Business must anticipate change. There is a constant stream of new ideas, new technologies, and new business models and no shortage of pundits to pontificate about them. And how good is the track record at predicting change as it applies to television advertising? Well, to para-phrase an old joke about the predictive power of economists, venture backed companies have correctly predicted twelve of the last two paradigm shifts involving how media is bought and sold. And I may be being overly generous.

A number of companies believe that we are “just around the corner” from the demand for targeted advertising in television. Many of these prognostications appear to be more expressions of personal opinions than they are solid analysis. Given that it is easier to point out flaws in others than it is to put oneself on the line, it might be fair to ask how VODscape sees the potential for non-linear, targeted television advertising?

The answer lies in understanding who spends the television ad dollars and what motivates them to spend on other media. In other words, follow the money.

Much can be learned from analyzing the audience shift begun in the 1990's from broadcast television to the cable networks. The audience of the cable networks collectively surpassed those of the broadcast networks in 2002. However, you would be hard-pressed to see that trend reflected in the agencies' media buys (even after factoring discrepancies in inventory quantity). It turns out that advertisers establish an advertising budget and the agencies allocate resources between the media as they deem appropriate. In the case of local cable, they continued buying local broadcast until it was undeniable that too much of the audience simply was not there on broadcast.

Targeted advertising advocates miss this lesson because they want it to be all about the value of the medium. The logic roughly goes like this: advertisers want to target their message, and VOD/DVR ad inventory is the ultimate in one-on-one targeting, therefore, advertisers will buy this ad inventory just as soon as it is made available.

VODscape believes that this premise is in error. The correct message is this: the money that advertisers spend on non-linear inventory will be a function of the erosion of value in linear television. This is what happened in local broadcast versus local cable — agencies bought more cable after the broadcast audience erosion was undeniable and cable made it easier to transact. The truth is that agencies prefer buying what they know without working harder than is absolutely necessary. Additionally, the higher the transactional costs of a new medium are, the less profitable it is for the agencies to buy it.

I believe that there is a similar dynamic between linear and non-linear television. Where local cable had Nielsen rating to prove the eroded value of broadcast, the catalyst of the new audience calculation will come about from the DVR and its ability to easily skip 30-second ads.

DVR's have a well established pattern of usage quantifying how many people skip the 30-second advertisements. When putting a media buy together, agencies have not had to factor DVR's into their cost-per-million (CPM) equations because of the small install base. However, this should change after DVR penetration numbers surpass 10 million units. VODscape has modeled a possible erosion of the value of linear television around this pattern. This erosion is the amount of money that could be spent on VOD advertising if everything were transacted with equal efficiency. In reality, this erosion probably is the maximum “ speed limit ” because non-linear inventory is more difficult to transact than linear.

Looked at in this way, it is easy to see why past predictions failed to materialize and what the business drivers of the future really are.