When Sen. John McCain canceled his September appearance on The Late Show With David Letterman, the talk show host ranted about it on the following night's program. "I'm steamed," he said. "I feel like a cheap date." Letterman bandleader Paul Shaffer played the indignant sidekick. "He dropped you," Shaffer said.

Increasingly, viewers are also dropping regularly scheduled dates with TV shows. They're catching programs instead on DVRs or watching them -- in full or by way of abridged clips -- on any number of online sites, including Hulu and YouTube.

Letterman's McCain diatribe, in fact, drew 2 million page views on a patchwork of Web sites within a few days of the show's original network broadcast on CBS. That's a substantial addition to the roughly 4.25 million or so viewers that tuned in for the original broadcast, per Nielsen Media Research.

CBS streams dozens of shows, including current series and "classics" to 300 Web sites known collectively as the The CBS Audience Network. That moniker is an appropriate reminder of just how fragmented today's audience has become. In the course of a single generation, national distribution sources have blossomed from three broadcast networks, each with a single distribution platform, to thousands of outlets including broadcast's own growing array of digital extensions, cable, satellite, telco, mobile and Web sites.

The more viewing splinters, of course, the more complex it is for marketers to keep track of who's watching the shows and the ads, when they're watching and where. Equally important, it's hard to assess whether the commercials are resonating with viewers who tune in via all the disparate platforms and their surrounding environments.

Adding to traditional TV's headache is that Internet players like Google and Microsoft are exploring how they might shape the TV business, and are bringing major tenants of the online world to broadcast. They already offer advertisers alternative ways to buy and place advertising. And myriad other "outsiders" are also vying to shape the market, from set-top box makers and ad networks to research companies and tech firms with addressable and interactive applications.

While these outsiders hover, however, TV's traditional power players are hardly standing still. Their goal: to marry TV's branding power with the Web's data-fueled targeting and measurability. Already, networks have developed -- and are continuing to develop -- strategies for distributing content anywhere, anytime, in effect placing bets on where users will move next. And cable companies are creating a national platform to bring Web advertising techniques to mainstream TV. The quickening pace of these advances means the TV world will be changed even more profoundly than it was with the advent of cable in the 1980s.

"It's going to be a crazy, crazy world," predicts Dave Morgan, founder of Web ad networks Real Media and Tacoda. "It's not just because it's unsettled, but because it's being disrupted. What was a relatively settled ecosystem is now undergoing massive disruptive change."

All the moving parts are prompting marketers to ask where they'll fit into the big picture of the small screen five years from now.

Many industry pundits say a good place for them to look is Canoe Ventures. The startup consists of six cable operators -- Comcast, Time Warner, Bright House, Cablevision, Charter and Cox -- which are attempting to create a national platform to display advertising that is both addressable and interactive. In effect, Canoe hopes to bring to mainstream TV advertising techniques that have made the Internet a must medium for many marketers.



Kris Magel, evp, director national broadcast at Interpublic's Initiative, says it's a technique that has worked very well in the digital space via contextual and behavioral targeting. Says Magel: "The goal of the entire effort is raise the value and effectiveness of inventory for advertisers." The problem with the current mass-media model, he says, is all "the waste built into it." Even with a specialty net like The Food Network, he says, a 30-second spot pitching a kitchen utensil will be wasted on a sizeable portion of the network's total audience. But if there were a way to divide that audience into buckets of, say, 100,000 impressions, and through viewing and behavioral data identify those more likely to buy a garlic press, "that's a lot more valuable," he notes. "Video is so impactful to begin with. Imagine the power it could have if every impression was monetized that much more effectively."

Some industry insiders wonder, however, if cable already blew its opportunity to shape TV's future. The technology exists, but the cable companies have sat on their hands and failed to act, they say.

"Canoe should have happened seven years ago when VOD and DVRs were getting traction," says Tim Hanlon, evp, managing director, ventures at Publicis Groupe's VivaKi. "My hope is that something like Canoe gets us there. But it's getting a little late in the game," he adds, noting the rapid rise of online video and the possibility that Internet protocol television (IPTV) -- digital video delivered via any number of computer-network formats -- could "render any cable-centric solution kind of irrelevant."

In addition, Hanlon notes that the cable operators in the Canoe venture cover just two-thirds of the U.S. Not only do the companies have to cooperate with one another, he notes, but they also have to reach out to satellite and telco competitors, and bring them onto the platform they're creating to make it truly national. "I hope Canoe can get cable's act together," he says.

David Verklin, CEO of Canoe Ventures, disputes the notion that Canoe was too late to the game. "We know we have a lot to do, but I think our timing is pretty good," he says. "I'm not sure if you brought this out two years ago the ecosystem was ready for it. This challenge is less about technology and more about marketing and marketplace."

He notes that the companies behind the partnership are "very open" to extending the platform to the satellite and telco entities, and that there have even been some "preliminary feelers" between cable and satellite entities about the latter linking with Canoe. "Our vision is of an open architecture and open platform," he says.

The fact that cable competes intensely with both the telco and satellite sectors in several arenas shouldn't be a nonstarter, Verklin adds. "This happens in a lot of businesses where you compete in some places, but in some places your interests are aligned," he says.

Irwin Gotlieb, CEO of WPP's GroupM, agrees that the time is right for a Canoe-like platform. It's "key to cracking the code," he says, and enables the cable operators to offer a single, compatible platform. "I think we're at a point where it's scalable," he says.

Gotlieb adds that, ironically, the device that will accelerate the platform's scale has been a significant contributor to the derailing of the traditional TV model: the DVR, now in about 28 percent of the nation's homes. Research shows that those who have them skip through 60 percent to 70 percent of the commercials to which they're exposed. But the flip side is that the DVR can store targeted ads aimed at individual households or pause a program while a viewer telescopes to an interactive ad and then returns to the program.

"When someone is consuming a medium, you don't want to take them somewhere else because it breaks the flow of the communications," Gotlieb says.



Web meets TV

It stands to reason that the Internet giants would see their future as lying in TV. After all, what TV will look like -- near-limitless content choice and targeted advertising made possible by a digital backbone -- sounds a lot like the Web.

That's why Google and Microsoft are making credible bets on TV as a major new revenue stream. Of course, the main impetus behind their focus comes down to dollars. Microsoft CEO Steve Ballmer has committed the company to getting 25 percent of its revenue from advertising in a few years -- a task that would require a foothold in the largest video ad channels, including broadcast TV.

Google likewise wants to grow beyond its core Internet search business. Asked how advertising will change in the next five years, Google chief economist Hal Varian answers that TV would "come into the 21st century."

This reinforces a core belief that the TV ad model is broken. That's hard to dispute, given the steady audience erosion for network TV occurring over the past two decades, and which continued this fall. For the first four weeks of the new season, each of the five major broadcast networks was down in total audience, and across the five the decline averaged 11 percent. Still, they raked in $9.23 billion in this year's upfront market, according to net sources, slightly ahead of last year's $9.15 billion take.

Each year, the TV upfront marketplace is dismissed by Web execs who say that the decades' old system for buying and selling most of the annual network TV ad time is doomed for extinction. Advertisers, they argue, want more flexibility, better ROI metrics and the ability to buy inventory closer to airtime.

So far, however, Google and Microsoft have taken only baby steps into TV, knowing cable companies and networks view them warily. Both companies stress that they don't want to rock the boat. Google is forswearing its auction system to only tackle measurability and targeting in advertising. It's gathering second-by-second viewer data from set-top boxes and remote-control clicks to create a feedback loop for advertisers. With Web traffic data added on top, Google sees a chance to provide tracking reports that include data on sales generated.

Microsoft's approach is slightly different. Last summer, it bought Navic Networks, a Cambridge, Mass., technology company that allows cable and satellite operators to more easily sell targeted TV spots. The system is geared more to solving problems of integrating a new sales method with tried-and-true methods than overturning it with a new sales channel.

Scott Howe, gm at Microsoft's advertiser and publisher solutions unit, admits the company has some work to do to convince cable companies its intentions aren't threatening. Its efforts to develop software for cable companies, which began in the 1990s, have mostly come to naught. "Microsoft frankly has a checkered history with the cable industry," he acknowledges.

Both Google and Microsoft executives agree that major tenets of the online world will make their way to TV. Advertisers will be able to segment audiences, measure performance in near real time, target specific audiences by demographics and behavior, and, crucially for them, manage inventory by allowing third parties to sell some space. Yet TV's evolution will not inevitably look like the Web's.

"One of the greatest enablers of the online world is its open architecture," Howe says. "In the case of TV, it's a series of proprietary technologies" making it more akin to the hodgepodge of standards and gatekeepers in the mobile world.



Google's efforts got a big boost when it signed a deal with NBC Universal that will bring it ad inventory from NBCU's cable channels like Sci-Fi, Oxygen and MSNBC. It also has a deal with satellite provider Dish Network.

Mike Pilot, president of ad sales at NBC Universal Television, says the primary motivation for the Google deal was to gain more granular insights into viewing behavior patterns.

"We're feeling intense pressure from our agency and advertiser partners to develop ever more customized and specialized campaigns around specific shows and network brands," Pilot says. "Our human capital is getting pulled way further up the value chain than it was just a couple of years ago. It's incumbent upon us to figure out potential ways to use technology to make some transactions so we can free up people to collaborate with advertisers on new approaches, metrics and platforms."

Microsoft's Navic software is now in use by Time Warner Cable, Cox Communications and Charter, as well as Dish Network. Execs from both companies see a long slog ahead. "They're not willing to take the risk of wholesale change," says Chet Kanojia, Navic's CEO.

The next top model

For all the talk of technology, the question of TV's future comes down to business models. TV is often criticized as a slow-moving, conservative industry. Yet it's also a tremendously successful one that has no desire, in NBC Universal CEO Jeff Zucker's famous formulation, to "trade analog dollars for digital pennies." After all, the shift to digital distribution has been a case study in value destruction for traditional content businesses like music and newspapers.

Many questions remain unanswered, of course, as to what the TV 2.0 model will look like. What shape, for instance, will the ads take? It's been several years since the predicted death of the 30-second spot, which still remains the dominant form of TV advertising.

Still, many agree that there will be a greater variety of formats beyond today's mostly commercial-break model. Clues can be seen online, where advertisers are experimenting with overlay ads that appear around content and invite user response. TiVo has pioneered a search-based model for discovering content (and advertising offers). Longer-form brand programming is also gaining acceptance as a way for advertisers to invite viewers to watch more about a product.

For an idea of what viewing patterns and ads might look like, check out some of the experiments under way at Hulu, the NBCU-News Corp. joint venture that puts full-length TV episodes online, letting users watch them in their entirety or just sample and send snippets. Its viewing patterns diverge wildly from network TV. While American Idol might rule the roost on Fox, the long tail holds sway with the greater choice online: Airwolf and The A-Team are among Hulu's most popular fare. Hulu also has experimented with a choose-your-sponsor model that lets users decide if they want to see ads for an SUV or a compact from a sponsor like Nissan.

"So much of this is the chicken and egg," says Jason Kilar, CEO of Hulu. "There are many times in the day I wish I could fast-forward five years."

Kilar warns it will take a long time for things to fall into place. For one, fundamental issues remain unresolved, like the currency buyers and sellers use to measure and price ads. Last year, after much Sturm und Drang, the industry converted to a Nielsen ratings system where advertisers pay based on estimates of how many viewers are tuned to commercials, not shows, as had been the case for decades. But some still see the currency model as inadequate.



"The joke to me is you've got TV buyers still buying linear TV ratings when there are a lot of people that aren't watching linear TV," says Hanlon.

What's more, it remains unclear who will be the dominant players in the battle for TV's future. Cable companies and networks are confident they'll find their places, but many other players are crashing the party. AT&T and Verizon, for instance, are pursuing a so-called "over-the-top" strategy that seeks to break out of the constraints imposed by TV's traditional gatekeepers. If this vision of video delivered over broadband takes off, the future of TV will look much different from the past. Still, the safe money remains on the incumbents keeping control.

"Our feeling is the existing infrastructure will win out if they work together and can get it all together," says Mark Read, CEO of WPP Digital. "It's so built-in it has a tremendous advantage."