To reach potential buyers of its all-electric RAV4, Toyota Motor Corp. (7203) is using an advertising strategy as experimental as the battery-powered crossover car it seeks to sell.
The automaker is working with DirecTV to zero in on would-be customers identified as tech-savvy early adopters in Los Angeles, San Francisco and San Diego, where the $50,000 vehicle is sold. They’re using a new tool that combs satellite-TV subscriber data to help marketers like Toyota reach narrow slices of consumers, cutting wasted dollars and improving the effectiveness of ads.
“A mass campaign doesn’t make sense,” Dionne Colvin, Toyota’s national media marketing manager, said in a phone interview. “But we do want to get the message out.”
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The new technology is known as dynamic advertising, and it reflects a push by U.S. TV networks, cable and satellite carriers and providers of Web-based TV services to help marketers like Toyota connect more directly with audiences. The changes threaten to upend a decades-old system of delivering commercials over TV airwaves to large slices of the population, many of whom have little interest in the products.
DirecTV (DTV) hires marketing-data firms that compile consumer information from credit cards and other sources to identify, for instance, Spanish speakers, people trying to lose weight or, in the case of the Toyota campaign, who are like to buy new gadgets. DirecTV can transmit the ads only to subscribers who meet the criteria and live in the targeted cities.
At stake for DirecTV, the largest U.S. satellite service, along with broadcasters such as CBS Corp. (CBS) and cable operator Comcast Corp. (CMCSA), is part of the $73 billion a year marketers spend on U.S. TV advertising. They’re also defending their share of the almost $100 billion a year consumers spend for packages of channels at a time when technology companies like Intel (INTC) Corp. are developing pay-TV services that will use the Web to collect ever-more granular data on viewers.
Competition for users and advertisers alike is made all the more intense by the emergence of a generation of consumers who choose not to buy pay TV altogether. These budget-conscious young adults, known as cord-nevers, are bypassing pay-TV subscriptions, getting by on Hulu, YouTube and Netflix streaming. This year is the first ever that total U.S. pay-TV subscriptions will decline, according to researcher IHS.
Advertisers too are directing more money toward digital budgets, and television networks are putting shows online to accommodate them. Intel, Google Inc. (GOOG), Apple Inc. and Sony Corp. (6758) are all racing to introduce pay-TV services that would deliver programming over the Internet, gather a rich trove of data on viewers and accelerate the push toward targeted ads.
Those ads on U.S. cable channels and video-on-demand will generate about $150 million in revenue this year, Seth Haberman, chief executive officer of the New York-based ad firm Visible World, said in an interview.
The amount will double annually for the next three years, exceeding $1 billion in 2016, he said. Even with that growth, the sum is a fraction of the $73 billion that SNL Kagan estimates will be spent on U.S. TV advertising this year.
For DirecTV, better targeting is a tool to attract advertisers and keep them in the fold, while maximizing revenue from a shrinking pool of viewers. The company, based in El Segundo, California, doesn’t have phone or Internet businesses to cushion any revenue loss.
DirecTV controls two minutes of airtime per hour on 46 cable networks, including ESPN and USA, according to Paul Guyardo, executive vice president and chief revenue officer. That compares with about 14 minutes for the networks. The satellite company sends targeted ads to the 12 million of its 20 million subscribers who have high-definition video recorders.
“We can run hundreds of different commercials concurrently,” Guyardo said in an interview. “You’re taking 12 million households and literally slicing those up by a bunch of different criteria.”
The new services have the potential to disrupt a system in place since the 1940s. Networks like CBS or MTV traditionally show ads to broad swaths of TV audiences. Marketers choose shows and pay based on the number of people reached within a targeted demographic group -- say, women ages 18 to 49.
In the new world, Gillette could show a shaving ad to a male viewer, even if he’s watching Oprah instead of ESPN. Neighbors might be watching the same program at the same time, over the same pay-TV service, and see different ads because one is a woman shopping for a car and the other is a male who doesn’t buy cosmetics.
Pay-TV services have been testing the technology that allows for more tailored commercials for several years, said Amanda Richman, president of investment and activation at advertising firm Starcom USA.
“Companies are willing to pay more to reach that qualified viewer,” Richman said.
DirecTV isn’t alone. Fox Networks Group, part of Rupert Murdoch’s 21st Century Fox Inc., will begin showing targeted ads to subscribers of Comcast, the largest U.S. cable system, in January, Toby Byrne, the division’s ad sales chief, said at a May presentation to advertisers.
The ads will run in programs accessed through Comcast’s video-on-demand service, moving toward the precise targeting advertisers can find on the Web.
“Technology is thankfully catching up,” Byrne said in an interview. “We would have liked to do this earlier but it wasn’t possible.”
Intel, the world’s biggest chipmaker, aims to start a TV service this year. Its set-top box and servers will take targeting further, letting advertisers bid in real time for individual spots and gain feedback on demographics, behavior and location, according to a person familiar with the plans.
Advertisers would have the ability to target individual consumers as they sit in front of their screens, using a profile based on viewing habits, services purchased and billing information like ZIP Codes.
Intel and other technology companies weighing a TV service would round out the portrait with data from third-party marketing firms such as Experian, according to Haberman, the advertising executive. DirecTV is already appending its viewer data with information from third parties.
Even television makers such as LG Electronics Inc. (066570) and Sony are developing the ability to insert commercials based on who’s watching. Sony’s Gracenote unit is working with manufacturers and broadcasters on a system that will allow them to place ads for viewers in real time.
LG TVs that made their debut this month at IFA, Europe’s largest consumer electronics show, include digital sleuthing technology that tracks what viewers are watching, information that can be passed along to broadcasters and advertisers.
If they prove popular, the sets could siphon some advertisers from cable and satellite companies, and deliver an ongoing cut of revenue to TV makers.
They risk raising the “creepy factor,” said Warren Schlichting, senior vice president of media sales and analytics at Dish Network Corp. (DISH), the second-largest satellite-TV service. Companies tackling the problem from an engineering background lack the relevant experience with consumers and may push the boundaries of privacy, he said.
Executives at Sony’s Gracenote and at Cognitive Networks Inc., which is working with LG, said their technology is similar to software that tracks websites consumers visit from iPads. Users opt in before the system is enabled, Gracenote President Stephen White said.
“It’s important to be upfront with consumers about how you’re going to use their data,” White said.
Advertisers are happy with the attention. Toyota’s Colvin is at work on a campaign to reach viewers who speak both English and Spanish at home.
Kellogg Co. (K) worked with DirecTV on a campaign for its Special K breakfast cereal, targeting weight-conscious women, said Aaron Fetters, director of Kellogg’s insights and analytics solutions center in Kalamazoo, Michigan. A new round of commercials will begin airing in the next few months, on DirecTV and other pay-TV systems, Fetters said.
For DirecTV, its airtime becomes more valuable, letting the company sell more to Toyota and less to small businesses whose grainy, low-cost commercials have been a hallmark of local marketing on TV.
“This is the main driver of our ad sales going forward,” DirecTV’s Guyardo said. “It takes the value of our inventory and improves it by a multiple of 4 or 5 times.”
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