The Advertiser's Dilemma

In the realm of entertainment, advertising makes the world go 'round. I have learned this through experience. The TV networks are about to be reminded of it the hard way thanks to a device commonly referred to as a Digital Video Recorder (DVR). In 2005, one in thirteen households had one. Today, one in five households have one. By 2011, it is projected that one in two households will have one. And what are the two best features of a DVR? Time-shifting programs and skipping commercials. 84% of those using DVRs skip commercials. (It raises the question about what's wrong with the other 16%, but I digress...)

It's a given that within the next 5-10 years, the television revenue model will have to change. With people no longer watching commercials, advertisers will no longer pay, so there will have to be another revenue stream. All sorts of propositions are being tossed around, but I want to discuss two of them - one of which I think has almost no chance of happening and the other which may well be the future of network TV.

The first possibility is the simplest. The networks are already making a push to have DVRs manufactured without the ability to skip commercials. This seems like one of those concepts that the public will reject outright, but only after a lot of jeering. (Remember DIVX, Circuit City's proposed "rival format" to DVD back in the late 1990s?) Plus, getting all DVR manufacturers on board isn't likely to happen, especially considering the global nature of manufacturing. Today, it's easy to get a region-free DVD player – it will be even easier to get a DVR that fast-forwards. And there won't be anything that can be done about existing DVRs. There are so many holes in this strategy that any serious attempt to move forward with it is going to generate the kind of backlash that gets people fired.

Then there's the second proposal. This one has the virtue of at least being intriguing. The networks will split. Using NBC as an example, there will be a version of the traditional NBC that will carry local programming, syndicated fare, repeats of shows that aired several years ago, and perhaps some game shows and reality programming. All will have the usual commercial breaks and will also have fixed advertising to the left and right of the picture. (Remember that TVs will be widescreen, resulting in traditional 4x3 pictures being "windowboxed.") Think of the way many websites look, with the content in the center and ads on both sides. Then there will be an NBC-Premium channel that will be subscriber supported (maybe $20 or $25 per month). It will look a lot like HBO with HD movies and new programming, all commercial free. So, to watch something like Heroes or ER first run, you would have to buy this channel. Each show would probably produce about 13 episodes per year, so there would be four "seasons," each with a group of different shows. For those that only want one show, some sort of download option would be available. ($2 per episode?) But to get the full slate of NBC, CBS, ABC, and FOX programs, it might be necessary to pay $100 per month. (And who knows how sports would fit into the equation... Given the fan's reluctance to time-shift games, it sports might still fit under the traditional advertising model and could therefore continue to be shown on non-pay TV.)

Is this an improvement? It might be. If it results in better quality shows that are less ratings sensitive, it could represent an improvement over today's model. But there would be a lot of resistance from cable channels since this would virtually put them out of business. If the networks adopt HBO's model, where does that leave HBO? And is there really enough content out there to fill four subscriber channels every night of the year? My guess is that, alongside scripted shows with high production values, we might start seeing R-rated reality shows because they're cheap to produce. How about a version of American Idol where the contestants must perform nude? Is there an audience for that?

The bottom line is simple: the DVR is going to force TV to change. At this point, the direction that the networks may take is speculative, but it won't be long before the direct impact on revenue by the DVR is felt. Proactive thinking is required now, otherwise the TV networks will find themselves in downward spiral that they won't be able to pull out of.

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