Digital Outlets Like Hulu, Joost and Veoh Obliged to Show Commercials

By Michael Learmonth

Published: November 03, 2008

NEW YORK (AdAge.com) -- With DVR penetration knocking on 30%, much of America now views the ability to skip ads on TV as something approaching a birthright.

While they haven't had much choice in the matter, the broadcast networks say they're OK with this, that DVR users watch more TV and disproportionately more shows from ABC, NBC, Fox and CBS, which can't be bad, right?

But the networks haven't given up on the dream of a world of must-see advertising and are quietly attempting to take back that right -- let's call it a privilege -- on the next generation of digital platforms. Already, the networks have effectively eliminated ad-skipping on broadband and have made that a prerequisite in deals with online distributors such as Hulu, Joost and Veoh, as well as ABC.com's full-episode player.

ABC is even trying to export the model offline with its latest video-on-demand agreements with Cox Communications and Verizon's Fios, which allow next-day, on-demand access to shows -- with fast-forwarding disabled for the ads. More ABC VOD deals are in the offing, and the network says they'll all be ad-skip-free.

"It's curious and very counter to the way consumers are accessing television programming," said Tim Hanlon, managing director of Publicis' VivaKi Ventures unit. "From a consumer perspective, it seems antithetical."

'What, we care?'
Yet so far, consumers don't seem to be bothered, in part because the networks have also dramatically reduced the number of ads both online and, in ABC's case, VOD. Hulu served 142 million videos in September, mostly from NBC, Fox and Viacom, all with advertising that could not be skipped. Analytics start-up Integrated Media Measurement estimated that 20% of Americans watch some prime-time shows over broadband, and none of them are skipping the ads.

The networks are spending millions on research to make two arguments: Online-video ads have a bigger impact than TV ads and therefore deserve higher ad rates than TV, and that consumers don't mind the intrusion. Both ABC and CBS commissioned research from Magid Associates that shows consumer recall of an unskippable ad online is 50% compared with 18% for an unskippable ad on broadcast TV.

The networks are, in effect, attempting to put the toothpaste back in the tube on ad skipping in a bid to reinvent their own business model. Part of this bargain, at least initially, is living with fewer ads, but that could change as the networks look to bring the average revenue per viewer in line with broadcast TV. "The ad model is going to evolve, and we will see how many ads the consumer is willing to accept. I don't believe those boundaries have been pushed yet," said ABC President-Sales Mike Shaw.

The question is whether this will result in anything more than a niche experiment, or if it's actually a template for the future of free TV.

One theory of how broadcast TV lost its way is that the networks started loading up shows with more advertising -- 20 minutes' worth in hourlong episodes of "Grey's Anatomy" and "Desperate Housewives," for example. Then technology came along that made skipping ads easier and more desirable than, say, just doing nothing.

Endangered species
Broadcast audiences have been on a steady decline since the mid-'80s. This year prime-time network TV viewing is down 2.9% at CBS, 9.7% at ABC, 14.3% at NBC and 17.5% at Fox, according to Nielsen Media Research. At the same time, the networks are getting a significant amount of viewing on DVRs -- more than 4 million viewers for "Grey's Anatomy" and 3.5 million for CBS's "CSI" during one recent week in October.

Since DVR penetration is likely to hit 50% in the next few years, the business model is looking like an endangered species, unless the networks can figure out how to insert a fresh ad into programming when it's watched after the fact.

Interestingly, cable operators could hold the key to that hurdle. Cablevision won the right in federal court to introduce a network DVR. Since the content resides on Cablevision's servers and not on a DVR hard drive, the company could, theoretically, insert a dynamic ad that would make a time-shifted viewer as valuable as a live viewer. Cablevision could also disable ad-skipping altogether, which Time Warner Cable does with its "Start Over" service, but a spokesman said the company has no intention of doing that. Doing so would give satellite TV and even Fios a competitive advantage ("We have a DVR with a working fast-forward button!").

The endgame for ABC is to offer enough shows on VOD that consumers might just decide they don't need DVRs, and can do without the $10- to $15-per-month expense. Problem solved. Consumers watch all the ads, all the time.

Rewinding history
Not so fast. That might just lead to more technologies to circumvent the ads, or to more piracy. "We've allowed people to fast-forward for the past five years -- that would be tough to take away," said Jen Soch, VP-advanced TV at MediaVest.

What's more, to preserve broadcast's economic model, ABC and everyone else will ultimately have to load up those shows with as many ads as broadcast TV. Online ad rates have been higher than those for TV, but they'd need to be double the cost per thousand in order for a network to get away with showing half the ads, and right now, at least online, they're showing far fewer than that.

"We have to be very careful not to overstep our bounds," said Chris Allen, director-video innovations at Starcom MediaVest. "People won't accept five- or six-minute [advertising] pods you couldn't fast-forward, but three or four ads over a one-hour show -- they are fairly tolerant of it."

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