• by March 5, 2004

IT TURNS OUT THAT MADISON AVENUE'S FAVORITE DVR FEATURE MAY BE SLOW-MOTION - "Advertisers are slow to react to change." Harsh words indeed, but they are the main reason a top Wall Street firm doesn't expect to see a significant near-term impact on TV ad spending from the rapid acceleration of digital video recorders. That, and the fact that there doesn't seem to be a "perfect" substitute for TV advertising. At least that's the conclusion of a 36-page report compiled by the equities research team at JPMorgan that someone thoughtfully passed on to the Riff.

The report, like the groundswell being issued by others, suggests that while DVR penetration still is miniscule, it's approaching a tipping point that will see the technology explode with the fastest consumer adoption rates since the DVD, and ones that are more rapid than either the VCR or color TV. "We expect DVRs to reach 7.5 percent and nearly 50 percent of U.S. homes by the end of 2004 and 2008, respectively," predicts the equities team, adding that these steep curves, however, are premised on more aggressive marketing and lower pricing by DVR marketers.

Despite that pace, and the fact that commercial skipping is prevalent in DVR homes, JPMorgan estimates the impact will be only a "20 percent to 25 percent" reduction in TV advertising revenues by 2007.

The Riff was never very good at math, but if we're calculating this one correctly, those numbers suggest this will contribute to an exorbitant corresponding increase in the cost of TV advertising time. How so? Do the math yourself:

1. According to one of the most robust studies on the topic, Starcom's and TiVo's April 2003 research, 54 percent of all TV commercials are skipped in TV households. That's the net of both live and "near-live" viewing of recorded programming.

2. At JPMorgan's projected 50 percent PVR penetration level, that means 27 percent of all TV advertising spots will be skipped nationwide.

3. If ad dollar volume declines only 20 percent, prices would need to rise 7 percent to make cover the differential. If ad dollar volume declines 25 percent, prices would need to rise an additional 2 percent to cover the difference.

That may not seem like much, but that would be the incremental boost in ad pricing above and beyond the organic rates of inflation, which have been and would likely to continue to be hefty with or without the DVR factor. But this simple analysis doesn't consider a couple of other important marketplace factors. For one thing, TV ad pricing is not very elastic. It's based on scarcity market perceptions. When supply goes down, prices go up disproportionately higher, because it exacerbates an already existing high-demand proposition. This has been the simple case with network prime-time inventory. Over the past 20 years, as prime-time gross rating points have disappeared, the average price per 30-second spot has skyrocketed. Never mind that the networks keep squeezing new ad units into their inventory supply.

That's simple supply and demand. The reality is that there is greater demand - and an even more elastic pricing curve - for top-tier network shows, like "ER" and "Friends." And here's where the acceleration of DVRs can really explode the network pricing model. It's those very same top-rated shows, according to the Starcom report, that are most likely to be "Tivoed" and played back in "near-live" recording mode. Which means they're also the ones most likely to have their advertising zapped.

As bad as that scenario may seem for U.S. advertisers, JPMorgan makes a point that may send even more violent chills shivering up their spines. "We think it is unlikely that all of the lost TV advertising would be shifted to radio, print, outdoor and online," predict the analysts, explaining, "The main reason is that none of these mediums are a perfect substitute for television advertising. In our opinion, the power of TV advertising relates to its broad reach (nearly 100 percent penetration of U.S. households), the audio/visual nature of the medium, the emotive power of TV commercials, and its ability to target (for cable TV)." In other words, JPMorgan thinks TV is not only a perfect medium, but one that's not easily substitutable.

While the analysts' report does allude to the emergence of broadband video, which ostensibly would have the same emotive qualities as TV advertising, it doesn't predict it will reach a significant penetration to compete with TV advertising. The Riff thinks the financial guys are wrong on this one. We also think they're wrong on their central thesis that advertisers will be slow to react on this one. While that clearly has been the case in the past, we don't think advertisers will have any choice but to react. Our main reason: economics. TV will simply become too expensive for many of them and they'll have to find other effective ways of getting their messages out.

THE TRUTH IS OUT THERE, AND NOW YOU CAN LINK TO IT - Ordinarily, when the Riff is strolling through Union Square Park in lower Manhattan, we pass right by the groups of protestors rallying against secret government research and paranormal experiments. But this one was different.

We don't know if it was supernatural forces, the unseasonably nice weather, or the fact that these protestors were brandishing signs that read, "Hellboy is real." But they caught our attention. Still there was something suspicious and cheesy about the Bureau for Paranormal Research and Defense (BPRD) van they were marching around. It looked like something out of "X- Files."

Naturally, the first thing we did when we got back to our office was log on to the BPRD.net site, and sure enough, the supernatural forces that had taken possession of our minds were good old- fashioned public relations. In any case, if you want to see a really cool Web site, check out this one promoting the release of Revolution Studios' and Columbia Pictures' "Hellboy" movie, which is based on a popular comic book.

NOTE TO LES MOONVES: - Rubber-stamp "Amish in the City." It'll be UPN's biggest hit. How does the Riff know, because our colleagues at MediaDailyNews tell us that their story on the show getting mired in Viacom's development process broke a new record in terms of Web traffic.

They won't share the precise numbers with us, but they tell us it's about "30 times" the number of hits they normally get for their stories. At first we were wondering whether it was all those Amish people out their going online to read the story, but then we thought better.

All we can conclude, is that there is a lot of pent up interest in the Shaker set. We'll definitely be watching. "Witness" and "Kingpin" are two of our favorite movies.