As Consumers Watch More Non-Ad-Supported Video, Distribution Side Struggles With Monetization

Consumer use of video “is growing every single month," said FitzGerald. Almost half of Internet traffic comes from mobile devices, she said. Consumers are “flexing their muscles and changing their behaviors, taking advantage of choice, convenience and content,” she said. Citing Pacific Crest numbers, FitzGerald said growth in multichannel video programming distributor subscribers turned negative in Q3, and cable households dropped 10 percent in the past five years.

While traditional video subscriptions are dropping, streaming video subscriptions are on the rise, FitzGerald said. Hulu subscriptions jumped 45 percent, and Sling TV added more than 70,000 subscribers in the quarter. Netflix is now in 35 percent of U.S. households, said FitzGerald, citing a 20 percent bump in its penetration from roughly a year ago.

But FitzGerald said viewership numbers aren't as bleak as they seem because of dated measurement methods. In September, FitzGerald said, Advertising Age reported that for the first two nights of the new TV season the number of adults aged 18-49 watching prime time TV dropped 8 percent from the 2014 period. Viewing among adults aged 18-24 watching prime time TV for the two nights was down 20 percent and the 18-34 segment was down “even more,” she said, citing the same source.

“Unfortunately, the system that we rely on to measure our video content, and to monetize our video content, has really been failing us, and we need to do something about it as measurement companies,” said FitzGerald, including Symphony Advanced Media and TiVo Research Analytics, which were also represented on the panel. The current viewing measurement system was designed for “live TV, in the TV set, in the home,” said FitzGerald. “We’re just not capturing all of the impressions" being viewed by consumers "in this new environment," she said.

Panelists cited initiatives to distribute video across platforms along with the ads to support it. Although video consumption is “fractured” across more platforms, a “huge amount of viewing” is happening on TV, said Sherry Brennan, Fox Networks senior vice president-distribution. What’s missing is “currency” in nontraditional platforms, said Brennan. “It’s not that we’re not able to measure what’s being viewed or know how many ads are being watched,” Brennan said. “It’s that there are varying ways of normalizing that data into a currency that can be sold.”

Industry “created a monster” by licensing content to platforms and services such as Netflix that don’t incorporate an ad model, said Brennan. That has created in consumers “a strong desire for content viewing without ads,” creating a challenge for networks like Fox “when half of your revenue comes from advertising,” Brennan said. “You can’t just kiss that goodbye without significantly increasing the cost of licensing the content.” Brennan called the situation a “double whammy,” where industry has become accustomed to a revenue stream from non-ad-supported platforms that aren't replacing the lost ad revenue. She cited DVRs, because MVPDs pull in revenue from “selling their customers a way to watch our content without ads,” she said, without passing on any of the revenue to networks. “It’s a lose-lose for us.”

To compensate for lost ad revenue, Fox is looking at ways to change how ads are delivered, said Brennan. The network can’t yet insert targeted ads into linear viewing but that's coming in the next few years, she said. It's possible to insert ads into time-shifted content, and “I hope DVRs will come along,” she said. She envisioned a revenue model where ads are upfront in the DVR viewing: When users press play, they receive an ad “that you have to interact with for 30 or 60 seconds,” said Brennan. From that point on, “the ads could fall out,” she said: Fox is working on a project with Hulu putting ads in front of content “to let people interact” and then skip the rest of the ads. Fox is getting higher CPMs for that model, “but what we lack there is scale,” she said.

The varied content platforms create complexities in monetization on the buying and selling sides, said Jane Clarke, CEO of the Coalition for Innovative Media Measurement (CIMM), whose members include TV content providers, media agencies and advertisers. It’s not only challenging to get a measure of usage and user on each platform, said Clarke, but there has to be a way to determine the “unduplicated reach” of a campaign, which advertisers need to know. There has to be a way to separate content measurement from ad measurement so advertisers can add up all exposures, and content owners can understand how content is being consumed across all platforms, she said. Content providers need to be able to tell if viewership is "one person on five platforms or five people on each platform,” she said.

A major challenge for Dish Network is the decreasing use of TVs among millennials, which leaves MVPDs to chase the same pool of customers, said Prasad Joglekar, general manager-data and analytics. Those customers are “churning between one provider and another,” which drives up the cost of subscriber acquisition, and that means “we’re not able to break even for many, many years,” said Joglekar. If a customer churns out after two years, it’s not enough to recoup the cost of sending a truck to install a satellite dish on a home, he said. Exacerbating the financial strain is a growing trend for consumers to avoid paying for content they might have paid for in the past by deferring viewing and waiting for it to come out on Netflix "and watch no ads” in the process, he said. He cited Dish’s offering as a way to offset declining satellite-TV revenue but said it’s “still early days.”

Frank Foster, TiVo Research general manager, promoted TV’s effectiveness in advertising along with the company’s cross-screen research. TiVo worked with geolocation company NinthDecimal on three ad campaigns -- mobile, online and TV -- for a fast-food client that wanted to drive foot traffic to its restaurants. The customer reported a 15 percent return on investment from TV ads versus 2.5 and 5 percent from online and mobile, he said: Agency buyers told TiVo that ads on a 60-inch TV were “a much more compelling experience” than with a mobile screen, where audio “isn’t very good and video doesn’t always sync.”

Panelists noted limitations of using 1940s-era audience measuring techniques. Charles Buchwalter, Symphony Advanced Media CEO, cited his company’s smartphone-based app that can track “every media thing that a consumer does in a day,” including TV, video, online, social media, music, email and texts, along with geolocation. “If someone gets media stimuli and they go to Taco Bell or they get an auto ad and go to a showroom, we have the ability of tracking that.”

In Q&A, an audience member asked about privacy implications of data tracking. Buchwalter and others said data is “anonymous” down to users and households.

One of the reasons the current TV measurement system has endured is the proprietary watermark used in all content for Nielsen measurement tools, said Clarke of CIMM. One of CIMM’s projects has been to develop an open standard that will embed content and ad identifiers in programming. The standard will lead to innovation including second-screen syncing and “a lot of different ways to interact with content and ads,” Clarke said. CIMM has been working with the Society of Motion Picture and Television Engineers and hopes to have a solution early next year, she said.