Digital Dilemna

On June 28, a new phenomenon will burst, or at least trickle, onto UK television screens. BSkyB will start the “soft” launch of Sky Digital TV channels for its satellite and cable customers.

Details are sketchy, and Sky refuses to say how many channels it will carry or which brands will advertise. The test will pave the way for a full launch in November.

But the media sales teams at Sky Digital and the other digital networks, British Digital Broadcasting, and digital channels ITV2 and Ch4B, which will launch later this year, are having a tough job persuading brand owners to shift their ad budgets out of ITV and onto this untested range of over 200 digital channels.

Nick Shepherd, marketing general manager for coffee and food at Kraft, is one marketer who won’t be rushing to plough his 27m budget into the new channels.

“If we’re going to spend money on digital next year it will be a very small amount. We might test something somewhere, somehow but what, how or when I don’t know,” he says.

For a major packaged goods marketer like Shepherd, the launch of digital TV is still an irrelevance. There are far more urgent things to worry about, like the current state of ITV, where brand owners spend about 1.5bn a year.

Advertisers have always resented the paradox that ITV costs can rise while audiences fall. In the past five years, the network’s viewing figures have slumped by a fifth – and they will keep on falling. The launch of Channel 5 and growth of cable and satellite has already cut ITV’s share of commercial viewing to 55 per cent from the 69 per cent it held in 1994. One source estimates it will fall to 45 per cent by 2005.

Marketers like Shepherd have yet to be convinced of the advantages of advertising on digital TV, but this does not stop his colleagues from berating the only viable destination for big brand advertising, ITV, for its mounting costs and low delivery.

Only last March, Michael Hebel, chairman of Unilever’s UK advertising committee and business director for Birds Eye Wall’s ice cream brands, attacked ITV for “an appalling performance”. Toyota’s marketing director Mike Moran vented his frustration at the TV Barcelona conference, saying: “It’s [ITV is] getting ridiculously expensive.” At the same conference Martin Sorrell, chief executive of WPP Group, said: “Clients should think about effective cost per thousand and start to use small audiences rather than large ones. Fragmentation leads to more effective targeting.”

So will the advent of digital TV and dozens of alternative channels be a good or a bad thing for today’s advertisers? Will it give them a stick to beat ITV with – by threatening to take their ads elsewhere – or will it weaken the channel that many of them desperately want to stay strong?

As advertisers scrap over smaller ITV audiences, prices set by the system called station average price (SAP) are rising. SAP is the money spent on advertising each month divided by the actual headcount of viewers for a particular region and audience. If audiences go down, the cost to advertisers of reaching each consumer goes up.

ITV audience decline has been blamed not only on the BBC holding onto its share of viewers, the growth of cable and satellite and the launch of C5. It has also been blamed on ITV itself, which is accused of allowing audiences to drift away through poor programming and scheduling, because as a monopoly supplier, ITV finds price inflation is a good thing.

The new ITV Network Centre management team was appointed to put the brakes on audience decline after years of criticism from ITV’s biggest customers. For the first time ITV chief executive Richard Eyre set targets for the station’s share of peak viewing – 38 per cent for this year, rising to 39 per cent next year and 40 per cent by 2000. This compares with ITV’s overall share of total viewing at 32.2 per cent for the first quarter of this year (IPA).

But ITV inflation is not only down to dwindling audiences. Advertisers have actually been part of the problem because they have refused to abandon the network despite its diminished power.

ITV is a tried and tested brand for advertisers and media agencies. If advertisers throw enough money at ITV, they reason, some of it will stick. ITV remains at the core of most media schedules.

Eyre says: “For advertisers it is always going to be a value equation. For some advertisers the equation is looking wrong. There is no complacency at ITV. No one is saying the decline is inevitable.

“The value equation will continue to work to our advantage as long as we can maintain market leadership. We can afford to sustain the revenues to make the programmes to keep us on top. There is a real benefit to advertisers in us doing that.”

Yet James Walker, managing partner at media strategists Advanced Techniques Group, part of MindShare, questions the “fishing by handgrenade” use of TV, given that most packed grocery products achieve 70 per cent of their sales from only five per cent of households. He argues that advertisers should be embracing alternatives to ITV now.

Walker says: “ITV audiences are in freefall – and will continue to be. Rather than berating media owners, ITV in particular, over something they can do little about, our focus should be on developing strategies, research and analytical tools that are more appropriate for creating value in a complex media environment.”

That is, targeting audiences and reaching them through a tapestry of different small channels, such as digital TV and magazines.

By using mixed media, including TV channels watched by only a tiny percentage of ITV’s audience, advertisers can save money, and this will slowly erode ITV’s share of ad budgets. As Walker puts it: “Even if the future competitive environment for ITV comprises dozens of channels with low ratings, death by cocktail sticks is still death.

“ITV will face a declining audience – but this is not bad news for advertisers at all – advertisers should look to the future with excitement, not fear.”

But digital TV advertising does not have to be just for youth or niche brands (those audiences which avoid the main channels). Sky’s British Interactive Broadcasting will launch next year, and offers brand owners the chance to interact with their consumers.

Nigel Foote, strategy director at MediaVest, says: “Digital at its ultimate becomes like the telephone – a one-to-one communication.”

Advertisers usually foist their messages onto the public who can switch them on or off, he says. Now-adays people want and expect to get more in return from advertising.

And with so many more channels, the same programmes will be repeated and repackaged, and media strategists will have to ask “which programme?” rather than “what time is it on?”

ITV’s digital channel, ITV2, will offer viewers repeats and reviews. BSkyB’s near-video-on-demand service, where 15 to 20 films will be shown every night at 15-minute intervals, is the most dramatic example of this “time-shifting”. With such a huge capacity of TV, spot buying will become obsolete and airtime will be sold only in packages. The spots will be paid for by consolidating the ratings (the percentage of an audience “hit” by an ad) at the end of each week.

Marc Sands, head of brands marketing at British Digital Broadcasting, says opportunities for advertisers on digital TV could also include programme sponsorships across a whole channel, buying every spot in a daypart and so on. With digital it seems anything goes because airtime will be so cheap.

Overall TV inflation will fall more in line with the retail price index as the number of commercial channels increases and newcomers like C5 grow, and the share of commercial viewing rises. Estimates forecast commercial share of viewing will rise from 55 per cent to 70 per cent by 2005.

But if there are those who are bullish about the possibilities for advertisers on digital TV, many more are deeply sceptical.

Andrew Sharp, director of marketing and communications at Initiative Media, argues that take-up of digital “multi-channel” TV – offering packages of channels as opposed to single channels – will be slow. Satellite and cable took five years to penetrate nine per cent of UK TV households.

Sharp says the launch of digital pay-TV could prove tricky when the new channels will be competing against established, well-loved and free alternatives.

“ITV will be weaker but it will still dominate. It will still be the price-setter. It’s not going to lose as much in revenue as it’s going to lose in terms of audience share,” he says.

Another digital TV sceptic also argues that ITV has had a bad five years but that it is now moving into a more positive cycle.

He adds: “Digital is another form of multichannel TV. The number of people with Sky dishes is almost at saturation point. Multichannel TV needs digital to become more attractive to keep it on the same curve.”

Advertisers will begin to re-evaluate ITV and if anything, the availability of dozens more channels will make the network more highly valued. ITV’s champions point to the situation in the US, where the big networks still command huge advertising revenues because, when an advertiser needs to achieve breakthrough very quickly, the big network will remain the only option.

Advertisers will still want to use the mass audience channels even if they are selling niche products because they want their brands to be famous even among viewers who cannot afford to buy them – creating a desirability and a price premium for that brand.

In a fragmented media world, some TV programmes on the mass audience channels will become even more coveted, leading to a growing polarity between the price of ITV peaktime between 7pm to 10.30pm and other parts of the day.

This gap could widen if pressure increases on ITV to spend a bigger proportion of its programme budget on pricey sports and movie deals for its peaktime slots to compete with digital TV. Eyre, however, argues that homegrown drama will be at the forefront of its peaktime schedules.

For years clients have struggled with the tension between the new and complex media strategies that pick off audiences in small numbers, and the use of ITV – a proven vehicle for all its failings.

But there is also a warning, or perhaps a thinly veiled threat, from Eyre: “It may be said that fragmentation has been won at the expense of a very large channel, {which is} of more use to more advertisers. So I don’t think digital TV will be good for advertisers… if in order to bring about easier negotiations for themselves, they bring about the downfall of their best advertising vehicle.”

But at what point will the situation where ITV remains the dominant mass-market channel (albeit a weakening one) dissolve? The day may come when ITV’s share of total viewing drops so low that the trickle of advertisers spending serious money elsewhere becomes a flood. Then the likes of Shepherd at Kraft will have to start thinking seriously about the what, how and when of advertising on digital TV.

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