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Advertising—It’s for Telcos Too Opportunities in Mobile and IPTV Advertising Susan Tucker Managing Consultant Detecon Susannah Spellman Senior Consultant Detecon Corinna Schramme Business Analyst Detecon Introduction This paper addresses the evolution toward an advertising-based revenue component in the telco business model. The objective of this paper is to highlight the industry and marketplace factors driving the emerging video/TV market and identify potential advertising business models available to telcos as they move into the video market for mobile- and fixed-line services. The topics include the implications of the following on the telcos’ fixed and mobile business models:

• Key issues: o Shift in advertising spending across media o Personalization and interactivity—both are increasingly important in the emerging

digital media environment and new advertising techniques o Power of IP–based services to leverage more precise targeting, intimacy, and

interactivity o Targeted ad insertion to user level o Acceptance of mobile as the fourth screen o Advertising integrated into content (e.g., programming, games) o Advertising-sponsored content and services o Location-based services—mobile’s sweet spot for advertising revenues?

• The role of advertising in today’s telco business model • Future potential advertising models for telcos • Recommendations for emerging telco advertising opportunities

Just as telcos are launching new services—primarily content-based—to satisfy end-user demand and offer more choices in the marketplace, they have another customer opportunity—they can offer advertisers a targeted, intimate, and interactive platform for advertising messages. To elaborate on this opportunity for telcos, this paper provides an overview of the changing

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advertising landscape and opportunity for telcos to exploit new (telco TV) and existing (mobile) services as advertising platforms. It begins with a short overview of the advertising’s role for telcos today in terms of information services, advertising via mobile text messaging, and on-line portal services and partnerships. The paper then delves into potential advertising models that telcos can consider for their fixed-services portfolio (primarily through telco TV and on-line services) and mobile-services portfolio. The conclusion highlights the emerging competitive landscape for telco advertising, as well as key findings and recommendations for fixed and mobile operators. Key Trends The key trends that provide the largest impact and opportunity for telcos and advertising are the development of Internet protocol (IP)–based networks and convergence, the launch of video services for fixed and mobile networks, “information overload,” and the current shift in advertising spending from traditional media to on-line media. Advertisers are yearning to get closer to the consumer with targeted advertising and be able to measure more closely the effectiveness of the advertising platform. Internet and IP–based advertising platforms are delivering these opportunities to advertisers. IP–Based Networks and Services The development of and migration to IP–based networks has been somewhat slow by national incumbents but will usher in not only new revenue opportunities through IP value-added services (e.g. IP television [IPTV]), but also operational savings. An IP–based network allows for increased flexibility in new service creation and greater customization for operator (and even customer) needs without major capital investments. The movement to IP–based “next-generation networks” at the fixed-network level also allows for easier network integration or convergence of communications and entertainment platforms—the foundation of a truly converged and seamless service where a consumer’s voice and electronic communications and entertainment are converged onto one device though a unified interface delivered by the consumer’s telco. Using a next-generation network (NGN) or IP–based platform for advertising creates a differentiator for telcos that is only matched by on-line/Web services today. The ability to more precisely target the end user to create intimacy and well as interactivity is unparalleled for advertising via television—an ability that cable does not have yet. Maximizing this platform differentiator is a key opportunity for telcos to play a larger role in television advertising via their telco TV initiatives. Telcos’ Entrance into Video Services The emergence of digital media and the deployment of fiber-to-the-x (FTTx) networks for triple play are ushering in a new landscape that will offer telcos revenue opportunities beyond new content and subscription models. This new landscape will result in a fundamental change in traditional broadcast TV, direct response advertising, and home-shopping TV that will have implications for broadcasters, content owners, and telecommunications providers that are building the TV networks of the future. Video services delivered over IP–based broadband networks will enable personalization (individual content) and interactivity to a degree that is not available in today’s broadcast and cable TV environments. Under this new paradigm, as telcos reach critical mass with their IPTV audience, they will have new revenue opportunities from advertisers anxious to take advantage of the benefits of targeted audience reach enabled by personalization and interactivity.

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Figure 1: Market Drivers: Individual and Integrated Content (Source: Detecon)

Information Overload and Advertising With hundreds of TV channels, Internet news sites, commercials on the radio, blogs to track, and even e-mails and voice mails to catch up with, today’s society is faced with information overload. While new technologies and services create many efficiencies for the average person to allow them to access information anytime or anywhere, these technologies also create a bombardment of information—solicited and unsolicited. With the information overload that is emerging as a part of a person’s everyday life, being able to provide a meaningful, pertinent, and relevant advertising message is crucial. Being able to deliver it in an efficient manner that allows for some degree of interactivity or response is also a significant component of advertising. Because of today’s information overload, advertisers are looking for innovative new ways to reach consumers and more closely target the delivery of and actual advertising message for more efficient advertising spending. Advertisers also want more feedback on their advertising through direct response, instant action, or generic feedback to track the efficacy of their message and medium. Many of the telco advertising models that are outlined later in this paper can deliver these attributes to an advertising campaign. On-line and IP–based platforms that telcos own and operate (from portals to IPTV) allow for targeted advertising at the end-user level and can be further enhanced with opt-in programs that collect demographic and interest information. On the IP and mobile platform, two-way communications can occur to allow the advertiser to provide the consumer ways to instantly comment on, vote on, or even buy the advertised product. Shift in Advertising Spending As we go further along the path toward a digital economy, consumers are gaining greater control over the information that they are bombarded with on a daily basis. This control includes a desire to decide what advertisements they would like to view and when they would like to view them. In this new backdrop, traditional advertising vehicles (e.g., broadcast TV, radio, newspapers) are increasingly being supplemented by new mediums such as the Internet. The latter offers the advertiser a mechanism for targeting certain segments (e.g., youth, special interests) that traditional media cannot as effectively reach in a targeted manner. As technology advances, IP–based TV and video services will enable the advertiser to more specifically target sub-segments in specific geographic areas with specific messages.

Future

TodayBroadcast TV

Video on Demand

Time Shift Video

Personalizedand targeted

services

Pay-per-View

Home-Shopping TV

Transaction TV

Direct Response AdvertisingToday

Future

Videotext

Time Shift Channels

Call Media TV

Targetedinteractiveadvertising

EPG

On-DemandE-Commerce

channels

TV-Micro-publishing

Indi

vidu

al C

onte

nt

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Internet & TCservices on TV

Surfing on TVVideo Telephony

Unified messaging

DVR

Digital interactive PG

Premium TV: Programmingpackage choices

Push services

GamingGambling

Distancelearning

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Figure 0: U.S. Advertising Spending Growth (Source: Internet Advertising Bureau, Universal McCann, Goldman Sachs, PriceWaterhouseCoopers, Detecon)

While still getting a small percentage of total advertising spending, the Internet represents a strong growth area (compound annual growth rate [CAGR] 25 percent 2003–09), offering advertisers an important alternative for reaching the consumer. At the same time, advertising spending with broadcast TV will see a CAGR of 3 percent and cable TV advertising will see CAGR of 10 percent. These numbers are interesting to compare to the overall CAGR of U.S. advertising for 2003–09, which Detecon calculates at 6 percent, indicating that video service providers (e.g., cable) and Internet advertising are the most promising growth areas for advertising. This evolving shift in advertising spending provides an opportunity for new players with consumer segment reach and flexibility an opportunity to gain a share of advertising dollars from the traditional market players. Advertisers have begun to see beyond traditional media as a vehicle for their messages, as seen with the increased shift toward Internet marketing. It provides a ripe playing field for telco-based advertising platforms, which, as we will discuss later, have many similar elements to Internet advertising in terms of target marketing and interactivity. Today’s Telco Advertising Business Models Traditionally, information services comprised primarily of the yellow pages have provided advertising-based revenues to telcos. However, in recent years, many telcos have sold off these divisions to pay down debt accrued during the pre-bubble acquisition trend. Increasing competition from on-line local search engines such as Yahoo and Google has put added pressure on the telcos’ directory business and their continued presence in the space.

8%7%6%4%4%3%

10%

2008

67%

16%

10%

2005

15%

69%

2007

9%

Broadcast TV

Other

17%

8%

71%

18%

8%

20042003

71%

16%

71%

Cable TV

Internet

2009

67%

15%

9%

2623

20

1197

2003 2004 2005 2007 20092008

+25%

U.S. Internet Advertising Spending in U.S. Billions

Total U.S. Advertising Spending Growth

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Another source of advertising revenue, albeit indirect, is branding and content relationships with leading on-line portals. Telcos bundle or co-brand their broadband services with portal services (e.g., AT&T, Yahoo) and receive from the portals a portion of advertising revenues earned through those subscribers using the portal. Advertising through mobile messaging is another source of advertising revenue, but it is also indirect. In most mobile advertising models, the operators are not selling the advertising platform. Instead, they see revenues through mobile text messaging usage. To date, advertising has not been a focus area for many telcos, as it is not deemed a “core business” and represents a relatively small source of its total revenues. Traditional Telco Advertising Model – Information Services Advertising revenues from publishing the yellow pages directories have long been a mainstay of traditional telcos’ information services business. Over time, in addition to the print directories, the telcos have expanded into Internet directory services and directories that can be accessed by mobile phones. They have also expanded their footprint through a series of mergers and acquisitions that shrank the original post-divestiture regional Bell operating companies (RBOCs) from seven to four and soon to be three with the impending AT&T-BellSouth merger. As a result, the remaining RBOCs now have substantial directory businesses, as summarized in Table 1.

Telco 2005 Revs. (% of Total) Segment Description Scale

Verizon $3.5 B (4.7%)

Yellow pages, on-line directory and searches, and directory and info services on mobile phones

1,300 directories with a circulation of ~121 million in the United States and ~8 million internationally

AT&T $3.7 B (~5.8%*)

Yellow and white pages directory advertising and electronic publishing (also in yellowpages.Com JV with BellSouth)

700 directories in 13 states, delivering ~110 million directories a year

BellSouth $2.06 B (10%)

Publishes telephone directories, including on-line through its JV yellow pages.com

500 directories with 65 million copies distributed in 2005

Table 1: U.S. Telco Publishing and Information Services (Sources: Company annual reports) (Note: AT&T Directory Service Revenues as a Percentage of Total Assume AT&T Operating

Revenues and 60 Percent of Cingular Wireless Operating Revenues for 2005) However, while directory and publishing revenues have been strong for the telcos, they have been declining year over year, with a growing shift away from print directory revenues. While BellSouth has experienced some growth in its advertising revenues from print directories, other RBOCs have not. In fact, AT&T and Verizon experienced declining print ad revenues that were not completely offset by the increase in on-line directory advertising revenues (see Figure 4).

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Figure 3: Growth Trends in U.S. Telco Publishing Revenues

Consumers—and, consequently, advertisers—are relying on different sources for locating businesses. The yellow pages are no longer the sole source of such information. There are on-line and mobile accessible directories, making listing searches easier to find (e.g., access to directories across the United States rather than just a local directory). The telcos face an increasingly competitive on-line directory marketplace. As interest in print directories such as the traditional yellow pages wanes and competition heats up for on-line directories, is it time for the telcos to consider exiting the telephone directory publishing business? If so, is the time right to sell the business now, with shrinking revenues? Verizon may think so. At the end of 2005 it announced that it was exploring the potential of either spinning off or selling its information services division. It would not be the first U.S. telco to make that move. The directory publishing or information services business segment has long been considered a cash cow. Some U.S. telcos that faced mounting debt after the 2000 slowdown looked on their publishing businesses as a way to reduce debt and refocus on their core business. In 2002 and 2003, there were two major transactions in the telco publishing business arena when Qwest and Sprint closed their sales (see Table 2).

Table 2: Telco Publishing Business Sales (Sources: Company Financial Reports)

The largest U.S. telcos have, until now, held onto their publishing business. However, with the recent announcement of Verizon’s pursuit of either a sale or spin-off of its yellow page business, is this signaling the end of the U.S. telcos’ involvement in the directory business or just a change in its advertising focus? If so, what will replace such revenue streams? Detecon asserts that telcos are, for the most part, exiting the information services business due to stiff competition from on-line local directory services from on-line portals. Telcos can also extract a decent price today for their information services divisions today—and may not be able to in the future as non-telco on-line and mobile information services portals start to become the predominant source of local directory information.

Telco Yr. Sold Sale Price Annual Revs. Directory Scale Qwest 2002 $7.05 B $1.6 B (2001) 14 states, 45 M copies distributed in 2001 Sprint 2003 $2.23 B $556 M (2001) Directories covered 18 M in 18 states

3.53.63.8

0.0

1.0

2.0

3.0

4.0

5.0

3.8

2003

3.8

2004

3.7

2005

-4%

-1%

Verizon Information Service Revenues ($B)

AT&T Directory Revenues ($B)

AT&T saw online directory revenues grow by $30 M in 2004 and $39 M in 2005

Verizon’s online directory revenues grew by 22% in 2004 and 18% in 2005

Sources: Verizon and AT&T

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Mobile Advertising Models Mobile advertising is still in its infancy in the United States when compared with Asia. The maturity of mobile advertising in markets is largely determined by user behavior and acceptance in terms of advertising and how far along the markets are in the adoption curve for mobile services and devices, the United States (and Europe) lagging behind Asia in these areas. However, in the United States, it is a growing and potentially huge advertising opportunity, with mobile phone penetration reaching approximately 75 percent penetration and 70 percent (according to M:Metrics) of those subscribers with Internet-capable mobile devices. One of the most difficult issues advertisers face is the ability to track the response to or impact of their advertising campaign. With the two-way interactivity of the mobile phone, advertisers have a way to create action or an immediate response to marketing efforts and can therefore track the efficacy of their campaigns. There are specific reasons as to why mobile advertising is not as mature in the United States as in other markets. Part of the reluctance of U.S. mobile operators to launch mobile advertising is the fear of alienating their customers through mobile spam and making end users feel their privacy is being invaded on their phones through unsolicited advertising. However, it is the intimacy of the mobile phone to the user that also makes mobile advertising such a huge opportunity for the advertiser to get closer to users at a more frequent rate than traditional advertising channels such as TV or newspapers, simply because users typically carry their mobiles with them everywhere. To deal with the issue of mobile advertising and privacy, the Mobile Marketing Association has developed a code of conduct for mobile advertisers. This code of conduct specifically addresses the concept of “opt in” and “opt out,” which are similar to what is already applied to e-mail marketing. The code of conduct explicitly states that “consumers must opt in to all mobile messaging programs … (and) consumers must be allowed to easily terminate—opt-out—their participation in an ongoing mobile messaging program though channels identical to those through which they can opt-in to a given program.”1 Early mobile-based advertising has been based on messaging platforms in the form of “pull” advertising, that is, advertising-sponsored phone numbers or short codes (discussed below) that allow the consumer to text the advertiser to indicate interest, provide feedback, or vote. Mobile operators are, in the most part, not concerned about this type of advertising, as it encourages messaging use. It is when advertisers use “push” mobile message strategies that issues arise—as stated earlier, the fear of mobile spam. Mobile Messaging as an Advertising Tool Initial forays into mobile advertising were through short message service (SMS) or simple mobile texting. It has been a successful tool for opt-in marketing and contest entry for pull advertising and has been criticized by users and operators in the push scenario for fears of mobile spam and privacy concerns. Today, advertising via text messaging is primarily through SMS, but with new data networks and multimedia messaging system (MMS)–capable devices being more widely dispersed, advertising via mobile messaging will most likely move to MMS for richer content and message capabilities. Nevertheless, advertisers need to be aware that MMS messages are more expensive than SMS and those end users may be charged a fee for receiving an MMS. Another interesting model that is enabled by mobile messaging advertising is coupon delivery. Already today, there are many mobile coupon solution enablers to help advertisers create advertising messages with embedded coupons (UPC or special codes) that the consumer can use 1 “Code of Conduct for Mobile Marketing.” Mobile Marketing Association. www.mmaglobal.com/modules/content/ index.php?id=5. Accessed on August 16, 2006.

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for in-store, on-line or mobile content payment. Such a platform could be developed or supported by a mobile operator to provide additional value to their customers through an opt-in coupon disbursement program. Coupon-based advertising could be enhanced even further with location-based services, which is discussed later in this paper. The operators’ MMS and SMS message fees are a key inhibitor to mobile advertising in the United States. Operators can play a key role in this situation and offer a platform that ensures that advertising-sponsored SMS/MMS messages received are not paid for by the advertiser rather than the end user. This central platform could also control another inhibitor to advertising via mobile messaging—message volume and content control. Mobile operators would be able to better control how many messages are delivered to their mobile subscribers or manage an opt-in network for advertising based on personal interests. They could also control, to some extent, the content of the advertising messages, ensuring that they are not offensive. Short Codes as an Advertising Vehicle Mobile short codes, also known as common short codes (CSCs), are a subset of mobile messaging and have been a successful marketing and interactive strategy for content providers and advertisers. These codes, instead of being a 10-digit phone number, are five- or six-digit numbers that are routed to the campaign owner or advertiser. Numbers can be randomly generated or can be “vanity” numbers such as “SPORT” for a sports-focused advertiser or content provider. In the United States, short codes are managed by the CSC administrator (developed by the Cellular Telecommunications and Internet Association [CTIA] and managed by NeuStar) for interoperability and central management reasons. The consumer use of CSCs can also be charged in different ways—free, standard SMS, or premium SMS where the end user is also charged. For advertising purposes, the first will be the most likely model. Mobile short codes for content/marketing purposes were first used by the Fox network and AT&T in 2003 to allow viewers to vote for contestants on the American Idol show. The popularity of short codes is largely due to ease of use (just five to six digits) and consumer desire to react or participate in content. Mobile short codes are also a win for advertisers, as they promote a direct response to their marketing efforts and allow for other innovative interaction models such as voting and text-to-win. For operators, supporting and promoting such an advertising vehicle is also a net positive, as it stimulates mobile messaging usage. Portal Partnerships Telcos initially entered into partnerships with Internet portals such as Yahoo and MSN to encourage users to move from dial-up Internet access to digital subscriber line (DSL). Today, the relationships have expanded and include access to music, video, on-line storage services, premium e-mail and computer security, and antivirus services. Today’s portals are moving beyond just search services and into media content, needing telco partners for broadband more than ever. Internet portals have revolutionized advertising with innovative business models, and the telcos have partnered with portals to capitalize on those advertising revenues to some extent. To help promote mobile data services, telcos have developed mobile portals for easy access to information services and e-mail, either co-branding such services with an established Internet portal or using a white-label service to develop their own branded portal. As of yet, advertising via mobile portals has not been widely launched—mobile operators are reluctant to use mobile phones as an advertising platform. Fixed Portals Internet portals such as Google and Yahoo have revolutionized and essentially cornered the on-line advertising and IP value-added services marketplace. In many cases, the brand names of

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MSN, Google, and Yahoo have become synonymous with the Internet. Telcos, recognizing early on their deficiencies in Web-based IP services and ability to provide competitive portal services, partnered with the “big” portals in order to stimulate DSL adoption through relationships with a recognizable brand (e.g. SBC-Yahoo DSL) and give their DSL customers value-added services such as advanced e-mail features, on-line storage and access to on-line content such as music or video. SBC, now AT&T, was one of the first to capitalize on a portal relationship with Yahoo. Verizon and Qwest partnered with MSN shortly thereafter. While the actual financial relationship between portals and telcos has not been publicly disclosed, analysts speculate that in the case of the Yahoo-telco relationship, for each DSL customer, Yahoo receives a monthly fee for access to their premium content, and in return, the telco receives a monthly amount per DSL subscriber from Yahoo that is based on top-line premium services revenues and advertising that is conducted in their DSL base. Mobile Portals Mobile phones also have Web portals, usually custom-built for the mobile operator using a “walled garden” approach. The walled garden, in mobile terms, is essentially a closed Web portal allowing users access only to operator-predefined Web sites. In recent years, major mobile operators have either developed their own portals (e.g., i-mode by NTT DoCoMo) and licensed the technology and content to other mobile operators or partnered with mobile portal providers such as Yahoo Mobile or MSN Mobile. Some mobile portal/search partnerships of note include Google with T-Mobile International and KDDI of Japan and Yahoo with Cingular, Helio, and 3 Network, but in most cases, it is just for the underlying search engine technology, not the full-fledged portal. Most recently, there have been reports that U.S. mobile carriers have been seeking out smaller mobile search partners, including Medio and Jumptap,2 wary of giving too much control or revenue opportunities to the larger mobile portals and search engines such as Google and Yahoo. Mobile Internet portal advertising is still nascent, with most wireless application protocol (WAP) or Internet-ready Web sites still refraining from including advertising on their sites, but as mobile data networks increase in speed, this will change. As the major on-line portal providers have cornered the market in personal computer (PC)–based on-line advertising, many mobile operators will want to make sure that they retain a larger share of the future mobile advertising revenues and will therefore most likely keep relationships with top on-line portals such as Google and Yahoo at arm’s length for their mobile portals. Potential Advertising Business Models for Telcos Future advertising models for telcos can be based on both fixed and mobile components. Portal advertising (either in partnership, as is done today, or on its own) will continue to be an element of an overall advertising play, but IPTV and other video services being launched on new FTTx networks will become the primary advertising revenue driver for telcos. IPTV and video services will enable new advertising revenue streams from local ad insertions through personalized, interactive advertisements. On the mobile side, the removal of the walled garden boundaries and the emergence of opt-in advertising to offset subscription charges for users will help drive data growth and ultimately

2 Amol Sharma. Wall Street Journal. (Eastern edition). New York, N.Y.: Jul 27, 2006. pg. B.1

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open up new revenue streams from advertising. Strong growth in data subscribers and 3G devices (e.g., Verizon Wireless data subscribers grew by 47 percent from the first quarter of 2005 to the first quarter of 2006, and Cingular reported data subscriber growth of 39 percent for the same period) helps set the stage for movement into mobile advertising. The time is now for telcos to investigate opportunities in advertising, and developing the right model for the advertiser and the consumer will be crucial. Potential Advertising Models for Fixed Operators Most telcos have jumped into telco TV or IPTV to provide triple play to their customers, maximizing the value and revenue potential of the broadband connection and competing with cable’s aggressive voice over IP (VoIP) offering. However, what must also be considered are the advertising revenue opportunities that are present through a telco TV platform. Although advertising will initially represent a smaller revenue potential for telcos due to the small “audience” size of their titrated rollouts and low penetration due to initial market entry, telcos still need to consider advertising a key area of focus for their telco TV rollouts as a potentially significant source of future revenue. The telco must develop a new business model that incorporates advertising’s growing role as part of its revenue potential. Sole reliance on subscription-based models is a thing of the past. Targeted Ad Insertion Similar to the cable industry today, telco providers offering IPTV have the opportunity to generate advertising revenues from local ad insertions and there are already solutions available to the telcos that would enable such models (e.g., Terayon, PacketVision). Although telco TV has a smaller addressable market than cable today and for the short-term future, it has the opportunity to deliver highly targeted, interactive advertising. With an IP–based delivery platform, advertising content can be sent to the home level or even viewer level with special interactive view identification systems. In contrast, the cable operators’ can, at best, target ads at the zip code or neighborhood level. Even with a smaller addressable market, telcos can sell their advertising spots as more targeted and effective due to the granularity of advertising insertion and delivery that IP affords them. The ability to target more closely at a geographic level (and demographic and interest level) may also entice local advertisers to be more open to TV advertising, as it would be more cost-effective. One size does not have to fit all with telco TV advertising. Taking targeted advertising to a personalized level means applying opt-in models for more targeted advertising. Users will have to view advertising no matter what if they want to watch live television, but giving viewers the opportunity to personalize what type of ads they receive may be a value-add. Viewers can complete profiles of their demographics and interests and have advertising displayed based on their background and interest (e.g., 20-somethings will no longer have to view denture cream advertising). Opt-in targeted advertising is not that far-fetched in the eyes of viewers. According to a 2004 study by the Ponemon Institute, approximately 45 percent of those surveyed would provide personal information for targeted advertising. Interstitial and Interactive Video Advertising The ability to embed interactive content in advertising is also a new advertising model that would work well with the IP–based platform that most telcos use for their telco TV initiatives. The ability to offer an “addressable advertising” platform—advertising that can provoke immediate action or response either through the medium in which it is displayed or in another way—becomes a competitive differentiator in the TV advertising market. In the past, video-based

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advertising was hard or nearly impossible to measure, but addressable advertising allows for measurement. Interstitial and interactive advertising does what traditional broadcast advertising has not been able to do well in the past—actually track to some extent the success of the advertising campaign. Similar to targeted or local advertising, the IP–based platform of telco TV initiatives will allow for innovative, interactive, and integrated advertising—ultimately providing more value and “advertising bang for the buck” over traditional TV advertising delivery offerings. VoD and On-Demand Advertising Traditional television advertisements are generally sold in 30- and 60-second spots with several commercials airing back to back at set intervals. Current personal video recorder (PVR) technologies, as well as emerging technologies, enable the viewer to “skip over” commercials altogether. Advertising on demand is an emerging concept that allows a viewer to determine what advertisements they would like to see. These types of ads generally run longer than the 60-second variety, since the viewer has an interest in the message being delivered. The flexibility inherent in video on demand (VoD) is what makes it attractive to the viewer and challenging to the advertiser. Since VoD allows viewers to select a program during an extended period of time, it is difficult for an advertiser to deliver a short-lived call to action (e.g., car dealers running specials that expire before the VoD selection period). Normal advertising is invasive in ones life as it interrupts content, but on-demand advertising is different because the end user chooses to view the advertising. For larger purchases such as real estate or automobiles or even high-end services such as investment planning, this may be an exceptional tool, as it can provide more detailed information over a longer and even interactive format. While cable and other video services operators may be able to replicate this on-demand delivery model, with an IP–based delivery mechanism, telcos can provide a differentiator today by adding interactivity. There are two ways to approach the on-demand venue for delivering advertising. The operator can use an advertising insert (short message) in the video and allow users to view a longer ad at the end of the video program (if they choose to). This is sometimes referred to as “telescoping.” A second mechanism is to insert ads into the VoD at the time it is requested by the viewer. This allows the broadcaster or telco IPTV operator to insert the right ads to the right audience (e.g., ads are not pre-loaded into the video and are targeted at the demographic of the viewer). While VoD advertising revenues were relatively small for 2005, that is expected to change, and the telco is going to be well positioned to take advantage of that revenue stream. Advertising-Sponsor-Based Model This potential model offers users elimination or reduction of monthly subscription fees with advertising paying for the service. This model has been successfully deployed in the Internet world—lower-cost Internet service provider (ISP) services for viewing advertising and Google and Yahoo’s free value-added services such as instant messenger and e-mail. One of the Internet world’s pioneers, AOL, has even finally adopted this model and recently announced a major shift in its strategy to move away from its subscription-based model toward a reliance on advertising revenues. This was necessitated by rapid marketplace changes (e.g., strong growth in broadband, free Web services from Google and Yahoo) that saw its subscription-based customer base decline. Telcos also face marketplace changes that require them to make major shifts in their own business models. A shift toward an advertising-based model is one area for telcos to explore. Today’s portal services (e.g., instant messaging, search, e-mail) are largely advertising supported—that is, the user must deal with advertising on the Web site, which is often targeted to

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their search or on-line habits, in order to use the free on-line services. It is not explicit in this case that your eyes and on-line demographics are essentially paying for e-mail and instant messaging, but other content and service providers are using this model to attract users to their services. Disney trialed a similar model in May and June 2006 by providing on their on-line site on-demand streams of popular ABC shows, including Lost and Desperate Housewives. Included in the video stream were targeted advertising inserts that the viewer could not skip over. On-line gaming and mobile content (e.g., ring tones, video) are two areas today in which users can receive free content or access for viewing or interacting with advertising. This model could also be used by telcos for their telco TV services and may be a promising model in which to introduce new IPTV features such as VoD or gaming, allowing the customer to try the service without directly paying for it. In an extreme approach of applying this model, one could offer tiered pricing where the amount of advertising increases with the lower price to access the service. While some budget-conscious customers may find this offer appealing, it will only be feasible if there are ways in which to ensure that the user is viewing the advertising and not changing channels or using a PVR to fast-forward through the commercials. In these cases, interactive advertising that requires a response from the viewer or interstitial advertising (detailed later in the paper) would be a way to increase the likelihood of the viewer consuming the advertising, thus making this model work. Potential Advertising Models for Mobile Operators The launch of 3G networks opened up the potential for operators to launch new bandwidth-intensive applications—namely video services, as well as faster Web browsing, gaming, and messaging. These services, including global positioning system (GPS)–enabled location-based services that have been introduced in the past year or so, also create the opportunity for enhanced advertising platforms. Mobile as the Fourth Screen As mobile subscriber growth took off in the early 2000s and NGNs and services (e.g., video, mobile TV) were deployed, it became increasingly apparent that it would become a crucial medium for advertisers. In fact, it has been deemed the fourth screen behind TV, cinema, and the PC. Just like the Internet helped to make the PC the third screen, wireless data capabilities (e.g., 3G, video applications) will help drive mobile as the fourth screen. While the small viewership of the nascent IPTV market may limit advertisers’ interest in the telco networks as an advertising medium in the near term, no such issue is present for the mobile side. In fact, the significant penetration levels of mobile across the mass-market segments makes them attractive to advertisers as a new medium for more effectively reaching their target market. With mobile penetration levels expected to top 80 percent in the United States by the end of 2008 (see Figure 0-1) and wireless data subscriptions and video capable phones reaching further into the mass market, mobile will become an increasingly attractive medium for the advertiser.

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Figure 4: Projected U.S. Mobile Subscribers and Penetration Levels

Mobile Short Video Ads When one thinks of video or TV, it is also easy to think about advertising and its relationship to the medium and impact on the end user. As more video moves to the mobile screen and mobile TV is more widely launched, it is a natural assumption that video-based advertising on mobile devices will follow. However, the same limitations to mobile video also apply to mobile video advertising, including the number of mobile video-/TV-ready handsets, screen size, and mobile video viewing patterns (much less than the hours spent in front of TV or PC). Mobile video short ads are relatively new to the advertising market and will likely be most appropriate if offered as a part of advertising-sponsored content, which is discussed later in this paper. Operators must be very careful of pushing short video ads with content without recompense—it may ultimately turn off the end user to the content or service. Another issue that must be dealt with is if video advertising is being pushed to the end user or a part of a service that the user has paid for (without any disclosure that the content is advertising-supported), the “minutes” or kilobytes used to download or view the advertising must not be charged to the end user if it was not their choice to consume the advertising. Even though operators must tread lightly into the mobile video advertising space, it will become another primary avenue for advertising revenues. What will make mobile video advertising ultimately successful is also true for TV and video advertising on larger screens today: interesting content, concepts, and relativity to the end user. Location-Based Advertising Mobile location-based services, using GPS or other techniques to approximate the position of the user, will allow for a plethora of new services for mobile operators and content providers. One of the most promising opportunities with location-based services is advertising. Location-based advertising allows an advertiser to reach a consumer at the point of purchase or when the user is nearby to a relevant service, product, or store location. Location-based directory services are emerging in the United States, based on GPS location technology. As a next step to such services, advertisers could incorporate targeted local ads to effectively reach the most interested consumers. While mobile operators have been cautious in their approach to mobile advertising, future business models will include such undertakings. Location-based services are a particularly important component, as they offer advertisers the ability to deliver ads to the users that are close to the point of purchase. In fact, there are already applications being developed that would allow

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coupons to be sent for use in conjunction with applications such as location-based directory services. A consumer looks up a business, and the business can send a coupon. It is all about proximity and the ability to deliver it at the right time and place. This takes “local” to its ultimate end and can promote instant action and feedback to the advertising message. This advertising model is particularly appealing to advertisers as it is targeted to end users in a potential action or purchase position and can induce real-time activity. Mobile Portal and Search Advertising Mobile operators today are wary of introducing advertising into their WAP or Internet access portals. Some Internet-based advertising methods (e.g., pop-ups) are not optimal for smaller mobile screens. Advertising imbedded into the mobile portal may inhibit mobile Web usage by turning off the customer, as they generally pay for access to the mobile Web with the current model of users paying for mobile Web access by minute or by kilobyte. Mobile search advertising, similar to PC–based Internet browsing, will be the largest mobile portal advertising opportunity. Revenue from this model will be similar to the on-line computer search model—through key advertising words and click-throughs or pay-per-clicks. However, the operator will only truly receive revenue benefits through advertising in this model if they are the search portal provider or have a revenue-sharing relationship with the mobile portal provider. With walled gardens in mobile Internet access starting to come down, mobile operators may start to lose control of their customers’ mobile search unless they partner with a mobile portal search provider to offer a high-quality search offering or develop one on their own. Many white-label mobile portal and search offerings exist in the market today for mobile operators to brand as their own search portal, but the strength of Google and Yahoo as a search partner should not necessarily be ignored—partnerships with these large search portals and cross-promotions could be mutually beneficial to both the operator and portal provider in a shared revenue model. Hybrid Subscription – Advertising Subsidized Model Mobile is a growth engine for U.S. telcos, and given its current penetration levels, it represents an important medium for the advertiser. Its importance is highlighted by some mobile operators’ recent announcements to offer some of their services at different price structures for subscribers who opt in to advertising. In other words, there is a shift away from a pure subscription model to one that encompasses both subscription- and advertising-based revenues. Due to the nascence of advertising via mobile, this model will be very promising as a way to not only introduce advertising on the mobile platform, but also attract new data value-added service users who may feel that the current or unsubsidized price is too expensive. Advertising-Sponsored Content Taking the hybrid subscription model a step further is the advertising subsidized content model. While the most common model for content is based on subscription or pay-per-use, an emerging model is advertising-sponsored content wherein the end user would not pay for content, but the advertiser would. Specifically, content that works well with this model includes games, video, ring tones, and music downloads. Already today, some content providers have adopted this model. The opportunity for advertising in games seems especially ripe, as it is expected to grow tremendously in the coming years, with Screen Digest forecasting that the global mobile gaming market will be worth $6.4 billion by 2010 and Yankee Group’s estimates that in-game advertising will be a billion-dollar market by 2010. To make this kind of service even more attractive to potential advertisers, location-based advertising could be incorporated. For now, advertising-sponsored content and airtime is largely a tactic to get users more acquainted with mobile consumption of content and attract younger users who may have less disposable income to spend on on-line content; however, it can be positioned to become a very effective advertising platform.

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Advertising-Subsidized MVNO The traditional MVNO business model is based on providing a specialized service (access to content or service) beyond voice and/or to a market niche. Another emerging model is an advertising-subsidized MNVO in which the mobile service—voice and content—would be subsidized by the advertiser. With the current track record of MVNOs, the market potential does not look too promising, but the ad-subsidized service and an appropriate target market could be the right combination to overcome the current MVNO trend. Future Competitive Landscape for Advertising Advertising spending has become more fragmented in the past few years, as mentioned earlier in this paper. Telcos, being a new entrant into the video advertising space and launching mobile advertising platforms, will disrupt this further. While there remains a large opportunity for telcos and their future advertising plays, there are key competitors beyond traditional media that telcos will have to contend with, including improved cable advertising platforms, the on-line portal video plays, and content providers. Cable companies, recognizing the potential impact telco TV will have on advertising in their own operations, have been working toward new technologies that will allow them to target advertising at a more granular level—similar to what IPTV allows telcos to do. Today, most cable operators can target advertising to zip code and some are even testing new technologies that would allow targeting at an even more granular level. While the ability for cable companies to target advertising by the user or set-top box (STB) is a few years off, telcos need to pounce on the opportunity to provide advertisers a unique platform that is unmatched by cable today. However, while telcos have the advantage over cable companies when it comes to target advertising granularity capabilities, the cable companies have a higher penetration rate and audience size and will soon follow with improved targeted advertising levels. In this competition, the winner will be the one that improves on their current weaknesses faster. Another entrant into the video services game is the on-line or portal players such as Yahoo, Google, and Amazon. All three mentioned have launched or announced their intentions to launch VoD services for TV shows and movies. While most households will not stop subscribing to a home TV or video services such as satellite, cable, or telco TV, these video plays will impact the advertising potential for telco TV (and satellite and cable companies). These Internet companies have already revolutionized the advertising market and are innovative service providers looking to broaden their reach with new services to attract new advertising viewers. Although it is unknown how successful or how much of an impact on-line video services will have on traditional television services, they will be a competitor to the advertising dollars and interactive advertising opportunities that telco TV can also deliver. Portals will also become a significant competitor in the mobile arena as well. Already Google has launched its “adwords” model on their mobile platform, and it will not be long before such portals also become more involved in mobile content beyond just ring tones and simple games. A likely model that portals may adopt when it comes to mobile content is advertising-subsidized content, as they already have a wealth of advertiser relationships and use this model already for their on-line services. Another key competitor in the telco advertising play is the content provider. Already today, many content providers such as Disney and the big U.S. networks are going straight to the consumer to deliver their TV shows and movies. While on-line access to the bulk of their content is not

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exclusively through the Web, CBS, for example, broadcasts its TV shows and then allows on-line streaming access to them (with advertising, of course). This and others like it are new advertising platforms that will compete for advertising dollars with telco TV. Disintermediation by content providers will become a challenge for all multichannel video operators as well as for portal providers. Figure 6-1 below depicts the various competitors to telcos in terms of advertising, highlighting the degree of target market granularity capabilities and how they will evolve over time.

Figure 5: Advertising Competitors and Degree of Target Market Granularity Potential

While telcos will see intense competition for advertising dollars, they do have a very high level of inherent capabilities for person-to-person targeted marketing—unmatchable today, and for the most part in the future, by traditional media. Summary, Key Findings, and Recommendations Summary The advertising business is not easy to enter, but it can prove to be very lucrative. With the multi-platform advertising approach through quadruple-play platforms and the ability to provide targeted ad insertion—something broadcasters and cable companies cannot do today—telcos have an edge over traditional advertising platforms. Today’s advertisers need a way to get closer to the consumer with targeted messages and want to more accurately gauge the effectiveness of their advertising campaigns, and many of the advertising opportunities based on telco platforms described in this paper fill both of those requirements. With the shifts in advertising spending over the past few years and incredible growth in on-line advertising, we see an openness of advertisers to new, innovative advertising models. Telcos have an incredible opportunity to exploit their connections with consumers with the intimate mediums of TV and mobile services as platforms for advertising. What these mediums offer—targeted, action-based, interactive mediums—are key attributes of successful advertising platforms. Telcos

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need to take advantage of their investments and see revenue potential in advertising as well as communications and video services. To illustrate some of the opportunities highlighted in this paper, Figure 6 demonstrates the level of target audience granularity (to broadcast message versus narrowcast) and the current market maturity—a combination of the market adoption level and/or operational/technical readiness of the advertising model.

Figure 6: Telco Advertising Model Target Granularity and Market Maturity

Telco Advertising Models— Key Findings and Recommendations The following key findings and recommendations are applicable to all telcos and the advertising opportunity discussed in this paper. Operator-specific findings and recommendations are also presented, separated by type of operator—fixed or mobile.

• In the past, advertising has been a separate division for most telcos. With the emerging opportunities for advertising in telco services, it should be more closely integrated.

• Telcos must develop new business models that incorporate advertising’s growing role as part of its revenue potential. Sole reliance on subscription-based models is a thing of the past.

• New telco advertising platforms can and should become a part of an integrated source of revenue for the company instead of a separate division as it has been in the past.

• Telcos need to quickly develop core business and technology competencies in advertising and launch an integrated business division to support advertising, especially since they are at the beginning of the learning curve for advertising and integration of content.

• Advertising-subsidized value-added services may help stimulate the use or adoption of other value-added services and can be used to introduce new services or content.

• Special care and oversight will be necessary for protecting customer privacy needs when developing advertising platforms, especially in the mobile context where advertising is still not the norm.

• Quadruple play will allow the telcos to leverage an integrated product line to enhance the interactive nature of its advertising capabilities (e.g., interactive ads sent to mobile or

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TV). The ability to tie together an advertising campaign with two modes of consumer access—TV and mobile—is something that other advertising platforms cannot offer.

Fixed Line Operators – Key Findings and Recommendations

• Telcos compete with old and new media, but have the advantage over cable providers regarding the granularity level of target marketing. That is a major competitive advantage in the view of marketers right now. As penetration increases (e.g., IPTV subs, mobile data subs), these platforms become more and more interesting to advertisers.

• Telcos should play up their advantages (versus cable) through the telco TV advertising platform that is IP–based with targeted, localized, and personalized ad insertion, especially for local advertising. Targeted advertising greatly increases the value of the insert (and telco revenue).

Mobile Operators – Key Findings and Recommendations

• Advertising is coming to the mobile platform, and operators need to develop a platform to control and capitalize on this opportunity.

• Mobile advertising is still in its infancy in the United States, largely due to mobile operators’ reluctance to launch such platforms.

• Mobile portal advertising is still a nascent model worldwide; however, major players have announced movement toward this model and will be most lucrative through mobile local search.

• Users are very attached to their mobile phones, making advertising via this platform either a potential annoyance and/or a lucrative venture.