Cable Companies Going Online: It’s the Advertising, Stupid

Cisco’s $4 billion purchase this past spring of NDS Group — which helps cable companies stream digital programming to multiple devices — is a sign that the Internet is fundamentally transforming the TV industry. Another strong signal: Chip giant Intel’s recently-disclosed whopper of a plan to move into the video-delivery business (we’ll see how that goes). Cable companies are indeed steadily marching toward a more Web-friendly world, in large part because of competition from upstarts like Netflix, YouTube and Amazon. These companies are nipping at cable’s dominance as the best video-delivery game in town.

But there’s another, less-understood force prodding the cable guys to move: Advertising. That’s right, advertising. While competition from Internet video is the proverbial stick behind the cable industry’s push to provide IP-enabled “TV Everywhere” — TV on PCs, smartphones and iPads, in addition to the stationary living-room set — the tantalizing carrot for big companies like Time Warner and Comcast is the potentially lucrative new revenue stream generated by Web advertising that simply isn’t possible with current cable technology.

Consider the decidedly low-tech way cable-TV advertising works today. Right now, most of the ads you see are sold by the big content providers, like NBC and CNN. Everyone viewing the same program, whether it’s “Today” or the NCAA Final Four, is seeing the same ad. By definition, those non-targeted ads aren’t very effective (even though some, such as those sold during the Super Bowl, can be very memorable). The 15 percent or so of ads sold by the local cable companies can be more targeted, but only down to a neighborhood level. Your cable company knows your address and zip code. But usually all this means is that your cable provider can beam you a pitch for a nearby dentist or car dealer as you’re catching your late-night shows. Generally, these local ads stick out like a sore thumb in the middle of your programming.

Imagine a future, though, in which you also frequently watch TV on your iPad or through a browser on your laptop (this is obviously happening now, for you early adopters). In this case, cable companies know much more about you because they can track your IP address as you move around the Web. This is Web Advertising 101: You see much more relevant advertisements as you peruse various Web sites because all of your previous activities (reading, searching, shopping) have been captured by the sites you visit.

Men aren’t seeing ads for women’s shoes, for instance; someone doing Web searches in advance of a trip to Hawaii might see pitches for hotels or rental cars. And since there are now often multiple Internet-enabled devices in a given home, ads can be targeted directly to the device that a particular family member uses most often. Dad would see ads meant just for him on the smartphone he gets from the office, while the kids watching streaming Disney videos on the family iPad would see ads for toys and bikes.

There are important privacy concerns related to some aspects of Web advertising, of course (some argue that Web advertisers know too much about us), but the basic model is unchallenged and quite successful. Online advertising has surged in the last several years: In the first half of 2011 alone, Internet ad revenues in the U.S. soared to nearly $15 billion, up 23 percent from a year earlier, according to the Interactive Advertising Bureau. Just think about the new power cable companies can get from this targeted, or even hyper-targeted, advertising.

Earlier this year, analyst Laura Martin of Needham & Co. predicted that the rollout of TV Everywhere over the next three to five years could add $12 billion in revenue to the U.S. television ecosystem — most of it in advertising. Martin noted that this new revenue would be additive, and not in place of, existing cable-industry revenues, and would dwarf the revenues of video sites like Hulu and YouTube. She added that people watching content on demand, as people generally do on non-TV devices, are more likely to view ads than people who record shows on DVRs. This all means that cable companies can likely increase their share of the advertising pie by going digital. And there’s upside for the consumer, too. I know I’d rather see ads for products I’m likely to buy than the random ads I currently see when watching TV at home. Relevance is a win-win for operators and their subscribers.

At my company, RGB Networks, we are in the business of selling gear to cable companies and other TV service providers to make it easier for them to deliver IP-based TV to multiple devices. We’ve been extremely busy lately, and have seen cable companies take big steps toward embracing the Internet: Early this year, Comcast struck a deal with Disney — which owns ABC, ESPN and other key TV channels — to let subscribers watch those channels on Internet-enabled, non-TV devices, like phones and tablets, outside the home. Charter did a similar deal with Turner Broadcasting. RGB competitors Harmonic and Envivio — which just revived plans to go public — also aim to profit from this trend.

We think 2012 will be a breakthrough year for TV Everywhere — we’re involved in many deployments with large operators around the globe (with the smaller ones beginning to follow suit). And as they have worked through their smaller trials and vetted both the technology and the business model, we now see them going bigger — with more channels and more devices — and turning to targeted advertising to help recoup some of the investment they’ve made in new infrastructure to keep their networks state-of-the-art.

We are not yet at a place where we can simply transfer our at-home, cable-TV lineup to our iPads and watch all the same shows on the go that we can in our living rooms. That will take a lot more negotiation between the cable companies and the content providers. But that’s clearly the way things are going.

And as the technology side of the house has worked through its issues and stands poised for broad deployment, we see the barriers breaking down on the content side as well. We expect to see a similar pattern for targeted advertising — the technology is in place, and the new ad model will follow as the stakeholders work through their negotiations, with everybody coming out a winner.

Jef Graham is the CEO of RGB Networks, a Sunnyvale, Calif., company making network-infrastructure products to allow video providers to deliver content to multiple screens.

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