Commentary

Google, NBC Pact Challenges Madison Avenue

NBC Universal's new pact to sell some of its cable network time on Google is a game-changing move to secure more accountable and actionable audience metrics, which gives Google a foothold in the challenged $63 billion TV adverting market.

Although still a formidable ad platform, the ground-breaking pact underscores the stress that broadcast and cable networks are under to hang on to ad dollars that are shifting to the Internet and declining in an economic recession. For Google, it is a victory on several levels. The search giant has sought to make major inroads into the TV ad market. And as a broker for TV time, Google provides an auction element to pricing and placing ads that could become a model for TV advertising as it converts to universal digital interactive.

Just as important, the arrangement represents a new base from which Google and NBCU can create more ways to collaborate.

It remains to be seen whether so-called new media or more traditional media stands to gain more from the arrangement, which essentially opens the floodgates on more proactive marketing and transacting with target consumers--something advertisers would likely pay a premium for, even in tough times.

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Plus, it may encourage Google to take on Madison Avenue ad agencies that are trying to find their way in the digital universe.

It is telling that NBCU is the first of the major broadcast network companies to look to Google for assistance in taking a big step out of the mass audience realm. The implications for consumers are formidable. Instead of having to fast-forward through bulk advertising for the masses, consumers who view NBC-related video on television, designated Web sites and other interactive platforms will be more closely matched to targeted ads. Google will broker this customized ad time at premium-priced CPMs.

Consumers have indicated their willingness to trade some privacy in exchange for more relevant advertising and ongoing marketing relationships. But the application of Google's complex and comprehensive algorithms could reveal more confidential data than NBCU and consumers may want advertisers or Google to know.

In fact, this is a potentially explosive risk in the arrangement, which is expected to be embraced by rivals Disney/ABC, News Corp./Fox, Viacom/CBS and Turner. The deal underscores what could prove a devastating weakness for NBCU rival CBS--a more pure-play broadcaster that relies on advertising for 70% of its overall revenues, 26% of which is anchored in beleaguered local broadcasting.

Bernstein Research just issued a sobering report on CBS' dismal earnings forecast. Despite the traditional quadrennial-year boost, CBS is expected to post a 3.4% decline in total 2008 advertising and a nearly 4% decline in 2009. Negative operating leverage at TV stations--once cash-flow machines--is part of the problem. Bernstein estimates that CBS TV stations' organic growth decelerated from a decline of -8% in the first quarter to a decline of -13% in the second quarter, due to massive pullbacks in automotive, retail and financial spending that comprise more than half of the TV stations' advertising base.

The strategy behind the NBCU-Google deal is that a niche cable network's connection to consumers could become more valuable if it were matched to advertisers using specific demographics and data.

Developing so-called long-tail--or more customized--data and pricing for a niche audience will help to make the conversion of mass-media television to digital easier and more lucrative. Google will assist NBCU in developing self-service ad-buying opportunities through its Google TV Ads platform, while developing more effective ad metrics and attracting non-traditional advertisers to NBCU-owned cable networks. The new multi-year pack initially excludes USA Network and Bravo.

The grand alliance across the digital divide speaks to a more cooperative integration of so-called traditional and newer media that is inevitable. JP Morgan analyst Imran Kahn called the new pact "a positive milestone toward Google's TV strategy," noting that 1% of the estimated $63.4 billion 2009 TV advertising market in North America (according to ZenithOptimedia) could yield $600M in gross revenue to Google. The new pact could also pave the way to more collaboration between NBCU and Google on paid search and DouleClick display advertising, despite tensions between the companies over YouTube's unauthorized pick up of NBC programs in user-generated exchanges.

Among other things, its automated system could eventually replace much of what is done by ad agencies. However, any meaningful change in ad sales and production status quo will depend upon how quickly television in the home becomes truly interactive. It will be interesting to see how well Google initially capitalizes on small, less appealing non-prime-time ad inventory, generally sold to direct-response or infomercial advertisers.

Google TV Ads, part of the Google AdWords platform, sells small 15-word text ads that appear next to Google's paid search results. The TV Ads platform allows smaller advertisers to mix paid search and local TV ads (currently available only on EchoStar and Astound). That is expected to change in short order as broadcast and cable players take a closer look at the unmatched advantages Google provides by drilling down on consumers, who are becoming more unpredictable and elusive.

While Bernstein Research analysts Michael Nathanson and Jeffrey Lindsay believe a major threat to Madison Avenue is "unlikely in the medium term, given the complexity of marketing plans for the ad agencies' large multinational clients," the move certainly will be a jolt to the status quo.

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