assigns an anonymous cookie with a randomly generated ID number to a user’s browser. As the random number browses the system it compares pages seen with product category definitions (channels) stored in memory. The channels are a combination of rules set by advertisers and based on URLs, search terms and key words on pages. As each page is loaded and compared with the channels any record of that page is deleted instantaneously. No record of browsing behaviour is retained, the Phorm system only stores the anonymous ID, the advertising channel that ID matched and a date. When that random number arrives at a webpage participating in the OIX a targeted relevant ad is then served. No personally-identifiable information is obtained in the process.

The fact that the most important ISPs in the UK market are participants in the platform and are backing it with the full weight of their highly valuable consumer brands is indicative of the potential of the technology for the ISPs themselves.

For some time, ISPs have been seeking ways to diversify their revenue streams away from a reliance on subscriber revenues, given the increasing price pressure in the broadband market. ISPs have been viewing with some urgency the need to expand their ability to generate advertising revenue. To date, these companies have mostly been restricted to selling advertising inventory on their own portal pages. By contrast, when their customers leave one of their own websites to view another publisher’s site, they have lacked the ability to deliver advertising and have missed a significant revenue opportunity. Participation in the OIX will create a new revenue stream for the ISP sector, and will maximise the value of the internet traffic that goes through the ISPs’ networks.

By integrating Phorm’s technology into their own networks, the ISPs should be able to better monetise the wealth of information that they currently control, including users’ viewing histories and the contextual relevance of the millions of websites that their users currently view.

As part of the arrangements with the top three UK ISPs, the ISPs will jointly promote the consumer facing product, WebWise, to over eight million customers. This new product, which will be free to consumers, will incorporate both participation in the OIX and additional new benefits. It will be promoted as providing consumers a “safer, more relevant internet” and has been developed in response to a clear consumer demand for a higher level of online safety.
Thanks Canaccord Adams, 2008

A Look at Exec Comp in US Media

Michael Nathanson and team at Bernstein commissioned a research to analyze how executives are compensated at big 5 US media conglomerates: Disney, Time Warner, Viacom, News Corp. amd CBS. Below, I have captured the summary of their findings.

As per data from 2007 filings, Total Compensation from Bonus is as follows:

At Disney: 49.4% of CEO’s compensation and 49.2% of CFO’s compensation is comprised of bonus.

At Time Warner: 35.8% of CEO’s compensation and 30.9% of CFO’s compensation is comprised of bonus.

At Viacom: 34.0% of CEO’s compensation and 34.1% of CFO’s compensation is comprised of bonus.

At News Corp: 49.2% of CEO’s compensation and 34.8% of CFO’s compensation is comprised of bonus.

At CBS: 50.2% of CEO’s compensation and 50.0% of CFO’s compensation is comprised of bonus.

Disney has multiple quantifiable factors for determining executive bonuses. These factors include (in order of importance): EPS targets (28.6% of weighting), operating income growth and earnings net of capital charge targets (25% each) and after-tax free cash flow growth targets (21.4%). Achieving or beating benchmarks within these metrics determines 70% of the bonus payment, while the remaining 30% is based on the compensation committee's subjective assessment of the executive's performance. Disney also adjusts its bonus payments by a factor that rewards or penalizes management for Disney's stock performance relative to the returns of the S&P 500 Index.

Time Warner's bonus structure is based on two factors which determine 70% of the bonus payment: Adjusted EBITDA growth (70% weighting) and free cash flow (30% weighting). The remaining 30% of the bonus payment is based on the attainment of individual goals.

Viacom's bonus compensation is based on three factors: Operating income growth (60% of weighting), operating cash flow less CAPEX (20%), and undisclosed qualitative factors (20%).

News Corp.'s management is paid on only one quantifiable metric – EPS growth.

In CBS's proxy, there are no pre-determined formulas or quantifiable metrics to determine bonus amounts. Rather, the proxy states that bonus awards are "subjective" and take into account many factors, like budgeted EBITDA and free cash flow, increasing the quarterly dividend, repurchasing shares, and expanding the company's digital presence.