The End Of Advertising By IBM

IBM Global Business Services

IBM Institute for Business Value

Media and
Entertainment
The end of
advertising as
we know it

IBM Institute for Business Value
IBM Global Business Services, through the IBM Institute for Business Value,
develops fact-based strategic insights for senior executives around critical public
and private sector issues. This executive brief is based on an in-depth study by
the Institute’s research team. It is part of an ongoing commitment by IBM Global
Business Services to provide analysis and viewpoints that help companies realize
business value. You may contact the authors or send an e-mail to iibv@us.ibm.com
for more information.

The end of advertising as we know it
By Saul J. Berman, Bill Battino, Louisa Shipnuck and Andreas Neus

The next 5 years will hold more change for the advertising industry than
the previous 50 did. Increasingly empowered consumers, more self-reliant
advertisers and ever-evolving technologies are redefining how advertising
is sold, created, consumed and tracked. Our research points to four
evolving future scenarios – and the catalysts that will be driving them.
Traditional advertising players – broadcasters, distributors and advertising
agencies – may get squeezed unless they can successfully implement
consumer, business model and business design innovation.

A glimpse into the future of advertising
Jim, the Chief Marketing Officer of a consumer products company, used to spend 60 percent of his marketing
dollars on broadcast, free-to-air television – a significant portion of which was spent in upfronts. But he never
knew exactly who he was reaching or how effective his advertising was.
Now, he has a very different approach…. and is more comfortable with the effectiveness of his marketing. Jim
assesses all media channels (television, radio, mobile devices, print, interactive portals and the like) neutrally
to determine how best to allocate his marketing and advertising dollars. Recognizing that consumers have
increasing control and choice over how they interact with, filter and block marketing messages, it is more
important than ever for Jim to know his advertising is reaching individual consumers, not generic zip codes at
the household level.
With the help of Cathy, the company’s Chief Consumer Officer, he has gained a full understanding of who
his target consumers are, where his consumers are going, and how to reach them on their terms across the
plethora of media devices they interact with on a regular basis. As consumers move to 360-degree content and
information experiences, marketing also personalizes its content to consumers’ lifestyle, context and location.
Previously, Jim bought broad-reaching spots, hoping to reach his target audience. But now, targeting, measure-
ment and analysis capabilities that previously were only available for Web advertising are available for all
channels. Jim can develop an interactive, integrated marketing plan tailored to his individual target consumer,


and he pays based on actual impact rather than by cost per thousand impressions (CPM). His marketing
message follows those customers across content platforms to deliver a consistent experience.
His advertising includes a mix of creative spots and formats, like special interest content, product placement and
self-published advertising that are tailored to his consumers’ preferences, community affiliations and devices.
This enables his target consumers – be they traditional moms in Des Moines, Iowa, urban professionals in
Berlin or university students in South Korea – to better experience the value of his product. Jim created his
advertising campaigns jointly with broadcasters, semi-professionals and avid product fans (or “influencers”),
who develop creative at a significantly lower cost than his traditional agency. Though Jim creates multiple
versions of his advertising campaigns in order to appeal to numerous customer micro-segments, his budget
has not increased because of the decreased cost of developing creative campaigns. His ROI is also improved,
because the advertising is more effective.
Because much of the budget is based on impact, he works closely with the Sales team, and a portion of the
direct marketing budget has moved to advertising channels. He is now able to measure the effectiveness of his
marketing campaigns through the use of marketing software packages that have centralized and standardized
disparate data sources.
Jim’s team can purchase much of its advertising space through an open, Web-based platform and manage its
impact through a “dashboard” that delivers realtime metrics and analysis across all advertising platforms. Gone
are the days of “hoping” advertising works. Jim is now in a world where he has full control of the effectiveness
of his marketing spend.

Introduction Based on an IBM global survey of more than
1
2,400 consumers and feedback from 80
“We will see ‘neutral’ evaluation of all advertising executives worldwide collected in
media formats. There is no primary conjunction with Bonn University’s Center for
2
Evaluation and Methods, we see four change
role for linear TV any more.”
drivers shifting control within the industry:
– Managing Director, advertiser, Europe
Attention – Consumers are increasingly
The trends toward creative populism, person-
exercising control of how they view, interact
alized measurements, interactivity, open
with and filter advertising in a multichannel
inventory platforms and greater consumer
world, as they continue to shift their attention
control will generate more change over the
away from linear TV and adopt ad-skipping,
next 5 years than the advertising industry has 3
ad-sharing and ad-rating tools. Our survey
experienced in the last 50. This means that
suggests personal PC time now rivals TV
many of the skills and capabilities that were
time, with 71 percent of respondents using
the mainstay of success in the past will need
the Internet more than two hours per day for
refinement, transformation or even outright
replacement.


personal use, versus just 48 percent spending To envision four possible scenarios for
equivalent time watching TV. Among the the industry in 2012, we juxtaposed two of
heaviest users, 19 percent spend six hours or the most uncertain change drivers – the
more a day on the PC versus just 9 percent propensity for consumers to watch, block or
who watch a similar amount of TV. participate in marketing campaigns; and the
openness of advertising inventories. Because
Creativity – Thanks to technology, the rising players across geographies and media
popularity of user-generated and peer- formats will progress at differing rates, these
delivered content, and new ad revenue-sharing scenarios will likely coexist for the foreseeable
models, amateurs and semi-professionals are future. The four scenarios are:
now creating lower-cost advertising content
that is arguably as appealing to consumers Continued Evolution: In this scenario, the
as versions created by agencies. Our survey one-to-many model still dominates, but the
suggests this trend will continue – user- industry evolves in response to digital video
generated content (UGC) sites were the top recorder (DVR) penetration, the popularity of
destination for viewing online video content, user-generated and peer-distributed content,
attracting 39 percent of respondents. Further, and new measurement capabilities (albeit for
established players, like magazine publishers “old” formats). Advertisers, therefore, allocate a
and broadcasters, are partnering with adver- greater portion of dollars traditionally spent on
tisers to develop strategic marketing campaigns direct marketing to channels typically used for
– taking on traditional agency functions and brand-oriented advertising.
broadening creative roles.
Open Exchange: Here, the industry morphs
Measurement – Advertisers are demanding behind the scenes, with little to no additional
more individual-specific and involvement- consumer influence. Advertising formats
based measurements, putting pressure on the largely remain the same, but advertising
traditional mass-market model. Two-thirds of inventory is increasingly bought and sold
the advertising executives IBM polled expect through efficient open exchanges, bypassing
20 percent of advertising revenue to shift from traditional intermediaries.
impression-based to impact-based formats
Consumer Choice: Tired of intrusions,
within three years.
consumers exert more control over the adver-
Advertising inventories – New entrants are tising they view and filter. Formats evolve to
making ad space that once was proprietary contextual, interactive, permission-based and
available through open, efficient exchanges. targeted messaging to retain attention.
As a result, more than half of the ad execu-
Ad Marketplace: Consumers choose preferred
tives interviewed expect that open platforms
ad types as part of self-programming their
will, within the next five years, take 30 percent
media choices and are more involved in ad
of the revenue currently flowing to proprietary
development and distribution. Advertising is
incumbents such as broadcasters.
sold predominantly through open, dynamic

3

exchanges, allowing virtually any advertiser and operating capabilities across the adver-
(large or small) to reach any consumer. With tising lifecycle – consumer analytics, channel
new consumer monitoring technologies in planning, buying/selling, creation, delivery and
place, consumer action drives pricing. impact reporting.

As the advertising value chain reconfigures, We know advertising remains integral to pop
broadcasters, advertising agencies and media culture and media investment. But it also will
distributors in particular will need to make need to morph into new formats and new
a number of “no regret” moves (necessary channels and offer more intrinsic value to
actions regardless of which scenario plays out consumers to capture a meaningful share of
in the future) to innovate in three key areas: fragmented audience attention.

1. Consumer innovation: Drive greater There is no question that the future of adver-
creativity in traditional ads, while also pursuing tising will look radically different from its past.
new ad formats across media devices to The push for control of attention, creativity,
attract and retain customers. For example, measurements and inventory will reshape the
consider tactics like campaign bleeds, micro- advertising value chain and shift the balance
versioning, video ad flickers, pod manage- of power. For both incumbent and new players,
ment and ad-supported content creation it is imperative to plan for multiple consumer
(embedded in the programming) to limit ad- futures, craft agile strategies and build new
4
skipping. This also means making segmenta- capabilities before advertising as we know it
tion, micro-segmentation and personalization disappears.
paramount in marketing. Anyone that touches
Key questions to consider
buyers and consumers needs to collect and
analyze data to produce relevant and predic- • Will advertisers still need a traditional agency? If
tive insights. so, in what capacity?
• Will traditional programmers lose significant
2. Business model innovation: Pioneer
revenue to the Internet, mobile device providers
changes in how advertising is sold, the
and interactive home portals?
structure and forms of partnerships, revenue
• Will consumers reject outright the concept of
models, advertising formats and reporting
interruption marketing in the future?
metrics. For example, broadcasters, agencies
• Will consumer receptivity vary by medium (for
and distributors can pursue opportunities
example, mobile devices versus home-oriented
such as agency gain sharing, more sponsored
devices)?
shows, impact-based pricing models, user-
generated advertising revenue-sharing models • Will consumers see value in advertising as a
and open inventory, cross-channel sales. trade-off for content?
• To what extent will advertising inventory be sold
3. Business design and infrastructure innova-
through open platforms?
tion: Support consumer and business model
• Do advertising industry players have the
innovation through redesigned organizational
customer analytics needed to better understand
and reach target customers?
• Are companies organized correctly to create,
market and distribute cross-platform content?


Industry battles and trends: our analysis shows that the actual growth of
Internet advertising has outpaced forecasts by
Power shifts 5
25 to 40 percent over the past two years.
As advertising budgets shift to new formats
and shape the future advertising market,
But even in Figure 1’s forecasts – which may
control of marketing revenues and power will
be too conservative – digital, mobile and
hinge on four key market drivers: attention,
interactive formats are clearly the key to
creativity, measures and advertising invento-
overall industry growth going forward. Mature
ries. This section will explore these changes
channels like print, traditional direct marketing
and their economic impacts through 2012.
and TV have 2010 CAGR forecasts of low
single digits, while the combined growth
Interactive advertising We expect overall ad spend to grow in line
forecast for interactive advertising formats,
with the general health of the economy, but
formats are key to such as Internet, interactive television promo-
the composition of that spending will change.
overall industry growth. tions, mobile and in-game advertising, is over
We have used an amalgamation of industry 6
20 percent.
forecasts for our consensus view in Figure
1. While this spending breakdown is helpful
Product placement is the only “traditional”
for highlighting the direction of change, the
marketing tool with comparable growth
speed and magnitude of this kind of disrup-
expectations – spurred by advertisers’ desire
tive change tends to be underestimated by
to drive relevancy and reach for their adver-
traditional forecasting methods. For example,
tising as consumer control over interruption
advertising continues.

FIGURE 1.
CAGR
Global advertising spend by category.
(2006-2010)
Mobile advertising
0
5.9% New ad Global Internet 0
00 formats
Interactive TV promotions 9
22.4%
30
5.7% In-game advertising 9
300 U.S. product placement 0
US$ billions

Global cable/multichannel
0
Global broadcast
00
Traditional
U.S. MSO advertising
ad formats
0
4.4% Global radio and outdoor
00 Global magazine
Global newspaper
0
U.S. local station
0
00 003 00 00 006 007F 008F 009F 00F

Source: IBM Institute for Business Value analysis based on an amalgamation of industry forecasts.


While control of attention, creativity, measure- enon, we are reaching a critical juncture where
ments and advertising inventories impacts all new platforms may soon have more impact
forms of advertising and content funding, we than TV. Today, consumers have more options
are focusing here on TV/video as an illustration for visual entertainment than ever before – TV,
of significant change. PC, game consoles, mobile devices and more.
Studies from several countries have shown
Attention that, especially for young users, TV is increas-
“Consumers will continue to gain ingly becoming a secondary “background
8
medium.” The primary focus of attention is
more power over content, but they elsewhere – surfing the Internet, chatting or
will not ‘skip’ all forms of adver- playing an online game. Our consumer survey
tising. Fewer will pay for all the showed that more respondents spend signifi-
cant blocks of time on daily personal Internet
content they want to consume; usage than watching TV, especially among the
there will be new models to heaviest users. This behavior is particularly
prominent for younger audiences (ages 18 to
trade attention to advertising for
24) and “gadgetiers” (early adopter consumers
content.” who own at least four multimedia devices).
Our survey also illustrates the ongoing frag-
– Account Executive, full-service media agency,
North America mentation of consumer attention and the wide
variations in adoption by age groups across
As we predicted in our 2002 “Vying for content services (see Figure 2). The only
Attention” paper, audiences continue to content service with mass adoption (greater
7
fragment. While this is not a new phenom-

FIGURE 2.
U.S. content subscription services adoption by age group.

18-24 25-34 35-44 45-54 55+
TV: Premium video content

Online: Social networking sites
Online: User-generated content sites
Online: Music service (e.g., Rhapsody)
Online: Newspaper subscription
Online: e-Book subscription

Portable: Music service (e.g., iTunes)
Mobile: Internet plan
Mobile: Content plan

Mass adoption (greater than or equal to 0%) Moderate adoption (0-9%)
Highest adoption
Significant adoption (0-9%) Partial adoption (0-9%)
across age groups
Strong adoption (30-39%) Niche adoption (less than 0%)

Source: IBM 2007 Digital Consumer Study.

6 IBM Global Business Services

than 50 percent) was Social Networking, and in the United States within the next five years,
this was only among respondents under the which poses a significant threat to the tradi-
10
age of 35. Younger audiences are far more tional TV advertising model.
willing to experiment with new content sources,
In our consumer survey, 53 percent of DVR
though less willing to pay, particularly for online
owners in the United States report watching
services. Older audiences had higher adoption
at least 50 percent of television content on
of more traditional services, such as premium
replay, supplying them with the fast-forward
content for television and online newspaper
capabilities that allow ad-skipping. As DVRs
subscriptions.
gain traction across demographic groups
As users migrate to new screens for content and consumer segments, traditional tele-
Advertising spend will
and information, advertising and marketing will vision advertising may be the first major
eventually synchronize
need to shift as well. It is more important than casualty of changing media consumption
with shifts in consumer ever to reach consumers where they want, habits. And though new commercial rating
attention from television to when they want and how they want. And with tools can now track viewership via DVR,
other media formats. advertising dollars funding a significant portion industry debate continues about the true
of entertainment around the world (sponsoring value of an ad if it is viewed after the initial,
an estimated 50 percent of television in major targeted broadcast period.
markets, for example), the medium, content
Multimedia devices are also proliferating,
9
and advertising spending must synch up.
though adoption behaviors vary by country.
We are also witnessing the possible substitu- For example, respondents from Germany
tion of other visual media for TV viewing time. appear to prefer portable devices and are far
Though mobile video consumption is currently more likely to have MP3 players and Internet-
lower than PC video consumption among enabled phones than any other country.
our respondents, 42 percent said they have Almost 70 percent of German respondents
already watched or want to watch video on a own an MP3 player, and almost 40 percent
mobile device. In the United Kingdom, nearly have an Internet-enabled phone, compared
one-third of those who watch mobile TV had to global averages of 50 percent and 20
consequently reduced their standard TV percent, respectively. In Japan, portable game
viewing patterns. player adoption is widespread, with almost
40 percent of respondents owning one,
In addition to preferring hot new devices and versus between 15 and 23 percent in other
screens for entertainment, users are also countries. U.S. respondents report higher
enjoying and exploiting new control tools. adoption of living-room-related devices, such
With spam-blockers, “do-not-call” and “do not as DVRs, high-definition television sets, and
mail” lists in the United States, the DVR and game consoles, but have lower adoption rates
peer distribution tools, marketers are being for portable devices, such as MP3 players,
forced to rethink how to prevent buyers from Internet-enabled phones and portable game
tuning out. players, than other countries. Finally, video on
demand (VOD) habits vary, with close to 50
For example, 25 percent of our U.S. consumer
percent of U.K. and U.S. respondents having
respondents and 20 percent of our U.K.
already watched VOD, as compared to less
respondents already have a DVR. Given high
than 5 percent of Germany and Japan respon-
customer satisfaction rates, forecasters project
dents who have done so.
DVR penetration to reach close to 40 percent

7

What do these trends mean for the indus- we believe that the current large discrepancy
try’s bottom line? Nearly half of the respon- between advertising revenues and eyeballs
dents in our advertising executive interviews will shrink significantly over the next five years.
expect a significant (i.e., greater than 10
The majority of the advertising executives we
percent) revenue shift away from the 30-
interviewed expect significant dollar shifts
second spot within the next five years, and
from traditional advertising vehicles to search,
almost 10 percent of respondents thought
mobile, Internet Protocol Television (IPTV), VOD
there would be a dramatic (i.e., greater than
and online video ads. Advertising industry
25 percent) shift.
incumbents could lose out entirely if they do
As consumers turn away from traditional televi- not keep up with advertisers who are following
sion and toward new content sources, such as their audiences into new channels.
popular online sites (like YouTube, MySpace
Creativity
and Facebook), games, mobile and other
“Consumer-created advertising will
emerging entertainment platforms, the shift in
attention will eventually be reflected in adver-
have all the appeal of anything
tising, subscription and transactional fees. This
crafted by the agencies, and will be
puts at risk the revenue base of incumbent,
traditional content distributors and aggrega- ‘coopted’ by the brands themselves.”
tors – especially for those that do not produce
– CEO, advertiser, Asia Pacific
content or own rights to distribute content on
these newer channels. In addition to new tools for control of what
consumers choose to view, lower cost tools
As shown in Figure 3, growth in Internet adver-
are also available that allow new creative input
tising far exceeds that of traditional channels
from consumers, semi-professionals, amateurs
like television. And while no evidence suggests
and nontraditional players. Inexpensive video-
a one-to-one correlation of advertising revenue
and photo-editing tools create opportunities
with this audience migration to new channels,
for hobby tribes and individual users to self-
produce entertainment and advertising – a
FIGURE 3. form of creative populism. At the same time,
Index of U.S. ad-spend growth: All television
content owners are increasingly partnering
versus consumer Internet.
directly with advertisers to develop innovative
700
and strategic marketing campaigns that go
Consumer Internet ad spend
600 beyond the traditional advertising formats.
00
Our consumer survey shows users – particu-
100-point index

00 larly those in the United States and the
United Kingdom – are increasingly willing to
300
participate in social networking sites, with 26
TV ad spend
00
percent of U.S. respondents and 20 percent of
U.K. respondents having already contributed
00
content. And though not quite as popular yet,
0
users are starting to create video content for
99 00 0 0 03 0 0 06 07F 08F 09F
UGC sites, with 9 percent of German and 7
Source: IBM Institute for Business Value analysis based on an
amalgamation of industry forecasts.


for creative services and making their money
percent of U.S. respondents reporting they
12
on the media. Conde Nast trades on its ability
have contributed to those sites (see Figure 4).
to blend images, characters and stories from
We also see evidence of consumers content into relevant, marketing campaigns,
becoming trusted influencers. When asked relying on a panel of more than 100,000
about how they find content on UGC sites 13
consumers to evaluate the advertising.
like YouTube, 32 percent said they followed
recommendations from friends. We expect FIGURE 4.
the power of communities to grow as tools for Percentage of global respondents who visit and/
or contribute to social networking or UGC sites.
community-based recommendations improve.
The “voice” delivering a message, along with 0
its perceived authenticity, will become as
powerful perhaps as the message or offer. 0
3
There are also other creative forces at play. In
Within five years, 30
addition to users, other members of the value

Percent
advertising executives
chain – such as content owners and broad-
expect 15 percent of 0
casters – are increasingly working directly with

television viewing time advertisers to drive nontraditional campaigns,
0
and 25 percent of PC bypassing the agency’s intermediary role

as the cost of production declines and tools
time to be devoted to 0
Social networking UGC site
become generally accessible. For example,
user-generated content.
creating a professional video ad typically costs United States Japan
around US$100,000 to US$350,000 or more, Australia United Kingdom
which is prohibitive for most small businesses. Germany Contribute
However, cheaper tools and community-based Source: IBM 2007 Digital Consumer Study.
or semi-professional content creation can
lower production costs to reasonable levels,
UGC impacts the industry through two primary
making them affordable for small and medium-
avenues: content production and attention
sized businesses that cater to niche markets.
influence. We’ve already discussed the rise
Current TV, for example, pays US$1,000 for
of semi-professionals, user enthusiasts and
viewer-created advertisements (V-CAMs) that
amateurs producing content. Now, let’s link
11
it chooses to air.
back to issues of attention, a circular topic of
sorts. As new types of content are created,
Further, content owners are broadening their
audience fragmentation increases. The adver-
creative roles, taking on responsibilities that
tising executives we interviewed expect a
previously belonged to agencies. There are
significant portion of content consumed on
already many examples of broadcast and
different devices to be user-generated within
publishing content owners that are displacing
five years – nearly 15 percent of TV time and
traditional ad agencies in creative and
about 25 percent of PC time. This means that
campaign planning. Companies like Conde
there is an opening for new aggregators and
Nast’s Media Group have creative units that
distributors – the likes of YouTube, Grouper or
work directly with advertisers to produce and
Current TV – to capture a share of revenue
distribute custom advertising programs often
that would have previously gone to traditional
at lower prices than agencies by charging cost
programmers or channels.

9

Measures
The majority of the respondents in our panel of
advertising industry executives also indicated
“It is becoming increasingly easy to
that UGC is not “hype” and is here to stay. They
measure actual viewership, engage-
also felt that inexpensive video production
ment and response. Having that
tools will increase competition among profes-
sionals, amateurs and semi-professionals.
accurate information will greatly
alter the way advertising is pro-
As a result, content owners, distributors,
advertisers and agencies are all becoming
duced and disseminated and how
more creative about how to reach the target
it is ultimately paid for.”
consumer. For example, broadcasters are
making use of content bleeds in advertising – Account Executive, full-service media agency,
pods – where characters become a part of the North America
commercial message. On the flip side, product
Evolving technologies, coupled with advertisers’
placement continues to become more popular
demands for improved targeting, accountability
as a way to integrate the marketing message
and ROI, are driving changes in measurement
directly into the program itself. There are also
and associated advertising business models.
an ever-increasing number of new ad formats
As consumer attention continues to fragment,
to capture the consumer’s attention, both on
measurements will only remain relevant if adver-
the TV screen and on the Web. Formats like
tisers track finer segments and perhaps even
short-form video, flickers, bugs, banners and
individual viewers.
pop-ups continue to evolve. Finally, players
are doing a better job of matching the ad
We therefore predict individual- and micro-
content with the programming content to drive
targeting becoming prevalent across all media
relevancy. The recent results of an ongoing
formats. In addition to requiring new partner-
study by TiVo Inc. concluded that relevancy
ships and investment, this kind of advertising
14
outweighs creativity in TV commercials.
will also necessitate a major increase in the
The ads least likely to be skipped were well-
number of creative spots and campaigns
tailored to their audience – they were often
to reach targets with niche or specialized
those ads that aired during the daytime on
messages. More spots will likely mean lower
cable (where shows have smaller, niche
average price points on creative. Companies
audiences and it’s easier to determine viewers’
like QMeCom are allowing for customization
interests) or during prime time on directly
with automation, so that hundreds of creative
15
relevant programs.
outputs take the place of the mere one, two or
16
five variations common in days past.
With a wider group of content creators contrib-
uting to the mix, pieces of the creative value
Hardware (i.e., set-top-box-based, head-
chain may commoditize or experience price
end-based, portable device) and software
pressure (similar to how independent films
technology advances are enabling improved
have lowered the cost of one echelon of
targeting and response tracking capabilities
filmmaking). The advertising value chain will
across media formats. Companies like TiVo
therefore need to proactively integrate the
and Nielsen are beginning to supply realtime,
more creative parts of its team, or others will
non-sampled measurements of ad-skipping,
do so from outside.


17
purchasing influence and the like. Other pod management, skip-resistant creative
companies are moving toward providing campaigns, greater creativity immersed
targeted delivery capabilities across media within ads (to entice people not to skip),
platforms, based on a combination of user more dynamic product placements and more,
behavior and opt-in data. should produce greater impact.

Two-thirds of the industry Furthermore, a new breed of Chief Marketing Finally, while much of the current industry
Officer (CMO), conversant with Internet discussion is related to new measures for
executives we interviewed
metrics, is seeking more focused targeting arguably “old,” one-to-many advertising
expect 20 percent of
and accountability (ROI) for marketing formats, the era of truly interactive, experience-
advertising revenue to shift budgets across channels. As the first genera- based advertising is coming. For example,
from impression-based tion of professionals who have grown up with in virtual 3D worlds, audiences can use and
the Internet rises to positions of responsibility interact with a brand, rather than just be
to impact-based formats
among advertisers, we are likely to see more “exposed” to it. And these new advertising
within three years.
experimentation and a greater readiness to experiences are marching forward largely
adopt new platforms – especially if they can without leadership from established broad-
demonstrate effectiveness. casters, agencies and advertisers.

Two-thirds of our global advertising industry These trends imply the boundaries between
executive panel expects 20 percent of “local” and “national” advertising will blur.
advertising revenue to shift from impression- Media companies historically strong in local
based to impact-based formats within three advertising (e.g., cable, newspapers) will have
years (see Figure 5). Targeting, measurement to improve their interactive capabilities, while
and accountability capabilities will have to national advertisers (e.g., Broadcast TV) and
evolve to reflect new advertiser goals and interactive players will have to improve upon
demands. This shift will be particularly critical their local targeting capabilities (meaning,
for traditional TV, as it is increasingly delivered know where the consumer is).
digitally. New types of advertising, such as
Advertising inventories
“The U.S. television advertising
FIGURE 5.
upfronts are not likely to exist more
Time horizon for shift from impression-based to
impact-based advertising.
than another few years.”
– Executive, major online media aggregator,
8% 3 years North America
33% years
Today, most inventory systems, such as the
3% Shift already started
television upfronts in the United States, involve
7% Never relatively few buyers and sellers, most of
which are very large companies. For example,
% year
GroupM, of the London-based WPP Group,
Source: IBM 2007 advertising industry executive interviews and
panel discussions.


sealed the first major deal of the 2007 upfront Internet players have shown themselves to be
season with a multiplatform, US$1 billion more adept at extending their predominantly
18
agreement with NBC Universal. online platforms into other channels. Google,
for example, is leveraging its tracking capabili-
According to our New platform players are offering advertisers ties and matching algorithms for both new
the ability to purchase ads via aggregated
industry executive and traditional channels, such as radio, TV and
networks. These capabilities provide key print through its acquisition of dMarc, partner-
panel, 30 percent of
benefits such as: improved inventory manage- ships with EchoStar and Astound Cable, and
advertising revenues ment, improved pricing transparency, stream- 19
the launch of Google Print Ads. This is a shift
will shift from lined buying/selling processes, and improved in focus to adjacent growth opportunities from
analysis and reporting capabilities. These new
traditional incumbents Google’s initial focus on paid search.
entrants/platforms are positioned to capture
to automated
an important part of the future advertising Investments in the traditional advertising
placement/auction and marketing value chain. Going forward, we space by new entrants may pose a threat to
platforms within the anticipate that inventory management systems current value-chain incumbents. As fragmen-
will become more open and transparent and tation becomes a permanent fixture within
next five years.
will involve a larger number of smaller buyers media and entertainment, advertisers will be
and sellers. forced to move to more efficient and dynamic
platforms capable of managing inventory,
The majority of our advertising industry execu- planning, delivering, tracking and measuring
tives agreed with this directional trend. In fact, effectiveness of advertising across multiple
they predict a significant shift in control of channels and in realtime.
advertising revenues, with more dollars flowing
Future scenarios: Scenarios of
from private to open markets over the next five
years. The panel also expects 30 percent of disruption
advertising revenues to shift from traditional To assess the degree and depth of change
proprietary sales models to placement/auction expected, we used a process called scenario
platforms within the next five years. However, envisioning. In this process, the most disrup-
changes to back-end platforms, along with the tive and uncertain variables are combined
increased willingness of suppliers to sell both to create and articulate a variety of extreme
remnant and premium inventory through these outcomes for the year 2012.
open systems, will be required in order for this
revenue shuffle to occur. Our scenarios are based on the following two
variables, which we believe will be the most
The reason for this trend? As revenues shift disruptive over the next five years:
in response to consumer fragmentation, it
• Marketing control: The propensity of the
will no longer be efficient to have dedicated
consumer to control, interact with, filter and
platforms for each channel. Market forces will
block marketing messages
move the industry to open, dynamic platforms
capable of following a customer by serving • Advertising inventory system control: The
messaging across multiple channels. This is degree of movement from controlled,
a natural progression caused by the shift of impression-based ad inventory systems to
advertising dollars across channels, which, in open auction or exchange platforms for
turn, is driven by advertisers seeking to follow advertising spots.
their customers’ interests as content is increas-
ingly divorced from devices.


– one in which a portion of consumers can still
FIGURE 6.
be addressed through traditional advertising
Four scenarios of the industry’s future.
models, while others must be attracted through

Open
interactive and innovative strategies. Increas-

Ad inventory systems
Open Ad
ingly sophisticated targeting, measurement
Exchange Marketplace
and accountability tools enable advertisers
to continue to allocate a greater portion of
dollars traditionally spent on direct marketing
Continued Consumer
to channels historically reserved for brand-
Evolution Choice
Closed
oriented advertising. Traditional agencies
Providers Consumers will continue consolidating in their efforts to
respond to advertisers’ demands for seam-
Media consumption control
lessly integrated, cross-platform planning,
Source: IBM Institute for Business Value.
buying, delivery and measurement services.
Similarly, broadcasters and distributors will
In Figure 6, the x-axis illustrates how the continue to focus on horizontal advertising
control of media consumption is shifting from opportunities for advertisers.
providers to consumers. As we move to the
Open Exchange represents a scenario in
right along the x-axis, consumers wrestle more
which the industry changes behind the
and more control over their media experiences
scenes, primarily driven by distributors
from providers.
– traditional players like Multiple Systems
The y-axis illustrates the change from closed Operators (MSOs) and Telcos, as well as
inventory to open auctions. As we move up newer technology players – with little to no
the y-axis, more television, print and interac- additional consumer-driven change. In other
tive advertising deals become accessible to words, marketing stays the same as what
smaller, independent buyers and sellers. was described in Continued Evolution, but
the process of buying, selling and delivering
Based on these two variables, four scenarios
becomes more efficient. Also similar to the
emerge:
Continued Evolution scenario, majority control
remains with content owners and distributors
Continued Evolution is arguably the least
The two variables rather than with consumers, and a majority
disruptive scenario, though it still involves rapid
likely to be most of consumers continue to passively ingest
change from today’s one-to-many advertising
disruptive to the marketing messages without a great deal
model. Control, in large part, remains with
of interference or proactivity. However, effi-
industry’s future are: content owners and distributors, but growing
ciency efforts – largely driven by new entrants
consumer demand for control forces some
the increasing degree
– shuffle profits and power within the industry.
progressive adjustments. The industry cannot
of consumer control A significant portion of advertising inventory
ignore the implications of the current DVR
over marketing and that was proprietary is now “open” – sold
penetration level and the associated ad-
through exchanges, as a result bypassing
the shift toward open skipping behavior it enables, the explosive
traditional intermediaries. New exchanges take
growth in popularity of UGC and related
exchange platforms for
major share in all advertising categories, and
advertising opportunities, or the measurement
advertising sales. inventory that was once exclusively available
capabilities now available to track ad viewer-
to large advertisers – including historically
ship. These factors imply a bifurcated market
proprietary national television spots – is now
available to smaller buyers.

3

Consumer Choice is a scenario in which in ad development and buzz/viral distribu-
advertising formats change at the behest tion of brand information. Further, back-end
of consumers who are tired of interruption players revamp the process behind the
or intrusive marketing. Consumers exhibit scenes. Because this scenario involves a
more control and choice over the types of truly open, dynamic exchange, virtually any
advertising that they choose to view and advertiser can reach any individual consumer
filter. Advertising formats, therefore, evolve across any advertising platform – as long
to contextual, interactive, permission-based as the advertising is relevant and appealing.
and targeted messaging to retain consumers’ Consumers have significant choice over the
attention and to help minimize both irrita- types of advertising they choose to see – and
tion and “tuning out.” To remain relevant, can decide the specific content and form
distributors offer consumers choices – in of their advertising. And with new consumer
some cases, enabling the consumer to select monitoring technologies in place, consumer
the appropriate advertising “packages” that action directly impacts the price of an ad
are most appealing or relevant. For example, – driving bids up and down. Advertisers can
a consumer might request advertising know immediately whether a spot or interactive
be confined to automotive, male-oriented experience is producing anticipated results.
consumer products, travel and leisure. At Likewise, media networks will know imme-
times, these choices will act as currency, diately if they have increased or decreased
with consumers opting-in for messaging reach – with prices calibrating elastically. The
in exchange for content. In other cases, definitions of “reach,” “effectiveness” and even
relevancy is determined by combining opt-in “marketing” itself change entirely.
information with behavior analysis of television,
Scenario evolution
the Web, mobile and beyond. New measure-
Based on their legacy assets and ability to
ment capabilities and consumer rating tools
develop new media capabilities, players
become a crucial component of any adver-
across the value chain will take different
tising deal.
evolutionary paths (see Figure 7). Though we
Ad Marketplace, compared to all other believe the industry will eventually become an
scenarios, is the most disruptive. Significant “Ad Marketplace,” multiple scenarios will likely
change in back-end systems and consumer- coexist for the near term.
facing marketing enable new entrants to
Signs of this evolution are already evident
emerge across the value chain. In this
in the marketplace. Examples of Open
scenario, consumers reject traditional adver-
Exchange initiatives are currently limited to
tising and instead choose their preferred
niche areas, but they illustrate what the future
ad types as part of self-programming their
could look like.
media choices. The user-generated and
peer-delivered content trend explodes, and
consumers become much more involved


FIGURE 7.
Potential scenario evolutionary paths.

Open
• Online companies expanding inventory • Self-publishing syndication platforms,
management and auctions to non-Internet with consumer revenue-sharing model for
channels advertising dollars

Ad inventory systems
• Third-party platforms that trade piecemeal • Cross-channel dynamic advertising buying,
advertising serving and delivery for non-traditional ad
• Online, do-it-yourself media buying formats
companies

• Content owners and product placement, ad-
free sponsorship
• Mobile providers with opt-in permission
advertising
• Personalized television overlays from set-top
Closed

boxes/DVRs
Consumers
Providers

Media consumption control

• Google The following present-day examples of
Although we expect
Consumer Choice illustrate experiments
- Online: Adsense – Offers online media
the industry to in new formats and marketing themes – in
publishers enhanced revenue opportuni-
eventually become reaction to consumers driving change.
ties by placing contextual advertising sold
an Ad Marketplace, 20
by Google on their Web sites • TiVo’s interactive advertising technology
this scenario as well enables pop-up messages while consumers
- Cable/Satellite: Astound Me, EchoStar
are watching programs, as well as while they
as the other three – – leverages Google online capabilities to 26
are fast-forwarding through programming.
Continued Evolution, sell, deliver and measure targeted adver-
tising on cable (Astound Me) and satellite • Aerie Tuesdays is a Partnership between
Open Exchange and
(EchoStar) based on consumer behavior American Eagle and The CW Television
Consumer Choice – 21
patterns Network to target teenage girls in more inno-
will likely coexist for vative ways, by developing unique content
- Radio: dMarc – Acquisition made in 2006
the next few years. programming related to two Tuesday night
that enables Google to offer its advertising 27
prime-time programs.
22
capabilities to the radio industry
• Sugar Mama from Virgin Mobile pays
- Newspaper: Print Ads – 2007 initiative by
subscribers one minute of free air time for
Google to streamline the buying/selling
every minute spent interacting with ads. One
23
process for the newspaper industry
year after launch, Virgin had given away 9
• NextMedium – Platform to sell, deliver and million free air-time minutes and was expe-
24
track product placement for film and TV riencing high response rates of around 5
28
percent.
• BlackArrow – Ad platform for the cable
industry that aggregates inventory into a • NBC Direct announced its 2007 programs
network and focuses on delivering targeted will be available for free online for one week
traditional and advanced advertising after initial broadcast. The content must
25
formats. be viewed on NBC proprietary technology,
29
which prevents ad skipping.


Marketplace platforms that trade completely Broadcasters: Arguably, broadcasters that
new marketing formats through an open rely on linear television advertising to fund
exchange are still in the experimental phase. operational and content costs are at risk in a
But we are beginning to see examples of how world of increasing consumer control, niche
the Ad Marketplace scenario could play out content and fragmented attention. And yet,
in the UGC segment of the industry through broadcasters have the opportunity to leverage
evolving business models like those of Revver, their current mindshare with customers, while
Narrowstep, Brightcove and YouTube. transforming their operations to embrace the
plethora of new digital content distribution
Value chain impacts opportunities. By delivering integrated, cross-
Given consumer and supplier changes, we platform advertising programs tied to their
believe that mid-term economic shifts will favor programming assets, they can migrate into a
consumers, advertisers and interactive players successful future model.
over the other players in the value chain (see
Distributors: Both traditional distributors (MSOs
Figure 8). And as advertisers, Internet/interac-
and Telcos) and newer interactive players
tive players and consumers gain power, tradi-
(Internet and mobile providers) have a small
tional agencies and broadcasters must evolve
share of the estimated US$550 billion 2007
or risk being disintermediated.
30
global advertising market. Slowly but surely,
We believe looming changes and shifts in incumbents are introducing the new platforms
advertising revenue and industry control will and formats needed to defend their positions
affect a number of players in the industry value in the value chain. They are developing new
chain, in particular: advertising capabilities (such as interactive

FIGURE 8.
Expected impact on the advertising value chain.

Creative Media
Media planning Content owner/
Advertiser Consumer
advertising aggregator/
and buying producer
agency distributor

Traditional
Full service media/advertising agency
distributor
(MSO, Telco)
Traditional direct marketing
Content owners
Advertiser Consumer
Broadcaster
and producers
Interactive
Traditional
Interactive
media buying,
media buying,
distributor
planning and
planning and
(Internet, mobile)
measurement
measurement

Relative economic value creation: Premier Moderate Non-differentiated Arrow represents change in
position from 007


Recommendations: Refashioning
and VOD advertising), integrating advertising
across in-home video, mobile and Internet success
channels and focusing on local advertising How can advertising value chain partici-
delivery opportunities. By opening their inven- pants prepare for the implications of these
tories through dynamic platforms, distributors scenarios? Broadcasters, traditional ad
create an aggregated inventory view that agencies and media distributors, in particular,
makes it easier for advertisers to see the will need to make strategic, operating and
full reach and volume a distributor can offer, organizational changes now to succeed in
helping distributors capture a greater share a world with more fragmented communica-
of advertising revenues. The race is on to tion channels and new media interaction and
deliver cross-platform integration. Telcos and consumption habits. We believe there are
MSOs currently have a window in which they a number of “no regret” moves for industry
could take the lead on integrating wireless, participants to work toward, regardless of how
broadband and video campaigns. scenarios evolve (see Figure 9):
These prevailing trends 1. Consumer innovation: Making segmentation,
Advertising agencies: Naturally, agencies
micro-segmentation, communities and person-
would like to protect their creative and
are shifting power to
alization paramount in marketing
analytical positions as intermediaries and
consumers, advertisers
consultants. To do that, agencies will need to 2. Business model innovation: Developing new
and interactive guard against increasing commoditization of revenue-sharing, distribution and pricing strat-
players, leaving their services by experimenting heavily with egies, radically shifting the dynamics in the
creative advertising content. If the rise of user-
traditional agencies and industry
generated advertising seems “outlandish,”
broadcasters at risk of 3. Business design and infrastructure inno-
consider how far-fetched the idea of a
disintermediation. vation: Improving horizontal organizational
consumer-generated encyclopedia was only a
capabilities and adjusting operations to enable
few years ago. Agencies need to become the
consumer and business model innovation.
masters of 5-, 10- and 30-second ads that are
not tied to linear formats – be the vanguard of
FIGURE 9.
testing new alternatives. Agencies can mitigate
Three innovation types.
the risk of the open inventory trend by offering
robust planning and analysis capabilities –
helping their clients analyze massive amounts
Bu innov
on

sin
of customer data and plan the optimal, inte-
ati

ess tion
ov

grated advertising strategy across the ever-
inn

mo
a

increasing platforms, formats and pricing
del
er
um

models available to them.
ns
Co

Business design and
infrastructure innovation


7

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