Next Step in Local Cable's Ad Story

The next frontier for operators looking to maximize local ad sales revenues is Digital Program Insertion (DPI).

Cable systems are making significant investments to increase the number of analog channels they can insert local ads into. For many, the digital tier can’t deliver enough viewers to generate an audience advertisers would want to buy.

For some MSOs already featuring major cable networks on digital tiers, DPI becomes an important issue.

Inserting on digital channels has proved a complex technical problem that is only now being tackled.

AT&T, along with Adlink, the interconnect serving Los Angeles, and hardware and software vendors such as Motorola, nCube and Terayon, is experimenting with DPI on 12 headends.

According to Adlink’s SVP/CTO Paul Woidke, the process under way uses the MPEG2file and, instead of decoding it back to analog at the point of insertion, slices it into the digital stream as it passes through the headend.

"AT&T was bold enough to step up to the plate, and we will continue to experiment and work out the challenges," Woidke says. "This is not a shrinkwrap product that pops out of the box and works. But we hope to have it perfected next year."

Time Warner Cable Advertising in San Antonio is also gearing up to add DPI on 20 channels in 2001.

"By next year, we’ll have 40 to 50,000 digital households, and if we do anything interactive, it’s going to require digital insertion of one digital stream into another," says Phil Johnson, GM-ad sales for Time Warner in San Antonio.

"Yes it’s complicated and a little dicey for us because we’re going to make an investment here before we see the revenue coming back," he adds. "Generally, we won’t look at a capital expenditure if we can’t pay for it in a year with incremental cash flow."

Johnson has always been a mover and a shaker in the ad sales business and, three years ago, was one of the first cable operators in the country who had 40 ad-insertable channels available.

"It doesn’t take a rocket scientist to figure out that more inventory equals more revenue," he says.

According to Paul Kagan Associates, local cable ad sales increased 20.4% in 1999 and will increase another 18.5% to $3.1 billion this year.

The leading networks in generating revenue for MSOs were ESPN (12.6%); CNN (9.6%); USA (9.1%); TNT (8.0%) and Lifetime (7.9%), followed by A&E, Discovery, TBS, Nickelodeon and TNN rounding out the top 10.

"Many cable systems have experienced a 20% to 30% revenue growth this year over 1999, with ad sales accounting for 5% to 10% revenue," says Kevin Barry, VP-local sales and marketing for the Cabletelevision Advertising Bureau.

"While that might not sound like a lot, it can account for between 10% to 20% of the gross cash flow," he says. "It’s the third largest individual revenue stream behind basic and premium, and it’s a fast-growing, unregulated, beautiful, clean cash flow in the short term."

High-speed cable modems and video-on-demand are seen as revenue streams of the future.

Not so long ago, however, cable operators had to spend money on equipment to begin to bring in the local ad dollars. Some moved quickly, but others are still trying to catch up.

"When I moved from broadcasting to cable in 1991, most cable operators were typically inserting on six to 12 networks," says Woidke. "Adlink was doing 12, and people were amazed that we could do so many networks. But the industry really turned a corner in 1995 and ’96 when the MSOs and interconnects in the country’s largest DMAs converted to video file server digital-based storage and insertion technology. After that conversion, we jumped to 20 to 24 channels, and today we are doing 40, and we will be going to 44 in the first quarter. That is still bigger than most."

According to the National Cable Communications CableTrack database, based on 2,000 large and small cable systems across the country, in 1985 the average number of ad-insertable cable networks was four. By 1990 that number had doubled and grew to 11 in 1995. This year, the average number of insertable networks was 18, however for MSOs and interconnects in the country’s largest DMAs, the average number of insertable networks falls between 30 and 40.

The Advertising Sales Group for Time Warner Communications in Houston inserts on 36 networks but plans are to increase those zones still operating at 18 up to 30 insertable channels.

Charter Communications is at 30 and, according to Paul Sly, RVP-advertising sales responsible for Missouri, Arkansas, Illinois, Indiana and Kentucky, will be inserting on every analog insertable network within the next 12 to 18 months.

"As recent as a year ago it was outrageous to think of a system that inserted on 30 to 40 networks because there were only a few doing it," says Barry. "With 40% of viewing in a DMA going to cable, those systems with only 20 networks are taking advantage of only half of that 40 share. The systems with 40 networks will be in a much stronger position to take advantage of those eyeballs and generate additional revenue."

Ratings and viewership gains continue to bolster the efforts of cable ad sales, and those solid performing networks don’t change much from year to year. What is changing is that the increasing number of ad-insertable networks is redefining the spot cable buy in the marketplace.

"What’s different is that the advertisers realize that for a balanced buy they need to be buying spot cable TV," says Sly. "They must buy time on established networks but also on newer networks."

Among newer networks, the Cartoon Channel, HGTV and Fox Family have done well for Charter, Sly says. He adds TBS’s premiere movies, A&E and Lifetime’s reruns of Once and Again and Any Day Now have been popular with advertisers.

Ray Purser, VP-advertising sales, has also seen a lot of growth in Lifetime and A&E.

"They used to be priced as a second tier, but now they are getting the same rate as ESPN," he says.

HGTV only became insertable last year, and he’s seeing a lot of growth there, too.

Andrew Ward, EVP/director-sales for NCC, says these emerging networks must be used for advertisers to receive the maximum benefit from cable ad sales.

"In the old days, agencies would cherry-pick and isolate high-profile programming, and they still request the same dozen or so networks they have in the past. Whereas an agency would target CNN because of the strong brand, they are beginning to understand it may not be the best vehicle to reach their demographic profile," he says. "Instead, agencies must buy a broader array of networks, including emerging networks, and different day parts to capitalize on the 30 share of viewing we represent."

In order to receive more of the advertising buy, cable ad sales must be as easy to buy as broadcast television. Cable systems are in an even stronger position if they sell advertising as part of an interconnect.

Kagan’s "Cable TV Advertising" newsletter says, "The typical cable network takes in about three times more revenue from national advertisers than it generates in local, regional and national spot billings for all cable affiliates selling local avails on the channel."

The newsletter goes on to state, "One-stop shopping in large markets (facilitated by interconnects and cable-ownership consolidation) and the cleanup of back-office problems have attracted stronger national spot cable spending, especially by automotive, telecom, retail, entertainment and dot-com advertisers."

NCC, however, reports that out of the top 100 television markets, only 15 qualify as a customer’s definition of a functional interconnect: Where there is a single piece of creative, one contract and one affidavit.

Owned by AT&T, Comcast, Cox, Time Warner and Katz, NCC is a spot television national rep firm that represents 98% of the industry. Recently, NCC created a CableLink Division to consolidate markets and create interconnects.

"There are some systems who are reluctant to form interconnects because they are experiencing enough local business which comes in at a higher CPM, but most realize the benefits of providing a comprehensive service for advertisers," Barry says.

In L.A.’s geographically, ethnically and economically diverse market, the interconnect Adlink has created two new ad strategies that allow advertisers better targeting than other media can offer.

"We utilize Targeted TV to target a specific set of eyeballs in a way the broadcaster could never do. We can do this geographically by headends or demographically by the networks we advertise on or by combining the two approaches," says Woidke.

Instead of the generic tag of your local Mercedes Benz dealer, now the specific dealer and location can be provided on the spots. The copy is written to focus on the demographics of the people who live in a specific area and watch a specific group of networks, he says.

"We can sell minivans in the San Fernando Valley, sports cars for the beach communities, luxury automobiles in Orange County," he says.

This approach could only be achieved through a customized billing and traffic system. Developed and owned by Management Science Associates (MSA), the TotalVision system is customized for Adlink.

"Without this customized system we would not tie our market together for national and regional spot advertising. With our targeted approach an advertiser could be running 80 different commercials at the same time," Woidke says.

"The back office infrastructure is the hardest part, and it’s the part that nobody sees," Woidke adds.

All the interconnects and the cable systems have or will invest in traffic and billing systems to keep up with the demands of inserting into 40 networks.

Next year, Houston will install the Eclipse Traffic and Billing system.

"We’re going from 270 networks to 540 networks; that’s one network per zone in traffic and billing talk," Purser says. "And we need a traffic and billing system that can traffic all the spots as quickly as possible and maximize revenue."

NCC is also leading the effort to increase efficiencies by tracking billing and traffic information electronically. Out of the 15,000 affidavits that come back to NCC, 80% of those are now returned electronically, which eliminates a lot of re-keying and duplication by cable systems.

"Our EDI initiative is intended to facilitate the transaction of our business on the back end, and our CableLink brand name is designed to create consolidated markets on the front end, both consistent with national advertisers needs," Ward says. "We as a company do $500 million, which is 4.5% of the $13 billion national spot broadcast marketplace. At the same time, we account for 30% to 40% of the viewing. There is a tremendous upside for NCC, and for the entire industry, if we position ourselves properly."