• by Frank S. Foster , July 21, 2008

I spent the better part of last week discussing addressable advertising with media buyers and their advertising clients.  Targeting was a contentious topic.  Some advertisers were convinced that the key to success would be found in sorting set-top boxes by their viewing behavior characteristics, while others wanted to combine real-time viewership data with Experian-style database matching.  Still others wanted the ability to reach only those viewers of specific programs within Zip+4 geographic clusters.  While I agree that targeting is the key to mainstreaming the technology, it is the unintended consequences of such a promise that are most intriguing.  

Despite rumors surrounding the influence Microsoft's acquisition of Navic may have on deployment, it is unlikely operators will lock themselves into a specific targeting approach.  Effective addressable advertising will not be the same for all advertisers and the cable operators will likely let media buyers decide among several.  But it is this targeting flexibility that will create a difficult problem.  Suppose a car maker agreed to pay four times the going rate to reach its target, and that target made up 10% of an operator's footprint.  While the CPM is much higher, the revenue associated with the inventory is only 40% of what it would be if the inventory were sold conventionally.  For the technology's prospects to make fiscal sense, operators must find advertisers who will pay to reach those households that make up the remaining 90% of the operator's footprint.  Addressability will necessitate two, three, even four additional sales.  Each sale will likely have its own set of negotiations and guarantees.  Add these sales costs to that required to implement the technology, and it is clear that the advertising sales groups will be under tremendous pressure to keep prices elevated.    

There, my friends, is the first unintended consequence.  Addressable advertising effectively increases advertising inventory.  With general interest programming, the technology may provide a vehicle for new advertisers to join the fray and enable media sellers to raise prices.  But the majority of cable networks are not general interest; most are targeted at specific audiences.  At the local level, the inventory is rarely sold out.  Further splintering will amplify the problem and likely drive prices down, not up.  

So what should the cable operators do?  I have suggested in the past that the cable operators would be wise to license the technology to the broadcast and cable networks and refrain from using targeting locally.  National inventory is often scarce, and given broadcast's recent stumbles, a few networks might jump at the chance to increase revenue for their most popular programs.  Start with two minutes of network inventory and once addressability has been incorporated into the network model, reverting might not be feasible.  In such a scenario, the cable operators would have a desirable technology unavailable to most other distribution players.

In addition to its highly touted efficiency, addressable advertising promises to leave a great fantail of fragmented inventory in its wake -- inventory that will surely prove more difficult to sell than the traditional, non-targeted variety.  The dramatic increase in remnant inventory is the second unintended consequence.  Before operators deploy addressable technology, they should cement relationships within the emerging cost per action industry.  Operators should seek out companies that can provide the necessary data, market insight and services to assist tactical and strategic buyers within a cost-per-action or hybrid cost-per-action business model.  Not only does the CPA industry represent a channel to monetize addressable advertising's cast off inventory, it can do so without upsetting the often precarious television pricing model.  

Now if we could just figure out how addressable advertising is going to be measured.  On second thought, I bet Nielsen's panel will do just fine .