Don't Touch That Dial

When Microsoft (MSFT) told television executives earlier this year that it was looking for ideas on how to spend hundreds of millions of dollars in advertising, the network guys sprang into action. With the recession in full swing, fewer companies were launching major campaigns. Microsoft was launching two: one for its upcoming Windows 7 operating system and one for its new search engine, Bing.

The networks didn't simply pitch choice ad time or even product placements. They offered to create ads for Microsoft, starring actors from hit shows who appear in character and use the company's products. As part of a larger deal, NBC Universal sold Microsoft on a series of Bing ads, tied to comedian Joel McHale's show Community. In one, McHale uses Bing to find countries where he can learn to speak Spanish after lying to a pretty girl that he's fluent. Fox (NWS), meanwhile, sold Microsoft a package including a 30-minute show made by Family Guy creator Seth MacFarlane featuring Windows 7.

TV networks have sold advertisers custom-made commercials for decades, but they're marketing them much more aggressively. Starting in 2007, companies began paying networks based on how many people watch not the shows but the commercials. Meanwhile, as of May, a third of households owned ad-skipping DVRs, according to Nielsen. So networks are more desperate than ever to get viewers to watch advertisers' commercials.

Custom-made ads sometimes feel like a throwback to the earliest days of television, when a host extolled a product's virtues before the camera. In a taped ad that ran on Comedy Central this summer during the sketch comedy Michael & Michael Have Issues, one of the two Michaels holds a cup of Dunkin' Donuts coffee while repeating the chain's slogan, "You kin' do it." The other excoriates him for being insufficiently creative. "You gotta relate to the product," he says.

HYBRID PRODUCTIONSCompanies like the way these ads blend in with the shows. "It's closer to being TiVo (TIVO)-proof," says Cynthia Ashworth, vice-president for consumer engagement at Dunkin' Brands. And unlike product placements, in which the brand is subservient to the plot, advertisers have more control over their messages.

ABC won a wide-ranging deal with Sprint, developing eight 45-second spots to pair with Desperate Housewives. The series of ads, written by Housewives creator Marc Cherry and shot on the show's sets, features a woman who uses her phone to find out whether her husband is cheating. "We wanted something that would get us noticed and provide entertainment," says Stephanie Kelly, a Sprint (S) manager who places such commercial hybrids on TV. The bet is paying off: According to TiVo's StopWatch system, which anonymously tracks viewing habits, more than twice as many people watched the vignettes as watched other commercials during the program.

These hybrid deals can be risky. When Fox offered to have MacFarlane cook up the 30-minute special to promote the new Windows 7 operating system, Microsoft jumped at the opportunity: MacFarlane's Family Guy has a passionate following among students, many of whom prefer Apple Macs (AAPL). But Microsoft's marketing team didn't take into account how MacFarlane's off-color sense of humor would jibe with its brand. After reviewing scripts and a raunchy taping of the special in mid-October, Microsoft abruptly canceled the deal.

To see a video report featuring some of the customized commercials produced by TV networks for brands like Microsoft, go to

    Before it's here, it's on the Bloomberg Terminal.