A New Digital Day For Cable Advertising

Wondering what's coming down the Infobahn? You can catch a peek on cable TV--four minutes, on average, out of every hour: It's local advertising. Sure, movies-on-demand and interactive services such as home shopping were supposed to be the killer apps of the I-way--and may yet be, once phone and cable companies figure out how to deliver them. Meanwhile, the so-called video servers being developed for those applications are getting a start in the less glamorous world of cable spots.

The world of advertising may never be the same. Cable biggies such as Cox Communications, Tele-Communications, and Time Warner are gobbling up video- server computers to insert local advertising digitally onto their networks and replace tape decks. The next act on cable: using the same machines to digitally encode and play back local news, sports, and other short programs.

All the interest in video servers is ringing up sales for computer and electronics companies such as Digital Equipment Corp., Hewlett-Packard Co., and Sony Corp., which are beginning to tailor systems just for advertising. Analysts say that in the next four years, the switch to digital ads will open a $150 million market for the specialized servers. That's a far cry from the $2 billion annual market that analysts said movies-on-demand would spur. But it's a way to make money today.

Indeed, the race is on. Cox Communications Inc. projects that 70% of its systems will be handling digitally encoded and inserted ads in the next four years. By yearend, 11 of 35 Time Warner Cable divisions will use video servers to feed local advertising onto cable channels. "This isn't dipping your toe in the water," says Vice-President Larry Zipin. "You will see a complete conversion in a relatively short amount of time."

How did local advertising become the hotbed for video servers? Cable TV now uses break-prone, mechanical tape decks--and lots of them--to insert local ads onto Discovery, ESPN, and dozens of other channels. Ads are filmed and stored on master tapes, which are then shipped to cable operators. In this time-consuming process, the tape--or ad--must be duplicated dozens of times, for each channel and each cable distribution point, called a "head-end," which in turn feed hundreds of homes. For large cable systems with dozens of head-ends, fresh tapes have to be delivered several times weekly, often across hundreds of miles.

Video servers automate that process, halving the time to get an ad out, and they deliver digital-quality image and sound each and every play. There's another advantage: Unlike the more exotic machines now being tested for playing movies, these ad-oriented systems are much less complex and expensive. For movies-on-demand, a computer must be able to handle hundreds of two-hour movies for thousands of customers. Ad servers handle perhaps 2,000 videos of 30 to 60 seconds each for the 20 or so head-ends in an average cable network.

WHY WAIT? Instead of millions, these machines cost $100,000 and up. And, cable companies say, they quickly pay for themselves. In San Diego, going digital has enabled Cox to run new advertising on 45 channels right away, instead of just 15 as in the past. "We could have never done it in the analog world without our costs going through the roof," says Patrick Esser, vice-president for advertising sales. Without the maintenance costs and tape resupply hassles, he says, first-year revenue from the additional channels will pay the cost of installing video servers--about $1 million.

What's more, digitized ads can be zipped to servers using the cable companies' own networks, bypassing the cost of ferrying tapes to each head-end. Eliminating tape duplication and ferrying now lets cable better compete with over-the-air stations for ads that must get out quickly. At Tele-Communications Inc.'s cable operation in Houston, it once took up to four days to get a new ad duplicated and delivered to all its 21 head-ends, up to 200 miles apart. Soon, TCI's freshly installed digital gear will air new ads in as little as a day. Computer-based systems also are more reliable--eliminating lost revenues from ads that don't play due to tape jams, scheduling glitches, or other snags.

Watching closely are telephone companies already experimenting with more powerful video servers for movies. They see an opportunity to use their existing networks to distribute national advertising to cable companies. MCI, for example, is planning to buy up to 122 video-server systems for a national ad-distribution network, computer makers say. Fred M. Briggs, MCI's chief engineering officer, won't confirm the number but says MCI will use video servers to enter cable and such markets as advertising, medicine, and education. GTE is surveying equipment makers for a similar market entry, a spokesman says.

HAIR TODAY. Growing purchases by cable providers are persuading some big video-server makers to adapt their machine to advertising needs. Until recently, three small companies--SeaChange Technology, Texscan MSI, and Channelmatic--were the sole vendors of ad-oriented servers. But on Jan. 11, Digital Equipment became the first large video-server maker to go after cable advertising, snaring a $9 million deal with a Los Angeles cable consortium. Then on April 10, HP won a contract from a Tucson TV station. And Sony Electronics recently announced its first server--targeting, of course, cable TV. "Cable is a known market, and it's here today," says Michael Baron, senior vice-president for systems marketing.

Already, the success with cable advertising has generated demand for the same equipment to be used to store other short-form video--such as news and sports clips. In Phoenix, Cox is putting its ad server into double-duty, using it for a local headline-news program. And cable companies say they can't wait to move their servers beyond local ad insertion to 10-to-30-minute "infomercials." So, it could turn out that the first glimpse of the Information Superhighway that consumers get is an ad for a miracle hair replacement.

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