Content

Saturation Ahead

4/28/2006 8:00 PM Eastern

After rising steadily for two decades, the number of TV channels on which local cable companies sell traditional 30-second advertising availabilities may be reaching its peak.

The culprits: fewer new networks with broad advertiser appeal, an industry migration toward on-demand advertising — rather than traditional linear commercials — and a sense that inventory levels are relatively well aligned with local market demand.

“In terms of insertable channels, I think we’re at something of a plateau,” says Terri Swartz, the director of advanced advertising for Seachange International Inc., a supplier of cable advertising insertion systems. “It’s sort of a natural limit of the universe.”

Making Time for Local Advertisements
Avg. number of affiliate advertising minutes per hour provided by national cable networks in 2005:
Network Local ad minutes per hour
A&E Network 2
ABC Family 2
AMC 2
Animal Planet 3
Black Entertainment Television 2
BET Jazz 3
Biography Channel 2
Black Family Channel 2
Bloomberg Television 2
Bravo 2
Cartoon Network 2
Casa Club TV 2
CMT: Country Music Television 2
CNBC 3
Cable News Network 2 (1 additional minute if system carries HLN & TBS)
CNN en Espanol 2
CNN Headline News 2
Comedy Central 3
Court TV 3
Discovery Channel 2
Discovery Health Channel 3
E! Entertainment Television 2
ESPN 2.5
ESPN2 2
ESPN Classic 2
ESPNews 2
Fine Living 2
Food Network 2
Fox Net 2-3
Fox News Channel 3
Fox Sports en Espanol 2
Fox Sports World 2
Fuse 2
FX 3
G4 2
GAC: Great American Country 4
Galavision 2
The Golf Channel 2
GSN 3
Hallmark Channel 2
The History Channel 2
History International 2
INSP: Inspirational Network 2
International Channel 2
Lifetime Movie Network 2
Lifetime Real Women 2
Lifetime Television 2
MSNBC 3
MTV: Music Television 2
MTV2 3
MUN2 2
National Geographic Channel 2
Nick at Nite 2
Nickelodeon 1
The Outdoor Channel 2
Outdoor Life Network 3
Oxygen 3
Sci Fi Channel 3
SíTV 2
SoapNet 3
Speed Channel 3
Spike TV 2
Style Network 2
TBS 2
The Tennis Channel 2
TLC 2
Turner Network Television 3
Toon Disney 2
Travel Channel 3
TV Guide Channel 10
TV Land 3
TV One 2
USA Network 2
VH1 2
The Weather Channel 2
Weatherscan 2
WE: Women’s Entertainment 2
Source: Cabletelevision Advertising Bureau, from 2005 Cable Network Profiles.

FORTY OR MORE

Others agree. With 40 or more ad-insertable channels available in many larger cable markets, sellers have at their disposal a rich variety of ad availabilities encompassing nearly every viewer demographic imaginable. “Forty to 60 networks in almost every market provide us with a lot of inventory. We’re not running out,” said Andrew Capone, a senior vice president with the cable spot advertising rep firm National Cable Communications.

On top of that, there’s a cost-benefit evaluation at work. Some advertising managers say they reach a point of diminishing returns after they go beyond a core of networks that deliver the majority of ad-supported cable viewing. “Once you get past the top 25 to 30, after that you get really niche networks. They’re quality networks, but they’re very niche,” said Richard Crist, the president of local cable advertising rep firm Rutter Communications Network Inc. “If you’ve only got 15,000 or 20,000 subscribers, it becomes somewhat tough to sell because there aren’t that many businesses for that small audience.”

Today cable systems and interconnects insert local commercials on an average of 37 networks, according to an updated annual survey conducted for media industry consultant Birschbach Media Sales & Marketing Corp.

At the low end, smaller systems like Cable One Inc.’s Page, Ariz., operation sell time on only four channels. At the high end, operations like Time Warner Cable Media Sales of Maine offer more than 50 networks to local advertisers — ranging from broad appeal channels like Turner Network Television to more narrowly targeted networks like SoapNet.

That’s certainly a far cry from the “core four” networks (Cable News Network, ESPN, MTV: Music Television and USA Network) that constituted the totality of local cable ad inventory for most cable systems in the early 1980s. But after adding local-insertion networks ritually each year since then, cable companies appear to be slowing down. The Birschbach Media study, based on questionnaires returned by ad sales managers representing 43 million local advertising households, or more than half of the industry total, shows the number of local insertion channels offered by cable systems in 2005 declined slightly from 2004.

Not that anybody should panic about a dearth of ad time. With 37 channels providing at least two minutes of local advertising time per hour over 16 hours or more a day, the typical cable ad sales organization now has more than 2,300 30-second commercial availabilities to sell every day. That compares to around 400 for a typical over-the-air TV station.

The sheer volume of advertising time available to local cable companies may mean the industry is nearing a point of saturation on its linear networks, some believe.

“If I’m an ad sales manager today, unless I have a truly niche advertiser in a particular environment, I’ve got all the avails I need,” said Birschbach Media president Jim Birschbach, a former AT&T Media Services vice president.

Not everyone agrees. Some local cable advertising executives say more advertising inventory is always welcome. “Inventory is the currency by which we compete in our markets,” Kevin Dowell, the senior vice president for cable advertising provider Insight Media told an audience at the National Show last month in Atlanta. “We want more of it.”

In part, that’s because top-rated cable networks are quick to sell out. To disperse ad campaigns more evenly across a broader array of networks, managers customarily package commercial time on high-demand networks like ESPN with channels that may otherwise be overlooked by local advertisers. That helps relieve inventory pressure on the most popular ad-supported cable channels.

Also, local cable advertising executives say more advertising inventory will help to satisfy demand from their own companies for commercial time devoted to hawking new products like cable telephone service and HDTV services.

But recent trends suggest that if cable advertising organizations want to increase their local ad inventory, they’ll have to rely mainly on the roughly 100 networks that already offer local advertising time through their existing distribution agreements with affiliates.

NO GUARANTEES

The reason: Even though there are lots of new cable channels on the horizon, there’s no guarantee they’ll offer traditional local advertising time. The horror channel announced in April by Comcast Corp., for instance, will be available only via on-demand platforms or over the Internet, rather than as a traditional linear network. That raises questions about how local cable ad time will be tied to the channel — or whether it will be available at all. (Comcast hasn’t said.)

Similarly, some new TV channels like MTV Networks’s MTV Overdrive and several planned launches from Scripps Networks will be available only via broadband Internet connections — reducing or eliminating a role for local cable ad sales organizations altogether.

Even cable companies acknowledge that the primary source of local advertising inventory historically — linear cable networks — appears to be a fading breed. Comcast’s top programming executive, Matt Bond, told a National Show panel that his company is cautious about adding new linear networks because available bandwidth is becoming scarce. “In the near-term, there’s not a lot of room for linear networks,” Bond said. “Bandwidth is extraordinarily scarce, particularly as we transition to high-definition.” Time Warner Cable’s executive vice president of programming Fred Dressler, speaking on the same panel, said some linear networks now carried by cable operators could get tossed aside. “Networks no longer should assume that once they get launched they are entrenched and will never lose their space,” Dressler said.

FEWER NEW OPPORTUNITIES

That means the roster of channels available for local advertising managers may not grow as fast as it has in the past.

On top of that, even some newer ad-supported cable networks that do follow the traditional linear approach have launched without reserving time for local affiliate advertising. For example, MHD, the ad-supported, high-definition music and entertainment channel from MTVN, doesn’t offer local affiliate advertising time, according to an MTVN spokesperson.

At the same time that some networks reconsider offering local ad availabilities at all, others are angling to use local ad time — once routinely tucked into affiliation agreements as an affiliate benefit — to achieve higher licensing fees. Insight Media’s Dowell said the company has rejected proposals that would have required Insight to hike its fees to carry certain channels if Insight elected to sell the network’s ad time locally. “I don’t think cable operators should be held hostage based on local avails,” Dowell said at the National Show.

Even if operators are slower to add local insertion capability to new networks, the market for companies that make local ad-insertion equipment continues to grow. That’s because many cable companies are replacing first-generation digital advertising equipment with new systems tailored to cable’s emerging all-digital networks, according to John Boland, vice president of market development for C-Cor Inc., which supplies advertising insertion equipment to cable companies.

Instead of converting digitally formatted commercials into the analog signals that end up in subscribers’ homes, the new systems weave local commercials directly into the digital signal streams that flow from cable headends to digital set-top boxes.

Boland says that of the 60,000 to 70,000 local-ad insertion channels in the U.S. cable industry, about 20,000 were replaced last year by the newer digital-into-digital systems. (The universe of local-insertion channels represents the number of cable networks offered by local cable advertising organizations, multiplied by the number of geographic points of ad insertion.)

Despite the changes affecting the decades-old symbiosis between local advertising time, cable networks and their distributors, some customs linger on. When NBC Universal Cable Networks launched its latest ad-supported linear channel, Sleuth, the company included the customary two minutes of local ad time per hour for affiliates to sell. According to NBC Universal vice president of affiliate advertising Brian Hunt, a handful of systems have begun inserting time on the crime channel, and more are on the way. Hunt believes there’s still demand for more local ad inventory on traditional linear cable channels, even as new delivery technologies like on-demand TV take hold. For cable companies, “The 30-second spot is a multibillion dollar business,” said Hunt. “It’s not going to go away tomorrow.”

There’s also a chance the issue of channel-by-channel advertising allocation could become moot, as new addressable advertising technologies and switched-video delivery schemes may make it possible for operators to direct local commercials not by network, but by household. Under that model, MSOs would employ large video servers to seamlessly integrate ads into whatever video stream a customer happens to select — as long as programmer contracts permit it. “Digital advertising will change things,” said NCC’s Capone. “At some point there’s going to be a way to almost infinitely insert advertising.”

September