Recent advances in digital advertising insertion technology and the corresponding adoption of the gear by cable operators is leading the industry into the unexplored territory of digital-to-digital, addressable and interactive advertising models–which some believe could spark a revolution of sorts in the massive video advertising market.

Until 1993, analog-to-analog commercial ad insertions were the norm. That all changed when a handful of cable systems and equipment vendors began tinkering with digital ad insertion gear. What followed was a momentous shift by the cable industry toward digital networks, and the birthing of the digital ad insertion process.

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Figure 1: Digital ad insertion's odyssey

And why not? With the local spot ad market climbing above $5 billion, the national cable ad market above $10 billion, and with cable getting just 15 percent of the $60 billion TV ad market (according to Universal McCann Futures), inserting commercials over expanding digital networks was bound to attract attention.

Embedded triggering systems (a specification known as DVS 253) are now being deployed that allow systems to automatically respond to ad insertion opportunities and maximize high value inventory. Tighter targeted ads, higher reliability, greater use of bandwidth and better cost efficiencies are additional upsides to digital ad insertion technology and the DVS 253 specs. In addition, experts maintain, advanced digital-to-digital technology will allow streaming and grooming into MPEG bit streams (DPI), now considered the next generation of ad insertion technology.

"In the early 1990s, cable ad sales were all analog-to-analog and used tape machines to insert local ad spots. That was the beginning of a business for cable because it was with local advertisers. That's when the business became real," said John Boland, VP and GM of the advertising systems group for nCUBE Corp.

It also prompted other realities. Admits Boland: "It was also very cumbersome, unreliable and bad quality, until digital. Now, the technology isn't the issue. It's the economy, Madison Avenue and the business models."

Nevertheless, some insist that once digital penetration passes 30 percent, the concept of digitally inserting highly targeted TV commercials over a growing number of digital networks is destined for revenue greatness. This year, local/spot revenue is expected to top $5 billion, and MSOs such as Cox Communications and others are experimenting with digital ad insertion business models, albeit in varying degrees.

Yet despite the growing upsides to digital ad insertion technology, its full impact isn't likely to be felt anytime soon, experts caution. "With the proliferation of digital channels and networks, there's a market operators have access to, but haven't had the technology to act on the ability to insert digital commercials. But now, there's definitely an opportunity for new revenues. As a market, it has promise," says Adi Kashore, analyst for The Yankee Group.

He notes, however, that most operators aren't rushing to deploy digital ad insertion business models or technology. "It's tied to the growth of digital services, and there's a relatively small number of digital viewers. But many have high discretionary income, and that's a significant opportunity."

It's an opportunity Cox and some others are seeing more clearly. "In the fall of 2000, vendors told us they had created a solution for digital ad insertion technology, but it was lab-based and wasn't ready for us," explains Guy McCormick, VP of technical operations for Cox Communications' Cable Rep Advertising and Advertising Sales.

That changed quickly, however, and now the rubber has met the road. "The defining moment was late in 2001 in our Phoenix lab. We could perform insertions through an interrupted signal, splice in commercials and seamlessly return to programming. There were lots of high-fives. But we still have work to do," he says.

Indeed. And proving the business case is topping the to-do list. "The cost is about $120,000 to launch four to six channels with upgraded decoders, video servers and other equipment. We asked our local ad sales (reps) what they could generate per month, and they told us about $140,000 annually on six networks. So, we would break even at the end of the second year, with an 84 percent rate of return. We know that adding networks makes us money. So those numbers were easily supported," McCormick notes.

Cox is on pace to deploy digital ad insertion technology "in as many markets as possible" by year's end, he adds. "We've proved out the business model and teed up eight additional markets with four to six networks per market. Those markets could generate over $1 million in annual revenue," McCormick says. The MSO recently implemented DVS 253 in its Orange County, Calif. system.

As puny as those numbers may sound, once digital penetration levels rise above 40 percent, most agree the digital ad insertion model will get the attention of those who count: Madison Ave. ad agencies and local advertisers. "Targeted viewers are becoming more valuable to advertisers, and the technology is under control. We'll see a ramp-up in operational functions next year with advertising migrating to digital tiers," maintains Paul Woidke, VP of technology for Comcast Advertising Sales.

Woidke and others have no illusions about the numerous obstacles that lie ahead. Admits Woidke: "The ad sales infrastructure that controls the ad buying process has always been broadcast. They've never had the tools to identify and address eyeballs on a targeted basis. From their perspective, they don't care, nor would they understand if they did care, about digital ad insertion technology. They want as many eyeballs as possible."

Those eyeballs are expected to come from a growing number of MSOs and networks who are getting the digital ad message, albeit slowly and with some trepidation. "We didn't foresee the network monitoring issue with the digital ad insertion process, and we need a more automated system. It's not as easy to make this as reliable as analog, so we must have DVS 253 working perfectly," says Doug Joseph, VP of engineering for Lifetime Movie Network, the first digital network to deploy DVS 253-based gear.

Just how close DVS 253 and similar digital technologies/specifications get to perfection may be a key to the success of digital ad insertion models, experts contend. "The work of the SCTE (Society of Cable Telecommunications Engineers) in standardizing cue tones for DVS 253 was a challenge. The technology isn't that difficult, but automating it across thousands of networks really is rocket science. But the technology part is done. Now, the business models and markets will take care of themselves," says James Kelso, VP and GM for broadband systems at SeaChange International.

That will take time, experts insist. "It's a very significant technological achievement (DVS 253 and digital ad insertion technology), but the revenue value isn't that significant, and the advertising community isn't buzzing about digital ad insertions. The argument is that digital subscribers choose the service and will watch it more. But if that represents only 20 percent of digital subs watching all the new channels, that's not significant. It will take at least two more years for fully inserted digital spots," maintains Kevin Barry, VP of local sales and marketing for the Cable Television Advertising Bureau.

Maybe so, but some in the vendor community are more upbeat about the potential of digital ad insertion models, especially in an on-demand world. "This is the first time the cable industry has connected the power of on-demand video as a persuasive advertising tool with direct response in a non-linear model. In the TV world, this is a critical milestone that the industry has hit," says Raj Amin, senior director of business development at N2 Broadband.

Other players, including BigBand Networks, Concurrent Computer Corp., Harmonic, Motorola and Terayon are deepening their involvement in the digital ad insertion business, which they insist will provide a relevant revenue stream in the years to come. "The market is maturing. Now, we can splice different ads in different regions and transport them to targeted ad insertions over many channels. And, we can use the intelligence we gain to target more ads. But, we must get increasingly digital and more efficient with service launches," says Seth Kenvin, VP at BigBand.

That translates to more marketing and operational upgrades, and a smarter advertising community, insists Joe Parola, vice president of product development for Concurrent Computer Corp.'s North American cable group. "Advertisers and ad buyers must see the possibility of more targeted ads and in using different advertising mediums. For operators, it's now an operations and marketing issue, and we still must reach enough people to attract national and regional advertising groups."

Cox and other MSOs are betting they will. Says McCormick: "By 2005 we will have resolved the majority of technical issues, and programmers will have implemented the standards. The entry costs are very small compared with annual revenues."

"Programming must be compelling enough to create the viewership. It's a simple economic model, and there's a larger viewing community, but is there a business case for programmers and MSOs?," Asks Marty Stein, senior marketing director for Motorola's Broadband Communications sector.

Evidently there is, at least for Lifetime's Movie Channel. Says Joseph of Lifetime: "MSOs are asking when it will be ready (DVS 253 and related ad insertion technology). Everyone wants to go digital. The whole concept is extremely significant for the revenue side."

And for advertisers, the significance is in the number of viewers, who they are, how they can be reached and at what price. "They're looking for ways to reach their audience cheaper. The technology and how it's delivered is irrelevant . . . They want to know how much more valuable their advertising can be using digital technology," concludes Kashore.

Most industry experts agree digital ad insertion is likely to be more valuable than its analog predecessor. It can pinpoint valuable customer demographics and open a revenue stream previously difficult to crack–local advertising.

Yet industry players admit there are business and operational issues to be resolved. And until the economy turns and advertisers begin pumping more money into TV advertising, the road to digital ad insertion riches will be a bumpy one.

"The ad slump has Madison Avenue pulling back, there's a capital crunch and some operational issues. But more targeted networks with 30 percent penetration is a very compelling business case. When it reaches 40 percent, you need to plan right away," concludes Boland.