Instant Replay, Maybe. Advertising, No Way

Hey, marketers, listen up because I have the deal of the century for you. This deal is so big it makes the Louisiana Purchase look like a sidewalk sale. The St. Louis Cardinals didn’t get a deal this good when they traded Ernie Broglio to the Cubs for future Hall of Famer Lou Brock back in 1964. You would have to go way back to 1626 when Peter Minuit convinced the Lenape Indians to fork over Manhattan Island for $24 to get even close to a deal this good.

There is an advertising vehicle available to you that has no peer. This advertising vehicle delivers your messages directly to consumers with television-quality video and sound, but it isn’t a television commercial. With this advertising vehicle, there’s no limit on the amount of time available to deliver your message, meaning you decide if you want to take 10 seconds or 10 minutes to tell your story.

This advertising vehicle can be tracked down to the minutest of details. You’ll know how many consumers accessed your advertisement, how many finished watching the entire advertisement, the average length of time a consumer watched your advertisement, what time of day they were most likely to watch your advertisement — you’ll get so much data your head will spin. The demographics of the audience you’ll be reaching is unparalleled — a group of upscale, leading-edge, technology-forward consumers likely to be in their 20s and 30s (not exactly the Jerry Springer crowd). You can even ask the audience if they want to receive email messages or coupons, and they can accept with the push of a single button.

So, where can you buy this advertising vehicle? The answer is TiVo, that personal video recorder everybody is talking about. The same technology gadget that strikes fear into the heart of Madison Avenue because of its vaunted ad-skipping capability has an advertising product the company’s been pitching to, well, Madison Avenue (sounds a bit like “pay me even though I’m killing you”).

TiVo calls the product advertainment when positioning it within the industry. Essentially, TiVo downloads an advertiser’s video footage to the consumer’s TiVo hard drive during its daily call to the network. The next time the consumer returns to TiVo’s main menu screen, the advertainment is offered as the last menu item. The name of the last menu item changes when new advertainment is downloaded. As an example, yesterday the last menu item on my TiVo read, “NFL Playoffs”; today it reads, “New Things. Turn Us On” (it’s not what you’re thinking, just some 60-second spots from TechTV).

According to an AdAge.com article, a few advertisers are seeing some great results from TiVo’s advertainment product. Those advertisers are primarily from the entertainment industry — such as movie studios and record labels — and they’re using advertainment to promote their offerings by showing exclusive content, ranging from movie trailers to music videos. The article talks specifically about Universal Music offering TiVo owners video footage of The Wallflowers and New Line Cinema offering interviews with the stars of “Lord of the Rings: Two Towers” and “Austin Powers.”

It would appear TiVo is making inroads in other industries as well. BestBuy ran a campaign in November intended to drive consumers into stores to purchase a James Bond video collection, and two auto marketers are reportedly about to sign deals.

So, are you ready to sign on the dotted line? I’m skeptical. Here’s why.

Another article appearing on AdAge.com makes an apt comparison, saying 671,000 homes in the United States have outhouses and 514,000 homes have TiVo. TiVo’s user base has grown to 620,000 since that article was written, so it won’t be long before TiVo’s penetration rate surpasses that of outhouses, although I doubt we’ll see a press release with that headline. Industry-watchers have also questioned the long-term viability of TiVo’s business model, stating that TiVo’s quarterly year-over-year subscriber growth was flat in the quarter ended October 31, 2002. Not exactly the type of growth rate you hope to see from a three-year-old technology product.

With these subscriber numbers and annual growth rate, how much can TiVo earn from advertainment? If you assume TiVo is garnering a $20 CPM, then each advertainment buy is earning a little more than $12,000. Give the company the benefit of the doubt and increase the rate ten-fold to $200 CPM, and you’re still looking at just $120,000 per buy. Assume four buys per month, and you’re looking at $480,000 per month in revenue. Remember, this is a company that earns $12.95 per month from each and every TiVo subscriber, amounting to a little more than $8 million per month in recurring subscription revenue. It would seem to me advertainment is a nice, little incremental revenue stream for TiVo (with an emphasis on the word “little”).

From the advertiser’s perspective, how much of an impact does advertainment make if TiVo only has 620,000 subscribers? Even with a phenomenal view rate of 10 percent, the advertiser would still reach just 62,000 TiVo users. At $200 CPM, that works out to be just under $2.00 per viewer. Understanding that we’re talking about 62,000 people here, is it worth the time, money, and effort required to negotiate a deal with TiVo, create exclusive content, and track the results on the back end? Most marketers won’t even consider advertising on a cable television network until it reaches 1 million homes. So why are marketers spending their constrained time, money, and energy on advertainment when it is distributed to slightly more than half that number of homes?

Don’t get me wrong, I own a TiVo and am a huge fan. As advertised, it does change the way you watch television. Federal Communications Commission Chairman Michael Powell was widely quoted last week saying, “TiVo is God’s machine,” and I agree. What I don’t understand is TiVo’s attempt to play in the advertising arena. Why would the company expend time, energy, and resources on an ancillary revenue stream that lies outside its core competency during this critical moment, when it faces flat subscriber growth and competition from many sides? An article appearing on NYPost.com (“Confusing TiVo Faces Heave-Ho”) quotes industry analyst Greg Ireland as saying, “Consumers may have heard of the term TiVo, but they don’t know what it is.” That same article says multiple manufacturers and the nation’s second largest cable provider, Time Warner Cable, are looking at launching their own personal video recorders in 2004.

I give TiVo tremendous credit for creating the personal video recorder category. However, I think it has much bigger challenges to face than building an advertising revenue stream, and they need to be addressed immediately to ensure the long-term success of the business.

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