• by Paul Gough , October 13, 2003

After nearly a quarter of a century of conventional wisdom that consumers will not support advertising on pay TV platforms, whether they are premium channels, pay-per-view or newer video-on-demand (VOD) services, the first major test of an ad-supported VOD service is challenging the notion that the only thing such consumers want is what they pay to see.

While VOD is being pushed by cable operators, much of it has been of the pay- to-play or subscription variety that doesn't include commercials or any other kind of ad support. Cox's FreeZone test in San Diego involved putting ad content front and center, giving companies like Coca-Cola, Kraft and Volvo a chance to use long-form content to directly market to consumers without the clutter of 30-second spots crammed into commercial television.

Two million pieces of ad-supported content were accessed over the past year by 50 percent of Cox's digital cable subscribers. The average viewer watched about 25.5 minutes of ad-supported content a week. And Cox said usage has remained steady for about a year with an average of 3.76 ad-supported content accessed per viewer per week. That's well above data by Kagan World Media that pegs the buy rates among active VOD households at between 0.75 and two movies a month.

Tim Hanlon, vice president/director of emerging contacts at Starcom MediaVest Group, said Monday that Cox's test has shown that ad-supported content in a VOD environment works even though more research needs to be done. Starcom worked with Kraft on the FreeZone trial in San Diego.

"It doesn't have to be just movies or premium content," Hanlon said. "It can be ad-supported or ad-only content. The challenge is, what is that content?"

The optimal length of ad-supported content hasn't been determined yet but it's sure to be different for an industry that has created the 30-second commercial as a currency. Hanlon said that VOD advertainment isn't boxed in by the constraints of a 30-second spot.

"What video on demand offers is a new box, a bigger box," he said. "A box that has a lot of rooms to play in."

The FreeZone trial also gets to another issue with VOD: Measurement. VOD's success isn't about ratings or impressions but rather about viewing: How many viewers accessed the video, how long they watched and, in the future, what ZIP code or ZIP+4 where they live.

"That's the basis upon which advertisers are going to become interested or pay for these environments," Hanlon said. "Without those types of data points, it's not going to happen at all. You're not going to buy it on faith. It's measureable, Internet-like. We'll be able to tell whether something works or not, whether it was really seen or not, whether it was really accessed or not."

Data released Monday shows the average response rate for FreeZone advertisers was 4.4 percent, which Cox said was about twice as much as direct mail. Opinion poll participation is 26 percent, Cox said.

Larry Gerbrandt, chief operating officer and analyst at Kagan World Media, said that some of the viewing is likely incremental but it probably also comes out of traditional TV consumption too.

"People still watch their favorite shows (such as "Friends") but spend a little less with some of the more fringe content," Gerbrandt said. "They probably do somewhat less 'grazing' and sampling of digital cable channels and premium TV."

But at the same time, Gerbrandt said that lessons from the magazine industry teach that people like ads about things they're interested in, particularly when it comes to "enthusiast" titles.

"In some cases, the ads are as important as the editorial content, from the reader's perspective. Advertisers will pay a large premium to reach their target audience. The challenge is to get enough viewers that it makes sense to create customized commercials for them," Gerbrandt said.

Starcom MediaVest's Hanlon said that advertisers and agencies are learning more about this dynamic on VOD and other on-demand platforms than ever before. It's about video, not just linear television or even on-demand platforms and digital video recorders.

"One of the initial learnings is that people will interact or seek out ad messaging if it's relevant and of interest to them. The key is, how do you serve that up? Is it in a generic menus structure? Is it relational to targeted content, like a network brand? Those are the things that we need to figure out. The navigation and relevance are the keys to video messaging going forward," he said. Advertisers have to take the lead and figure out how to create audiences for their own content and enable the audiences to find the messaging.

He isn't sure what form of VOD will survive, either a network-branded type arrangement that features content from strong TV brands like ESPN or Discovery or HGTV, or one dominated by MSOs like Comcast, Cox and Time Warner Cable that features a variety of content segregated by topic (sports, teen, etc.) from different providers. Hanlon thinks it's a tremendous opportunity if those squabbles can be worked out quickly.

"Unless the two sides generally start to agree with each other, we may not even have an ad-supported on-demand business to talk about," Hanlon said.

Russ Booth, director of media futures at Mediacom, said he applauds Cox's efforts in ad-supported media. He said that the success of non-ad-supported VOD is displacing viewers from the ad-supported opportunities in other television that advertisers are paying more for less now. He said he'd like a future step to be the opening of those other VOD environments - with first- run films and premium content - to advertising, lowering the cost of programming and distribution to consumers who are already paying for digital cable, video on demand and other technology.