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Zapping commercials seemed like a threat the networks could afford to deal with later. Well, later is here. Since December, ratings agency Nielsen Media Research Inc. has been revising its measurements to include how many folks TiVo (TIVO ), or record, shows to be watched later -- with the option of skipping the ads. Nielsen now has the numbers to provide a meaningful picture of what's going on out there. And it's sure to make network brass squirm.
Based on BusinessWeek's analysis of the Nielsen numbers, when American Idol judge Simon Cowell eviscerated crooner Ace Young on Apr. 18, some 1 million homes caught the action an hour or more later on their digital video-recorders (DVRs). Of those viewers, perhaps 800,000 fast-forwarded past the commercials.
DVRs aren't yet ubiquitous in America. Fewer than 5% of Idol's 28.5 million viewers TiVoed the Apr. 18 show, and a relatively tiny half-million or so people did the same for recent episodes of CBS's Without a Trace and CSI: New York. But with the cable guys pushing DVR technology hard, 20% of U.S. viewers could be in a position to zap ads by the end of next year, according to researcher In-Stat.
Pam McNeely, group media director at Dailey & Associates Advertising (IPG ), figures the number could go to 40%. "You tell that to clients," she says, "and they say, 'Oh, my God! I'm cutting TV spending.'"
You can bet the DVR will be a divisive issue as network executives and advertisers gather in New York this month for the annual "upfront" scrum, when most of the haggling over ad rates happens. Some big ad agencies say they intend to pay only for "live" viewing, such as the 10.6 million homes that tuned in recently for ABC's Grey's Anatomy .
Mike Shaw, ABC's sales president, publicly blasted the ad industry's position as "unfair and unjust" and intimated he wouldn't negotiate with those who won't pay for more than live viewers. He and his counterparts at the other networks argue that DVR households are watching more shows now that they can record programs to watch later. And CBS (CBS ), ABC (DIS ), NBC (GE ), and Fox participated in a study that found DVR owners are more likely to pay attention to ads than viewers who may leave or zone out during the commercial breaks. The upshot: Network executives want their rates based on the total number of viewers, including those who see a show later.
HUSTLING TO ADAPT
The networks will find it harder to defend their position as Nielsen gets better at tracking DVR use. So far the agency gathers that metric in only 5% of the 12,000 homes in its national sample. But Nielsen says about 11% of U.S. households have DVRs. That means the 593,000 homes Nielsen says recorded American Idol may be closer to 1.2 million. And while it's hard to put a precise number on ad skipping, the practice seems common. In a survey of 406 DVR owners, says senior In-Stat analyst Mike Paxton, 87% said they used the skip function frequently.
For all their combativeness, the networks and advertisers are hustling to adapt. A new Ford Motor (F ) spot on American Idol features the cut-down lineup of contestants and is shot to look like part of the show, a ploy to prevent viewers from zapping the ad. And advertisers already are negotiating for perks, including first placement in each string of commercials, so viewers will see some of their ad before they manage to grab the remote, says Garth Ancier, outgoing chairman of The WB (TWX ) Network: "That's all about the DVR."
With fewer than 3% of ads being zapped, the TV advertising model is far from dead. But with the Age of the DVR upon us, it's in serious need of corrective surgery. "The two sides have to talk now, because [the DVR] threatens both networks and advertisers if they don't," says Brad Adgate, research vice-president at ad consultant Horizon Media Inc. There's no zapping past that grim reality.
By Ronald Grover, with Jon Fine in New York