Given the nature of Platform’s business I spend quite a bit of time thinking about the future of the advertising-funded broadcaster model. Advertising has been the life blood of the industry for a number of years and unless you’re a state-funded or subscription only TV channel.
We all know that traditional ad revenues have been under pressure recently, however my personal view is that once we’re out of the current downturn, total ad spend will return to growth. That’s good news for the TV industry, but it must also work hard to reverse or at least slow the migration of advertising from TV to the web. And there will be other threats, such as the mobile content industry, which will move to mass-market in the near future, leaking away more ad/marketing revenue from the traditional TV industry.
One approach to mitigate downward pressure on revenues is for the broadcast industry to deploy technologies that enable advertisers to closely target ad delivery and accurately report the results. This will happen, but the take-up of these techniques may well be slower than many would like and it’s not certain that the resulting increase in effectiveness will lead to an increase in CPMs (cost per mille) sufficient to replace the ad revenues lost from leakage to the web and fragmented audiences.
So far so gloomy – however I’ve been thinking recently about why brands use TV advertising and how important it is to them. One company that I often think about in this context is the UK’s Direct Line insurance. If you live in the UK, you’ll know it as the company with the animated bouncing phones and insanely catchy dial tone based jingle. If you stopped 100 people in the street and asked them what sort of a company Direct Line was, I’m sure you would get a very high percentage of people telling you it’s an insurance company. There more I think about it I wonder it that’s really correct.
To see what I mean, let’s look at what it takes to set up an insurance company. You need to set up operational systems and invest premium income, so that after paying claims you can make a profit. And of course, you need to underwrite risks. To simplify, let’s imagine you’re a life insurance company, so that underwriting is relatively straightforward. You get some mortality tables and then take a view on how these tables will change over time. To be successful you now need to go and find lots and lots of customers. Preferably you want millions of customers, as you will have designed your company so that as you scale your profits grow much faster than your costs.
So, success comes down to the cost-effective acquisition of millions of customers! I suspect that it’s harder to do that than to provide insurance services, which is why I believe that in reality Direct Line is a marketing company that also happens to sell insurance. The company has used TV advertising absolutely brilliantly to build a massive customer base in a relatively short time. Without TV advertising it would have been very difficult for Direct Line to have grown anywhere near as quickly.
Interestingly, I recently heard a dissenting voice when a spokesperson from an insurance company was being interviewed on the UK’s agenda setting Today programme. He said that TV advertising was now too expensive and that price comparison web-sites provided a much lower cost of customer acquisition. If you drill-down, you realise that what this means is that rather than the primary supplier advertising on TV it’s the comparison web-site that has advertised heavily to build brand awareness and gain visitors to its site.
I believe that this shows that TV is still the best way of building a brand fast. It also perhaps heralds a new marketing model, in which super aggregators, such as price comparison web-sites, spend the TV ad dollars, while the product providers fight using the weapons of price and features rather than the power of their brand. Of course, even if this new model takes hold, there will still be aggressive companies that see the value in brand building to grow at a rate faster than their competitors solely relying on the aggregators for their primary route to market.
I’m certain that for consumer facing companies, TV advertising, however it morphs in a converged broadband and TV future, will continue to be a critical tool in enabling a consumer facing brand to grow really fast. I’m really looking forward to watching how TV advertising develops, both through my day-to-day work life as well as from my sofa at home.