Will The Nielsen Spin Off Be A Hit?

It all depends on how well it handles new technologies

Any near-monopoly can expect a certain amount of bellyaching from its customers. And Nielsen Media Research Inc., which provides the television ratings on which the sale of $42 billion worth of advertisements each year is decided, is no exception. "The May sweeps were a disaster," gripes David F. Poltrack, senior vice-president for research and planning at CBS Corp. "The industry became aware just how bad a measurement service Nielsen was providing." For Nielsen, fending off such jabs has become even more critical since July 1, when it became a stand-alone public company for the first time in its 49-year history.

Nielsen finds itself flying solo at a time when it is enjoying hefty profits but also facing mounting challenges. Plans by several of its disgruntled customers to launch a competing service are gathering steam, and Nielsen is spending heavily to head them off and prepare for the launch of digital TV.

At the same time, newly anointed chief executive John A. Dimling, a 15-year Nielsen veteran, has found that independence comes with tight pursestrings. Nielsen's former parent, Cognizant Corp., was itself a spin-off from the old Dun & Bradstreet Corp., comprising Nielsen and health-care research firm IMS Health. But IMS, led by Cognizant's former executive team, spun off debt free with $640 million in cash, while Nielsen was awarded no cash and $300 million in debt. "There are a lot of things going against them at the outset," says analyst James D. Dougherty at Prudential Securities. At least Nielsen is now the master of its own destiny, says Dimling, free to pursue new avenues, such as measuring usage on the Internet. "As PCs and TV converge, we think we really need to be there to be able to measure both," he says.

Today, Nielsen's main business consists of two ratings operations. One is a national service built around electronic "people meters" wired to TV sets in 5,000 homes. The other, which measures viewership in 211 local markets, uses the archaic practice of recruiting couch potatoes during quarterly sweeps periods to scribble what they're watching in diaries. Customers have long bristled about Nielsen's shortcomings, from its methodology to its pricing. In the recent May sweeps, for instance, response rates from local diary samples were abysmally low, but Nielsen stood by its numbers.

"NO GUARANTEE." Now, digital television presents a whole new ratings challenge. Whereas current meters measure only the channel a TV is tuned to, digital TV can transmit several signals through a single channel, and existing meters won't be able to measure accurately who is watching what. Nielsen has spent almost $30 million developing a new digital meter, but even its own regulatory filings concede there is "no guarantee" it will be adopted.

Even as it struggles to adapt to independence and technological change, Nielsen is a money spinner. It generated operating income of $21.3 million on $96 million in sales in the quarter ended Mar. 31. Getting growth, though, won't come easily. Some will come from winning over more local markets to its electronic meters and by signing on new cable channels. And Dimling has hopes for a "potential kicker" from new Internet and digital-TV gizmos. Nielsen and Microsoft Corp., for example, have teamed up to develop a ratings system that can measure television viewing through PCs using Windows 98. This year, Nielsen is also planning a service that will monitor home computer usage and market the results to everyone from advertisers to software developers.

High-tech doesn't come cheap, however. Although it will have to spend 22% of its cash flow on servicing its newly inherited debt, Nielsen is planning to plow as much as $110 million between this year and 2000 into new computer systems and the rollout of the digital meter--double its outlay of the previous three years.

Nielsen has little choice but to spend. A coalition of 29 broadcasters, advertisers, and agencies has been sponsoring a $40 million-plus pilot project of a new digital metering system devised by Statistical Research Inc., of Westfield, N.J. SRI is currently soliciting letters of intent from broadcasters and if it gets a $100 million commitment, plans to launch a new national service within two years.

SRI DOA? However, without cable giants Turner Broadcasting System Inc. and Viacom Inc.'s MTV Networks--notable abstainees from the SRI project--its chances are considered dicey. Larry Goodman, Turner Broadcasting's president of sales and marketing, isn't sure SRI will actually produce better research than Nielsen. "We believe the Nielsen data is fundamentally accurate," says Goodman. But others, like Tim Brooks, senior vice-president of research for USA Networks, worry that without the threat of SRI, Nielsen's service won't continue to improve.

Publicly, Dimling plays down SRI's chances and notes that Nielsen has outlasted past rivals like Arbitron Co. But how does he cope with his customers trashing him and angling to launch a competitor? "We don't try to retaliate against them by producing lower ratings--tempting though that might be," he says slyly. Indeed, rating well may be the best revenge.

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