On The

Because there is no standard blueprint for an advertising model that works in a video-on-demand environment, media agencies, clients, programmers and distributors have spent the better part of the last four years constructing what is essentially a brand new way of selling television. The trouble is, the end result reminds some observers of nothing so much as a massive Rube Goldberg device, an ornate mechanism that makes what should be a relatively simple sales proposition seem like an exercise in convoluted logic.

It’s not all teeth-gnashing and garment-rending on the cable-operator side. VOD, still in its pull-up-diaper phase, helped funnel some $50 million to MSOs last year. That’s a fair chunk of change for a service that didn’t exist in any real way five years ago. But in an industry in which Wall Street’s inflated expectations can exact a punishing toll on an operator’s stock price and advertisers threaten to take their dollars elsewhere, some argue that VOD advertising is moving far too slowly.

Even as VOD boosters like Comcast continue to bang the drum for free on-demand content, a number of factors have held back growth of ad opportunities. One of the more pressing issues: certain technological limitations that prevent content providers from offering their ad partners a regularly refreshed environment for their spots.

“The problem is, from the standpoint of delivery, you still have to have your spot ready to go two weeks out because essentially everything has to be baked in 14 days before the content is made available,” says Lydia Loizides, principal analyst for Paphion. Much of that lag has to do with the amount of time it takes to punch virtual holes in the stream, allowing room for the spots and the metatags that help track the spots.

That said, the baked-in time has begun to decrease as third-party tech vendors have worked to accelerate the spot-identification process. “The efficiencies are apparent in that the time has been reduced by almost a half of what they once were,” Loizides says. “Last year, you had a 28-day lead time. But there is still a ways to go before we begin to approach anything like true dynamism.”

Those numbers will get halved yet again if Comcast has any say in the matter. Earlier this year, Comcast Spotlight, the MSO’s ad-sales division, said it had launched the first phase of a trial of Tandberg TV’s AdPoint platform across its national footprint. The phase that allows each DMA to individualize advertisers (i.e., add local spots to content in addition to the national footprint ads) will launch this quarter; Spotlight aims to have all the particulars of updating ads within its VOD content worked out at some point during the third quarter of 2006.

Another VOD vendor, Massachusetts-based SeaChange, has trialed its own ad-insertion software, called AdPulse On-Demand. It is working with a number of cable operators to develop a series of standards that should allow programmers to open ad pods in the middle of a stream.

Terri Swartz, SeaChange’s director of advanced advertising, says that VOD advertising has been limited to bookend opportunities, largely because there is no standards-based way to identify breaks. “We don’t have the luxury of a cue tone, something that says ‘insert spot here,’ and that’s holding up the ability to create pods inside those interior breaks,” she says. That’s a relatively easy fix in a limited market trial—it’s when an MSO goes wide with dynamic ad insertion that things are bound to get interesting.

Within the parameters of dynamic ad insertion, all sorts of questions remain, Swartz says. SeaChange can allow advertisers to place several ads for the same product on a server, so that a number of different spots for the same brand or service can be cycled into a VOD stream depending on dayparts or where a given subscriber falls on a ZIP-plus-four map.

“We have the technology that enables advertisers to target to more granular demographics,” Swartz says. Currently, the most granular anyone can dig down is ZIP-plus-four, but Swartz believes household-level targeting is on the horizon.

“The MSOs will have to work through issues of privacy—I’m not talking about legal compliance, but their own comfort in as much as how they talk to their customers about it,” Swartz says. While skirting the customer’s understandable Big Brother fears will be a delicate issue, Swartz says, there’s no way advertisers will turn their backs on the Holy Grail now that it’s within reach. “The key advantage of VOD,” she says, “is that point-to-point connection. How can you not exploit that?”

Time Warner Cable is also kicking the tires on nano- targeting, testing a predictive-analytics system designed by Invidi Technologies enabling the digital set-top box to track whatever is playing at any given time on each TV in the home. By analyzing viewing habits and certain patterns of remote control use, Invidi says its software can determine the age and sex of the viewer, allowing it to then send a demographically appropriate spot to his or her set-top box.

Another area Time Warner is exploring is the telescoping model of VOD advertising, which allows a viewer to access long-form ad content by clicking on a special on-screen icon via the remote control. It’s an opt-in model that allows users to voluntarily seek out further information about products they are interested in, says Larry Fischer, president, Time Warner Cable Media Sales. “Telescoping is like TV on steroids,” he explains. “We can migrate a viewer from a linear ad they just saw for Papa John’s to a screen that offers them a coupon for a pizza from the same place.” And because Time Warner maps VOD-specific channels like Driver TV and the experimental Movie Trailers On Demand to their own dedicated channels, users don’t have to drill down as far to get to the relevant ad content, making them more likely to actually access an on-demand spot.

Fischer says Time Warner also offers showcase-sponsorship opportunities on its VOD channels; American Express is one such sponsor on the new Trailers channel. But there are limitations to what operators can track in an on-demand environment. “Remember, the on-demand platform wasn’t built as an ad platform per se. It was built to get someone to buy something,” he says. In other words, time tracking wasn’t built into the original VOD server systems because whether a subscriber watched five minutes of a title or the entire two hours, the cable company still charged a flat pay-per-view rate.

A number of companies have stepped up to quantify VOD usage, including Rentrak, which primarily focused on tracking home video rental until chairman and CEO Paul Rosenbaum joined the company in 2000. Rentrak’s new ad-viewership reporting application, AdEssentials, was introduced at the 4A’s Media Research Conference last March and is an adjunct to its core VOD tracking system.

Speaking at an investor’s conference earlier this year, Rosenbaum said that Rentrak can analyze “250 million records in 25 seconds,” adding that it would take an hour for anyone else to do the same job. Still, no matter how quick Rentrak can report back to the MSOs, there’s a limit to the sort of demographic granularity the company is willing to delve into. “We do not know who you are, nor do we want to,” Rosenbaum says. “We don’t want to get involved in privacy issues.”

Besides tracking VOD usage for the likes of Comcast, Cablevision and Charter, Rentrak also provides viewership data for 19 content providers, including nine Viacom properties, CBS, National Geographic Channel and the NFL Network.

A pair of recent studies suggest that VOD usage may be leveling off among adults; Magna Global analyst Lisa Quan expects video-over-mobile phone adoption to surpass that of VOD, adding that “if suppliers had worked more closely with advertisers at the outset of the development of VOD and made accommodations in their favor, VOD would be a much larger business today.”

That said, some programmers are extremely satisfied with the ad model. Chris Pizzurro, vp of digital, new media ad sales and marketing, Turner Entertainment, says he can’t understand why some believe ad dollars will skip VOD to go to broadband. “I’m sold out on all my networks into third quarter,” Pizzurro said. “If anything, our ad clients aren’t backing away from VOD at all. More and more are coming to me all the time.”

While he admits that the dynamic-ad-insertion issue isn’t being resolved quickly enough, Pizzurro notes that VOD opportunities as they now stand still offer a solid platform for “brand-centric, evergreen content. But yes, in order for free VOD to scale, things do need to go faster.”

Pokiness aside, Pizzurro says the exclusivity of Turner’s VOD sponsorships is a major draw for clients looking to break free of the clutter associated with linear networks. Each VOD play is presented to a single sponsor, he says, with enough inventory available for each piece of programming content to accommodate a five-second bumper, a 30-second spot and up to a minute or two of creative on the back end.

So far this year, he hasn’t seen any defection from VOD. “We’ve outpaced everything we billed in 2005 already and it’s only April,” Pizzurro says. While network VOD sales are generally understood to be incremental, Turner extracts a “premium price” for its exclusive ad opportunities.

Comcast also has embraced the sponsorship model while it waits out the dynamic ad-insertion lag. It offered an exclusive branded sponsorship to Kimberly-Clark’s Huggies, signing it as a sponsor of PBS Kids Sprout. It also inked New Balance to a deal that will have its sneakers appearing prominently on its new ExerciseTV VOD channel. While sponsorship rates are not disclosed, sources estimate similar VOD deals range anywhere from $50,000 to $150,000 per month.

While exclusivity carries weight, some media experts say that programmers are becoming frustrated by the limitations of VOD. Raj Amin, president of Amin Media, says this year marks “the first time advertisers are saying they plan to shift dollars to broadband faster than to VOD.” Besides the inherent and immediate measurability of the Web, VOD is suffering from cable’s somewhat cautious approach. “There’s been a lot of investment happening on the broadband side,” Amin says. “I don’t think cable has moved fast enough with content opportunities.”

Going into the upfront, media agencies are stymied as well. “There’s not nearly enough innovation in the marketplace,” says Starcom senior vp, director of entertainment Laura Caraccioli-Davis. “It still sounds like everyone is just going to sell us those same old :30s.”

Tech and measurability issues aside, when all is said and done, cable doesn’t offer nearly enough in the way of compelling content against which to advertise. “You’re not going to get really exciting content on VOD until programmers can figure out how to make money off it—that’s why NBC and CBS are open to the pay-per-view model,” says Yankee Group analyst Adi Kishore. “You do get the sense that the advertisers are backing away from VOD.”