Addressable advertising: what next for Channel 4?
Introduction
Channel 4 and Sky have recently announced an extension of their broad strategic partnership, which includes:[1]
An extension of the current content deal that gives Channel 4 Formula 1 highlights
A carriage deal renewal which broadens Sky customers’ access to All4 with exclusive programming, box sets and an extended access to Walter Presents (Channel 4’s foreign-language VoD service)
Collaboration to roll out AdSmart technology to 4Sales’ portfolio (including its digital channels, the UKTV portfolio and BT Sport)
The two companies are still ironing out the technical implementation of addressable advertising and in the meantime, we ask:
What does addressable advertising mean and how does this apply to Channel 4?
What are the dangers for the free-to-air broadcaster if they don’t plan their strategy carefully?
What is the best strategy for Channel 4?
TV spot advertising revenues and major broadcasters’ reach are under threat
It’s no secret that the TV advertising industry has struggled over recent years. Traditional spot ad revenues have declined by 2.8 per cent over the last three years, following a period of growth between 2012 and 2015. Total TV ad revenues only declined by one per cent a year, largely held up by strong growth in BVoD revenues, which grew from £175m in 2015 to £391m by 2018.[2] Without a football World Cup to boost revenues, 2019 looks like a year of further decline.
Spend is shifting to online as the industry responds to changing consumption habits as consumers migrate to à la carte viewing, spread across both linear multichannel portfolios and online offerings. The flagship channels of the major broadcasters – ITV, Channel 4 – remain dominant destinations for mass-reach campaigns, but are struggling to maintain the level of reach they once did (the number of programmes on ITV1 achieving an audience over 10 million dropped from 157 in 2010 to 24 in 2016).[3]
Sky AdSmart has significantly increased its reach and capabilities
Over the last year Sky began roll out of AdSmart across Virgin Media homes, increasing reach to 30 million UK individuals. To date it has run 17,000 campaigns, on 100 channels including Sky and Viacom portfolios, Discovery, MTV, Comedy Central, E! and Fox. Sky’s own research claims that AdSmart leads to 48 per cent less channel switching, a 21 per cent increase in engagement, and a 10 per cent increase in the enjoyment of advertising.[4]
AdSmart is the first linear addressable provider in the UK; with the inclusion of Virgin Media homes it can reach nearly 11 million UK households, versus other contenders with the scope to develop linear addressable – seven to eight million Freeview Play and around two million YouView households.[5]
Sky’s platform offers advertisers a similar level of data-driven targeting as online, while at the same time guaranteeing a brand-safe environment – bringing together the best of both worlds. As AdSmart only counts an impression if at least 75 per cent of the advert has been viewed at normal speed, it’s an attractive option for advertisers who are sceptical about the viewability of online ads.
There are many advantages to addressable advertising
Addressable advertising is good news for TV – at least in the short term. Increased targeting capabilities mean that TV is now an affordable medium for smaller advertisers, since they can buy smaller targets. Both they and seasoned advertisers will pay more for highly targeted impressions. This, twinned with the novelty of the technology encouraging advertisers of all sizes to experiment with the medium, means there’s likely to be a short-term uplift in TV ad revenues. Sky has allowed non-traditional advertisers such as McLaren to run highly targeted sports car campaigns; in other markets advertisers with diverse product portfolios use a single spot to show different adverts based on who is watching (estate cars vs city runabouts, or children’s yogurt vs probiotics).
Another advantage of addressable is the potential for integrated campaigns, combining a big-budget TV ad with follow-up transactional online ads: a consumer sees an aesthetically high-quality car ad on TV for example, then is served an online ad offering a free test drive of the model at a local showroom. Cross-platform campaigns like this enable advertisers to capture the consumer’s attention, then push them through the purchasing decision, linking brand awareness to transactional advertising. Such experimentation maintains TV’s attractiveness and could limit the flow of ad money online.
Channel 4’s deal with Sky means it’s part of the revolution
Channel 4’s decision to team up with Sky is part of a strategy to consolidate the relationship between the two broadcasters, but the inclusion of some 4Sales inventory on AdSmart marks a major turning point in the wider addressable narrative. 4Sales is one of the biggest sales houses in the UK, accounting for a quarter of all commercial impacts (Sky Sales and ITV are around a third each),[6] and is responsible for selling inventory on behalf of Channel 4 and Box Plus, UKTV and BT Sport. Even if 4Sales only releases limited inventory to AdSmart, it is symbolically significant, as Channel 4 has always maintained the independence of its in-house ad sales.
The biggest advantage for Channel 4 lies in the ability to aggregate reach and remove waste across portfolio channels. As shown below, main network reach is the most efficient way to achieve unduplicated mass reach – and sales houses can charge a premium for these slots. Smaller multichannels can achieve the same levels of reach, but it takes much longer, and wastage occurs as audiences see the same ad multiple times. In an addressable world, multichannels (such as UKTV, whose ads are sold by 4Sales) can target across their entire portfolio, using frequency capping to eliminate waste.
But several dangers lurk behind the initial uplift from addressable
If not managed correctly, short-term gains could mask long-term damage. Initially addressable will be beneficial to smaller and portfolio channels such as those belonging to UKTV, enabling them to aggregate impacts and contribute to the same level of reach as major network channels. But there are three consequences of rolling out addressable to these channels which may negatively impact Channel 4 in the long run:
Increase of supply: the ability to sell a slot to multiple advertisers significantly increases supply and puts pressure on price – at the same time, advertisers will only buy the impressions they require and could therefore expect to pay less, redirecting freed up spend elsewhere
Erosion of network premiums: smaller channels’ ability to provide mass reach impacts will enable them to compete with the main networks – reducing their advantage and their ability to sell at a premium
A levelling out of price: if the box knows who is watching and shows a particular advert based on that knowledge, there is no economic argument for why the same individual can be worth twice as much watching a main network rather than a channel lower down the EPG. Eventually there will be a levelling out of price – to the detriment of the network
This could eventually result in a reallocation of spend away from the largest broadcasters. The initial conditions under which Channel 4’s relationship with AdSmart is conducted will be critical in determining the ultimate outcome.
Channel 4 should pursue a strategy of careful segmentation
The exact terms of the agreement have not been announced, but we expect that Channel 4 will initially limit roll out of addressable to protect its network premium and focus on areas where there is scope to generate additional income. This might involve limiting initial inventory to:
Portfolio channels (and only a small number of impacts): the mass reach benefits of the main Channel 4 channel must be protected; restricting multichannel addressable impacts will limit the danger of creating a patchwork competitor to traditional network reach
Niche sub-demos: impacts should not be mass reach and avoid young people – since a young skew remains Channel 4’s USP
Geographical targeting: one of the main benefits of AdSmart and a key driver in getting new businesses into TV advertising
Existing ‘zero rated’ impacts: these cannot be sold based on BARB measurement
Such a strategy of selling a (very) limited number of impacts in areas which will not run the risk of segmenting peak and mass audiences, and should enable Channel 4 to enjoy the uplift in revenues enabled by addressable advertising, without creating a challenger to big-channel premiums or oversupplying inventory and putting pressure on prices. We will have to watch this space for how ITV responds and what addressable solution it will adopt.
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FOOTNOTES:
[1] Channel 4 press release, ‘Sky and Channel 4 broaden industry-leading partnership’, channel4.com (17 September 2019)
[2] AA Warc Expenditure Report (2019)
[3] Enders Analysis, ‘ITV et al facing the NAR squeeze’ (31 May 2017), p. 4.
[4] AdSmart from Sky, ‘Five years & forward’ (2019), p. 10.
[5] Enders Analysis, ‘Time to create an addressable TV market’ (18 February 2019), pp. 9-10.
[6] Barb, Trends in Television Viewing 2017 (February 2018); Channel 4, Television Corporation Report and Financial Statements 2018, p. 234.