Big Deal or Bad Deal

Advertising in the NewTV age

2008 / 11

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 Big Deal or Bad Deal

Table of Contents
1 Executive Summary............................................................................................. 2
2 Boundaries are vanishing – the rise of NewTV ................................................... 3
3 Approaching the challenge .................................................................................. 4
4 Results of the survey ........................................................................................... 4
4.1 The evolution to a NewTV world and its ad market. .................................... 4
4.2 The added value of technologies................................................................. 7
4.3 The most attractive ad environments and ad formats.................................. 9
4.4 The essence .............................................................................................. 12
5 Challenges and recommendations .................................................................... 13
6 The Authors ....................................................................................................... 15
7 The Company .................................................................................................... 16

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1 Executive Summary
Q NewTV is seen as the future convergence scenario between traditional TV and
the Internet offering for moving pictures.
Q NewTV video consumption is expected to triple by 2012.
Q Tracking and targeting are seen as major impact factors.
Q Growth in ad spending in NewTV will lag behind the growth in eyeballs.
Q NewTV marketers are expected to claim up to 20% of total ad spending.
Q Non-linear content is expected to have significantly stronger ad spending
growth than linear content.
Q Cross media packages and VoD are seen as the most attractive ad
environments.
Q Pre-/mid-/post-rolls will remain key revenue ad formats, interactive hyperlink
ads will become increasingly relevant.
Q Reporting enabled by tracking is expected to be worth a price mark-up of 5%,
starting at a critical mass of 500,000 users.
Q More than 10% price add-on is possible for targeted video ads while the critical
mass for target groups varies between 30,000 and 500,000 users.
Q Media agencies are still devoted to traditional channels and therefore represent
the bottleneck for NewTV-centric ad business models.

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2 Boundaries are vanishing – the rise of NewTV

In the days of Plain Old Television, signals were distributed over dedicated networks. The
infrastructure was a closed system that was optimized for the broadcast of data from a single
source to many receivers. In contrast the Internet is inherently an open bidirectional network
with non-discriminating data transfer based on the IP protocol. As faster data transmission
and better compression technologies provide the capacity to distribute large amounts of
data, video has found its way to the Internet. Though existing offerings cannot yet compete
with traditional distribution networks in terms of content and delivery quality, the Internet’s
open and innovative environment is a threat to the existing business models of all players in
the TV environment.

Advertising
opportunities

User-driven content
Personalization
Interaction

Targeting
Interactive Services

On-demand services

Multi Channels

Analog Age IPTV Age NewTV Age

Evolution
path
Integrates the Internet as an open and innovative platform

Figure 1: Increasing advertising opportunities along the TV evolution path.

The first technological step beyond the traditional Plain Old TV age can be seen as IPTV
using the IP protocol in a closed distribution network. This allows interactive services on the
application layer in combination with the accustomed quality of experience. But the walled
garden environment is limiting the development of innovative services.

The next step in the natural evolution, which Detecon calls “NewTV”, will provide comfort,
content and technical quality along with the innovative power of the open Internet. Technical
provision of content and services will no longer be a restrictive or visible factor for the user.
Alongside the increased diversity of content, the viewer will have the options of remaining
passive or (inter)acting in the way that they are accustomed to from the Internet.

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While today the majority of content on the TV screen is consumed in a passive “lean back”
modus, we expect that, driven by the users’ experience from the Internet, media
consumption will migrate to become more interactive (media consumption on demand and
media participation via communities, active communication, …). The trends we see in the
Internet today toward creative socializing, interactivity, personalized content delivery, and
better consumer control will have a strong impact on the NewTV world.

The prevailing business model in today’s TV and Internet worlds is ad funded – and it will
remain predominant in the NewTV world under new technological and behavioral conditions.
As the consumer’s behavior is changing and the technology developing to permit new ad
concepts, media agencies, marketers and publishers are faced with the challenge of
developing sustainable business models and ad concepts for the NewTV world. Traditional
ad revenues are already falling and many of the skills and capabilities that were the
foundation of success in the past will need refinement, transformation or even outright
replacement. Traditional paradigms are being interrupted while there is considerable
pressure to adapt to new ad-based business models and ad formats using advanced
technological solutions.

3 Approaching the challenge

To demystify the evolving scenario and evaluate areas of business potential Detecon has
carried out selected senior media expert interviews with industry representatives, from media
agencies and marketers through to publishers. The survey focused on facts and figures on
market development, and trends and product innovation in the TV, Internet and NewTV
advertising hemisphere. Furthermore, we looked at altering ad formats as a part of the
changing value proposition and determined impacts on current business models. Based on
the survey results Detecon has identified and derived the key challenges and implications for
each market player. In conclusion we provide strategic recommendations for market players
to be prepared for the new and fast moving NewTV environment.

4 Results of the survey

4.1 The evolution to a NewTV world and its ad market.

The first part of the interview-based expert study deals with the development of a NewTV
world which creates a new ad market space. As indicators of the general market
development we asked the experts for their opinion on expected growth in online video
consumption and shifts in the proportion of linear to non-linear video consumption in the next
five years.

In line with our previously developed NewTV scenario, a strong increase in online video
consumption is expected by the experts. The mean of the growth for 2010 and 2012
expected by the interviewed expert groups indicates a CAGR of 144%, which is illustrated in
Figure 2. Publishers believe that online video consumption will develop even faster, but this
has to be seen in the context that some of the interviewees are already doing business in
this market and are therefore more optimistic.

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Online video consumption growth (in %)

How do you expect online video consumption to evolve in the next 5 years? (in %)

Media Agencies
Marketers
Ø CAGR 144%
Publishers
513

339

Ø 269
221

Ø 152
89
70 74
30 46
17 Ø 45

2008 2010 2012

Figure 2: The expected development of online video consumption.

Regarding key impact factors that will drive the development of an emerging NewTV ad
market, the experts most often stated that tracking and targeting are important. This is
shown in Figure 3. Tracking provides the exact measurement of the audience reached and it
also allows users’ usage patterns to be recorded and the users to then be assigned to
specific user profiles. Tracking is needed for targeting-based advertising delivery, which uses
these user profiles to achieve better conversion rates for advertisers.

Key impact factors for NewTV advertising

Which will be the key impact factors for video advertising caused by NewTV?

Ø All
Media Agencies
Very Important
Marketers
Publishers

Important
Rating

Less Important

Not Important
Tracking Targeting On-Demand All IP PSN*

Impact Factors
*PSN: Personal Social Network

Figure 3: Key impact factors for NewTV advertising development.

When asked what the main obstacles in the evolution towards the NewTV environment are
seen to be two main aspects were mentioned: limited access to the consumer via proprietary
set-top boxes, and limitations in the interoperability of different software solutions.

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Detecon believes that future content offerings will be a combination of linear and non-linear
content in a non-walled garden environment as already offered by online video providers.
The strong growth in online video consumption mentioned above is coherent with the results
regarding the future video consumption mode. Non-linear video consumption will play a
much more important role than it does today.

Non-linear content consumption will reach a share of 30% of total video consumption in 2012
according to the experts. This shift in users’ behavior will result in an increased demand for
NewTV platforms, such as the online video described above, as well as other platforms like
IPTV which could then lead to a significant uptake in subscribers.

The experts were also asked how ad spending will be split up between linear and non-linear
content offerings. In contrast with the 30% share of non-linear video consumption expected,
the expected share of ad spending is only 17%. Even though this is a respectable amount of
money, it does show that eyeballs for non-linear content are underrated and thus represent
an opportunity for New TV players. These findings are shown in Figure 4.

Development of content consumption (in %) Gap between video consumption & ad spending

video consumption video consumption

ad spending
87 30%
Lin -17
70 30%

13 25% 8
Non-Lin +17 Today 13
30
2012
20% 5

Ad Spending 15% 17%

13%

96 10% 5
Lin -9
87
8%
5%
4
Non-Lin +9 Today
13 0
2012
Past Today 2012

Figure 4: The gap between linear and non-linear video consumption and ad spending.

To get a more precise idea of how and to whose benefit the developments in the advertising
market in a NewTV world will shift, four different scenarios were put up for discussion. In the
first scenario (Classic TV only) there is almost no change with regard to the ad market, which
is still heavily dominated by traditional players representing the old TV world. The second
scenario (NewTV) describes a market development where NewTV players gain a significant
(50%) market share due to their technical capabilities. The third scenario proposed (Partly
Substitution), assumes that traditional TV players will still dominate but will lose some market
share to NewTV players. The last scenario (Win-Win) envisages market developments
leading to a win-win situation with an increased market volume.

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As Figure 5 shows, the experts favor the “Partly Substitution” scenario which is accompanied
by a shift in revenues from traditional to new players. The potential of this shift in revenues
was estimated by most of the experts to be between 10 and 20%.

Development of the NewTV ad market

Most likely market scenario in 2012 Level of Substitution (in %)

Very Likely Ø All

Likely Media Agencies
Not Likely Marketers
Publishers

Classic TV 69% 25% 6%

67

NewTV 87% 13%

44 33
Partly Subs. 12% 18% 70% 50 25
19 17
33 13
Win-Win 33% 47% 20% 29 29 29
0 0

100% 0-5% 5-10% 10-20% 20-30% 30-40% >40%

Figure 5: Market scenarios and level of substitution.

Conclusion: NewTV will be here very shortly – the consumer is ready for it, now the right
offers combined with the right ad formats are essential!

4.2 The added value of technologies

According to the experts the key drivers for the development of the NewTV ad market are
tracking and targeting. Opinions concerning the financial impact of tracking differ among the
experts depending on their companies’ positions in the value chain. While marketers believe
that the additional value of tracking is lower than 4%, media agencies and publishers are
more optimistic. To employ tracking technology a critical audience mass forecasted at
around 500,000 users has to be reached. These results are presented in Figure 6.

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Tracking: Ø Value by group Tracking: Ø Critical mass by group

How high do you estimate the added value of How high do you estimate the critical mass for
tracking to be? ( in % price increase) attractive tracking to be? (in number of users)

>10% Publishers >1Mill.

Media Agencies
5-10%
500k-1.Mill. Publishers
Ø All
Marketers
4-5%
100k-500k Ø All
Marketers
3-4% Media Agencies

10k-100k
2-3%

0-1% 0-10k

Figure 6: The additional value and critical mass of tracking.

As described above targeting especially is seen as a key impact factor. This statement is
supported by the results concerning the importance of targeting given in Figure 7. These
demonstrate that its relevance is limited today but that this will change over the next five
years.

Targeting: Relevance barometer

How high do you see the relevance of targeting to be?

Today 2012
Media Agencies
High High
Ø All

Publishers
Marketers
Marketers
Ø All

Limited Publishers Limited

Media Agencies

No No

Figure 7: Relevance of targeting today and in 2012.

As for tracking, the experts were also asked to quantify the additional value of targeting. The
answers given in the interviews indicate that it allows premiums of over 10%. This is of
course only possible if the ad successfully targets an attractive target group. The size of
these target groups can vary from 30,000 to 500,000 users depending on their quality and
level of specificity. These findings are illustrated in Figure 8.

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Targeting: Ø Value by group Targeting: Ø Critical mass by group

How high do you see the added value of targeted What do you expect to be the minimum relevant
video ads to be? (in % price increase) group size for targeting? (in number of users)
Publishers
>10% >1Mill.
Ø All
Marketers
5-10%
Media Agencies 500k-1.Mill.

4-5% Media Agencies

100k-500k Marketers
3-4% Ø All

10k-100k Publishers
2-3%

0-1% 0-10k

Figure 8: The additional value and critical mass of targeting.

Conclusion: Reaching a critical mass along with the timely preparation of tracking and
targeting are the main variables influencing direct advertising revenues.

4.3 The most attractive ad environments and ad formats

When looking at formats and tariffs the different factors influencing the value proposition of
ad space and their development have to be considered. Regarding ad prices the quality of
the content it surrounds, the attractiveness of different content formats (ad environments),
and the tracking and targeting technologies are relevant subjects. The attractiveness of
different ad formats was determined by asking the experts to assess their acceptance by
users and their expected sales volumes.

To evaluate the potential of different types of content quality the experts were asked how
they expect ad prices (in %) for both linear and non-linear consumption to develop. For linear
content the trend shows stagnating or somewhat falling prices. For non-linear content the
experts forecast an increase in ad prices of at least 5 to 10%. Only user generated content is
seen less optimistically, with stagnating ad prices, as this type of content is judged to be very
risky from a quality and context perspective. This result is illustrated in Figure 9.

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Professional Content Semi Professional Editor Generated User Generated

>20% >20% >20% >20%

15% 10 - 20% 10 - 20% 10 - 20%
5 - 10% 5 - 10% 5 - 10% 5 - 10%
Linear

Ø All 0 - 5% 0 - 5% 0 - 5% Ø All 0 - 5%
-5 - 0% -5 - 0% -5 - 0% -5 - 0%
Ø All Ø All Ø All
> -5% > -5% > -5% > -5%

>20% >20% >20% >20%

10 - 20% Ø All 10 - 20% 10 - 20% Ø All 10 - 20%
Non-Linear

5 - 10% 5 - 10% 5 - 10% 5 - 10%

Ø All 0 - 5% 0 - 5% Ø All 0 - 5% 0 - 5% Ø All
-5 - 0% -5 - 0% -5 - 0% -5 - 0%
> -5% > -5% > -5% > -5%

Figure 9: Development of ad prices in relation to content quality.

Besides the quality of content the ad prices also depend on the environments (formats) of
the content that they are inserted in. In the experts’ opinion cross-media packages are the
most attractive ad environment, followed by VoD and live-streams. These findings are
illustrated in Figure 10.

Ø Attractiveness of ad environments

Which will be the most attractive environment for video ads in the future?

Highly attractive
Video-podcast 31% 61% 8% Attractive
Not attractive

VoD 15% 23% 62%

Live-stream 50% 50%

Video-clips 27% 53% 20%

Cross-media packages 36% 64%

100%

Figure 10: Attractiveness of different ad environments.

The last part of the analysis of formats and tariffs deals with the attractiveness of different
kinds of ad formats from the viewers’ perspective as well as from the advertisers’ point of
view.

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The experts were asked about the level of user acceptance for different ad formats today
and in 2012. As Figure 11 shows, formats like video hyperlinks and different kinds of x-roll
formats that use rich media advertising will gain more viewer acceptance in the next five
years.

Level of acceptance (ad viewer‘s perspective)

Which are the most accepted formats today? Which will they be in the future?

Highly
accepted
Hyperlinks
and…

Tolerated
2012
Today

… rolls will
increase
Not
accepted

Contextual Display ads Clickable Video Pop up Pre-rolls Mid-rolls Post Roll Channel
text ads crawlers hyperlinks overlays Switch

Figure 11: Level of acceptance of different ad formats from the viewers' perspective.

From an advertiser’s perspective the attractiveness of different formats will change in the
next five years and result in different sales volumes for each ad format. In accordance with
the attractiveness from the viewers’ perspective, video hyperlinks, rolls as well as channel
switch ads are seen as the key revenue drivers among the formats. These findings are
shown in Figure 12, which shows the expected developments in sales from today until 2012.

Sales volume (advertiser‘s perspective)

Which formats in video broadband advertising will advertisers buy today and tomorrow?

High Key
revenue
driver

Sales 2012
Medium

Sales Today

Low
Contextual Display ads Clickable Video Pop up Pre-rolls Mid-rolls Post-rolls Channel
text ads crawlers hyperlinks overlays Switch

Figure 12: Sales volumes today and in 2012 for different ad formats.

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Conclusion: Formats that the users know from the Internet and that are perceived to be
“non-intrusive” will gain most consumer acceptance.

4.4 The essence

The expert interviews provided answers to questions concerning the market evolution for
NewTV ads. There is significant market potential, especially for players that can take
advantage of the evolution by applying key impact factors to leverage their opportunities.
These opportunities stem from the dynamics of the shift in market shares and the additional
potential of undervalued eyeballs in the nonlinear ad market.

Implementing and applying key impact factors like tracking and targeting will play a major
role. But also the provision of attractive ad environments, preferably in combination with
different distribution channels, will make the difference. Last but not least, the finding that
with regard to ad formats video hyperlinks and different kinds of “x-rolls” will be the revenue
drivers in the near future is worth mentioning.

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5 Challenges and recommendations

The above summarized findings pose challenges to all players along the advertising value
chain. In the developing NewTV ecosystem players from the traditional television advertising
world will not only compete with their existing rivals but also with successful players coming
from the online advertising environment. This market convergence drives competition but
also creates opportunities as new distributors and publishers offer new channels to raise
business potential. The development of business potential using partnering strategies and
experimenting with formats and distribution channels will be critical to success. As time is a
limiting factor, players should start preparing themselves as soon as possible to be able to
outperform their competitors along the value chain. As partnering and the coordination of
processes and technology become more important the value chain will turn into a value
network. This development is illustrated in Figure 13, which also provides a structure for the
recommendations.

Viewer /
User
Advertiser Advertiser:
Provides ad funding, orders ad
campaigns
Media agencies:
Develops and controls ad campaigns

Advertising Marketer:
Publisher / Develops formats and sells ad space
value web
Distributor Publisher:
Media agencies Provides ad space within their content
environment
Distributor:
Provides technical platform for content
distribution and data gathering
Marketer

Figure 13: Actors in the advertising value chain

Media Agencies:

Q New business models and formats must be created and developed specifically
for the NewTV environment. These should reflect new capabilities like
multichannel distribution, targeting & tracking, and interactivity.
Q New organizational structures need to be implemented that take into
consideration the converging media landscape. Present silo structures do not
support the NewTV environment appropriately.

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Marketers:
Q Need to drive and lead the joint development of new ad formats and revenue
models with other NewTV players.
Q Provide a platform that integrates reporting tools by tracking with the ability for
cross-media distribution. Partnering with distributors is essential.
Q Trying out new innovative ad formats is essential to be able to understand the
potential and dynamics of this ecosystem. The experience in this NewTV
environment is still limited, even from a consumer’s perspective.
Q Promote new ad formats to media agencies, taking account of their learning
curves.

Publishers:

Q Drive the evolution of open standards and of open access opportunities,

therefore coordination with technology providers (distributors) to implement
NewTV targeting and tracking services is essential. Stand alone over-the-top
offers will not provide a customer-friendly long term perspective.
Q Develop new partnering models and strategies with marketers and distributors
that enable the unleashing of new business potential in the converged NewTV
ecosystem.

Distributors:

Q The timely development and implementation of new technological platforms

permitting tracking & targeting capabilities and providing flexible ad insertion is
vital. The technical challenges are still significant and have to be addressed
early.
Q A distinctive value proposition must be developed to exploit the unique position
of owning the customer control point.
Q The user benefits regarding personalization and their possible compensation
need to be communicated actively in order to enable timely data collection
permission and to be able to offer targeting to marketers.

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6 The Authors

This Paper was written by Detecon’s Center of Excellence “New Media” - a worldwide
network of highly motivated consultants combining a deep-rooted understanding of global
and regional media market trends with world class technology competence. The Center of
Excellence provides Detecon’s clients with direct access to the latest technology and market
trends from the most dynamic world regions.

Stephan Dieter leads the Center of Excellence “NewMedia”. He has more than ten years of
professional experience in the media and communication industry focusing on business and
innovation strategies.

He can be reached at: +49 89 546365-0 or stephan.dieter@detecon.com

Moritz Gruener works in the Strategy & Marketing Group within Detecon. His areas of
expertise are new media services and products with a particular focus on content distribution
platforms.

He can be reached at moritz.gruener@detecon.com

Matthias Schmidt also works in Detecon’s Strategy & Marketing Group. He focuses on
business innovation and the role of disruptive changes in the media industry and contributes
to the Center of Excellence for New Media regarding topics such as advertising and IPTV.

He can be reached at matthias.schmidt@detecon.com

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7 The Company
Detecon International GmbH

Detecon International is a leading worldwide company for integrated management and

technology consulting founded in 2002 from the merger of consulting firms DETECON and
Diebold. Based on its comprehensive expertise in information and communication
technology (ICT), Detecon provides consulting services to customers from all key industries.
The company's focus is on the development of new business models, optimization of
existing strategies and increase of corporate efficiency through strategy, organization and
process improvements. This combined with Detecon's exceptional technological expertise
enables us to provide consulting services along our customers' entire value-added chain..
The industry know-how of our consultants and the knowledge we have gained from
successful management and ICT projects in over 100 countries forms the foundation of our
services. Detecon is a subsidiary of T-Systems, the business customers brand of Deutsche
Telekom.

Integrated Management and Technology Competence

We possess an excellent capability to translate our technological expertise and

comprehensive industry and procedural knowledge into concrete strategies and solutions.
From analysis to design and implementation, we use integrated, systematic and customer-
oriented consulting approaches. These entail, among other things, the evaluation of core
competencies, modular design of services, value-oriented client management and the
development of efficient structures in order to be able to distinguish oneself on the market
with innovative products. All of this makes companies in the global era more flexible and
faster – at lower costs.

Detecon offers both horizontal services that are oriented towards all industries and can entail
architecture, marketing or purchasing strategies, for example, as well as vertical consulting
services that presuppose extensive industry knowledge. Detecon's particular strength in the
ICT industry is documented by numerous domestic and international projects for
telecommunications providers, mobile operators and regulatory authorities that focused on
the development of networks and markets, evaluation of technologies and standards or
support during the merger and acquisition process.

Detecon International GmbH

Oberkasselerstr. 2
53227 Bonn
Telefon: +49 228 700 0
E-Mail: info@detecon.com
Internet: www.detecon.com

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Detecon International GmbH
Oberkasseler Straße 2
53227 Bonn
info@detecon.com
www.detecon.com