The death of advertising has long been forecast but the old dinosaur lives on spawning new forms and species, fuelled largely by the ‘always on’, connected nature of the internet. So far the internet’s disruption of the advertising industry has been relatively benign for most, but the metaphoric meteor, and the havoc it will wreak, is about to collide…
Nowhere will the havoc’s impact be more significant than the TV industry.
The TV and advertising industries have been locked together in a marriage of convenience that celebrated its Golden Wedding anniversary years ago. This marriage is challenged now more than ever before due to irreversible technological advancements, and the impacts they are having on people.
Two of the most significant technology driven effects on the TV and advertising industries are as follows:
- Advertising has become more targeted, more measurable, and has yielded innovation in the ways messages are delivered to punters, such as short-form branded digital content, and social media usage;
- People have been given more choice in how they consume content – when, how, what device and so on. This expansion of choice has unlocked behaviour in people enabling them to avoid advertising.
Most players are totally focussed on the former, but not sufficiently focussed on the latter. Ignore people at your peril!
Technology is changing behaviours – permanently
So what behaviours have technological advances unlocked in people? Here’s a few:
- Growth in both awareness and use of ad blockers to vastly reduce the amount of internet and mobile advertising that reaches our eyes
- Social media pervasiveness is fuelling the hottest trend of influencer marketing – bloggers and vloggers are the start of a trend whereby marketing activity will be handled more by a brand’s best customers than the brand itself
- Zapping through TV adverts as a result of the ubiquity of PVRs and remote controls
- Rapid uptake of ad-free OTT platforms like Netflix and Amazon, showing just how much people want to consume content without ads, given the choice. Whatever Reed Hastings may tell you, it’s not the content on Netflix that is the main draw – it’s the convenience, it’s the lack of ads, and it’s the focus on personal delivery.
As an illustration, consider why streams of BBC’s iPlayer are disproportionately higher than the equivalent for ITV Player, even though the popularity of the content seen through their respective broadcast channels is on a par. A key difference is that BBC iPlayer has no ads, whereas ITV Player carries ads that can’t be zapped.
Most worrying for the TV industry is the generational time bomb ticking away whereby most younger viewers are using technology, as a normal behaviour, to avoid TV ads and subscriptions altogether. As this generation grows their impacts become both permanent and pervasive.
The rapid uptake of ad-blockers is an indicator of the public’s general dislike of advertising
Impact on ad-funded TV broadcasters
It is the predominantly ad-driven networks that have the biggest problem – they thrive and survive on the ‘only game in town’ argument, meaning they command a premium slot price for the mass audiences that they alone can deliver. However, audiences of major ad-funded channels globally are in continual decline as the number of content sources expands – there has to be a breaking point. Stretch the rubber band of audience fragmentation too far and it will inevitably break – and the break point is when premium pricing starts to suffer bringing down the whole market.
TV advertising revenues in the UK are forecast to be down 1-2% yr on yr in 2016 (following 10% growth last year) with the blame being pinned on the Brexit vote. Q3 GDP growth of 0.5% has just been announced suggesting that Brexit may not be the main reason for ad revenue falls this year. It’s a dangerous precedent that may be being set – rising GDP, but falling TV advertising! Sounds like the start of a permanent shift to me, and if advertisers who cut spending don’t see a corresponding reduction in sales, then why up the spend again?
It follows that if big brand advertisers downgrade the value they see in (ever decreasing) mass audience networks, the next step is to play hardball on spot pricing, or seek alternatives. Once the big brands lose faith, prices fall, revenues fall and the ambulance chasers fill the void – ads for cheap loans, PPI claims, cheap insurance and other commodity goods will then sit alongside content that will struggle to maintain its quality when production budgets are inevitably put under pressure. It’s a vicious spiral to the bottom that leaves old world broadcasters, and the content producers that supply them, having to adjust from the old ‘licence to print money’ days of ad-funded TV, to the new paradigm of ‘what the hell do we do now?’.
If Rudiger Dornbusch is right, spend on TV advertising could deteriorate rapidly, a situation not helped by the fragile nature of the economics of ad-funded TV networks. As largely fixed cost businesses with very high marginal revenues, a small drop in income will equate to a significant fall in profits.
Contrasting positions of UK ad-funded broadcasters
Five years ago, the UK’s ITV foresaw the fragility of their model and embarked on a strategy to reduce their reliance on advertising revenues. Since then ITV has invested heavily in global content creation to balance their revenue streams across advertising and production and chase the long-term riches that can ensue when hits arise. Whether they will succeed sufficiently to weather the impending storm remains to be seen, but they are better placed than most with a healthy 39% of gross revenues coming from non-advertising sources (half-year results, July 2016). Even so, ITV has just announced more cost cuts suggesting that management fear the worse.
Channel 4 is in a different position, unfortunately. Its non-advertising revenues are just 7% of total (2015 Annual Report), exposing it massively to any ad revenue downturn. With virtually no content creation business to provide a balance, it will have no alternative but to cut costs when the crunch comes. Ultimately this will result in reduced spend on programming with potential knock-on adverse impacts for the content production sector.
What should the production sector do?
The production sector, though, does have alternatives to pursue. Subscription-based aggregators and platforms like Netflix, Amazon and Sky are well placed to capitalise on a falling advertising market. But they are unlikely to plug the gap for the whole production sector. So what can be done?
Everyone still loves TV, though – there are multiple forecasts and reports showing that overall viewing is holding up overall, it is just fragmenting. But it’s the programmes that people love, not the business model’s complacent assumption that advertisers will continue to pay. Content creators need to reduce their reliance on ad-funded broadcasters and balance their activity with alternative models. There are many established and nascent models that can be pursued including:
- direct to consumer (streaming, subscription and download),
- premium content (and pricing) for superfans,
- integrating transactional/retail opportunities,
- developing innovative experiential and ancillary content extensions.
There’s a rich world of opportunity out there waiting to be explored by applying new economic models to the age old human desire for consumption of content. But to get there, the incumbent players need to make serious investment in innovation and wean themselves off the reliance on the ad-funded model that has perpetuated for so long. A major shift in mindset is needed to move from the low-risk, ad-funded models, to the more entrepreneurial and innovative models of the future.
The logic and necessity for the existing TV players to embark on major innovation strategies is powerful as a result of permanent shifts in technology and behaviour. However, just like it wasn’t the incumbent TV players that came up with game-changing evolutions developed by Netflix, Apple and YouTube, it looks unlikely that the incumbent TV players will be effective innovators of new models. Just like the dinosaurs had to die out for better life forms to evolve, the part of the TV industry that depends on advertising for its future existence is now facing a similar fate…
® Dan Allen