In the middle of last year, I began the research that would ultimately lead to me giving a presentation at “Distilledathon” (our company conference) about my vision for the future of marketing.
I have long believed that the skills our teams have developed - guided by a deep-seated desire to build our clients’ businesses - were becoming more powerful.
Mark Suster Changed My Thinking
We originally got into search as a way of building our clients’ businesses effectively. In recent years, we’ve pushed hard to define the way we do search marketing with a heavy emphasis on the marketing. In September last year, I travelled to San Diego for our Searchlove conference and watched Mark Suster give a presentation that has had more impact on my thinking than any other presentation I remember.
Suster’s views on the disruption being caused by online video, using Maker Studios as a case study, crystallised my thinking and led me to base my vision around the same disruption (and also finally persuaded me to read The Innovator’s Dilemma). If you haven’t already, I’d suggest checking out our piece on the future of TV before delving into this post.
I Started Learning
In order to be credible internally on the topic and inspire our teams about the mission we were defining for ourselves, I had to become an expert in the trends that will shape the next five years of TV. To do that I had to become at least familiar with how the TV advertising market works currently. This post draws together the reading, research, conversations and thinking I’ve done on the subject over the last six months. I hope it’s useful and puts the rest of our thinking into context.
Let’s start with the value chain:
Most of us have heard of the massive global media buyers who do 9-figure deals on behalf of the biggest advertisers in the world - names like Starcom Mediavest, OMD, ZenithOptimedia, Mindshare and MediaCom owned by behemoth groups like Publicis, Omnicom and WPP. In recent times, they’ve often hit the headlines with their plans to get even bigger.
These media buyers aggregate demand from brand advertisers to get buying power in their negotiations with the media owners.
What I hadn’t realised until I began my research was that (especially in the UK) the media owners are often represented in these negotiations by middle-men of their own. Called sales houses, they aggregate together smaller broadcasters, channels and content owners to improve their negotiating position. In some cases, these are also broadcasters - for example Sky is both a broadcaster and a sales house that negotiates deals for other, smaller content owners.
As you might imagine, when smart people make deals for large sums of money they have thought of all the potential improvements you can imagine. They are capable of selling against time-shifted content, on-demand content, of selling adverts targeted to individual people and households. All these innovations are coming. Sky in particular is these days effectively capable of selling advertising against its EPG.
There are some pretty big structural differences between the markets on each side of the Atlantic:
The US Market
The US market arguably works more like the common perception of how TV deals are done. The majority of the money changes hands in the upfront market. Each spring, TV executives get together with advertising executives and media buyers in glitzy events hosted by the likes of Oprah. The TV channels (or their stars) pitch a combination of stats-based performance and emotional appeal in order to lock in deals for the upcoming season which starts in September.
The remainder of the airtime is sold quarterly in what’s known as the scatter market in which prices are typically 20% higher but less certain.
The UK Market
Deals struck in the UK differ in two key ways by my understanding:
- The commitments made by the buyers before the season begins are much less iron-clad. They are typically complex - committing buyers to spending certain percentages of their total spend with a given player rather than a £ amount - leaving the channels much more exposed to changing economic conditions than in the US.
- Rather than selling “spots”, the deals are structured in terms of impacts - the number of viewers in a targeted demographic who end up seeing the advert. It is therefore only after airing the show (and its advertising) that the channel knows the revenue it has earned.
This second difference is the key one to my mind - meaning that true popularity (rather than forecast popularity coupled with emotional “quality” pitches) governs the revenue earned by a given show. When fewer viewers tune in than were forecast, the seller must typically make it up to the advertiser by continuing to run the advert against other shows and on other areas of their network. It’s easy to see how complex this must make the delivery planning.
(Incidentally, the feedback I’ve heard from smaller advertisers in particular is that when more people tune in than expected, they don’t get a surprise bill - rather it’s offset against under-delivery in other areas and / or priced into future negotiations.)
What do these Structural Differences Mean for the Future of TV Advertising?
Assuming the viewing trends happen at a similar rate in both places, I think that the changes I describe in our report on the future of TV will likely be noticeable first in the UK. It is here that changing viewer habits directly impact advertising revenue (or the ability of channels to deliver the impacts they have sold).
The subsequent upfront market negotiations in the US (i.e. the first after a significant shift in viewing behaviour - presaging a bigger potential shift the subsequent season) could however show a much bigger impact. If confidence in the forecast viewing numbers falls, the impact on the prices paid could be dramatic.
The Regulatory Future is Uncertain
The UK market is highly regulated - with strict limits not only on the nature of the adverts but also on the amount of advertising allowed. The (to-some-degree-artificial) scarcity has obvious effects on the market. Over The Top (OTT) video has much less of this regulation - at least in part because the ballooning number of potential providers makes it much harder to police and enforce. There is an open question of which route Ofcom will end up taking [PDF]:
- Deregulate the broadcast TV market at least to some degree
- Attempt to regulate the OTT market
- Continue with artificial differences in regulation based on arbitrary technical differences in delivery
At the same time, the US is seeing a number of cases reach the highest courts in the land that will define the technical landscape for a generation as we see the internet naturally route around regulation.
I'm Going to be Thinking About this a lot More
We believe that the biggest brands of tomorrow will be built online. We believe there’s a heck of a lot of disruption coming to the TV market. If you’d like to hear when we publish more, you can sign up to our email list here.
Our No-Longer-Secret Weapon
I’ve been guided through this process of discovery by a special mentor. Back in 2009, we started working with John Varney - making him the chair of our advisory board in 2010. His resume (including such roles as Director of Technology at Granada, CTO at the BBC) made him perhaps a strange choice for the little web design company we were back then. As we move into this world we’re calling online first, his expertise and contacts in the established world of TV have been invaluable. Maybe it wasn’t that crazy to work together after all.