NEW YORK -- As the advertising industry worries about the effectiveness of traditional television advertising, venture capitalists are betting the 30-second spot has a bright future.
Since 2000, venture-capital firms have poured millions of dollars into fledgling companies developing software designed to get America's couch potatoes to watch TV ads. Television companies are starting to roll out those services, which enable advertisers to broadcast commercials tailored to specific groups of viewers.
With the technology, a New York car dealership, for instance, no longer is limited to a one-size-fits all TV commercial. Instead, the dealer can air ads for its luxury brands in an affluent neighborhood such as Westchester, while marketing its lower-priced models in zip codes where residents may have less purchasing power.
In the next year or so, advertisers in some regions will be able to use the technology to target individual households -- a sort of direct marketing over TV. Depending on the company, it can be done on cable, satellite or traditional broadcast television.
"This is the future of TV advertising," says Dan Nova, a managing general partner at Highland Capital Partners, a Boston-area venture-capital firm that has an investment in Navic Networks, a startup specializing in the technology. "If I were to factor what TV advertising may be like in three to five years, I think today's concept of producing blanket TV ads will be analogous to dropping leaflets out of an airplane."
Fans of the targeting technology say airing ads that are more relevant to viewers will make them less inclined to reach for the remote to change the channel during commercial breaks -- and more likely to respond favorably to the messages in the ads. For advertisers, the ability to hook viewers has taken on a new sense of urgency amid the growing popularity of so-called personal video recorders, or PVRs, like TiVo, which allow TV watchers to zip past commercials.
Lance Maerov, senior vice president at Grey Ventures, the independent venture-capital arm of New York ad firm Grey Global Group Inc. (Nasdaq: GREY), said $50 billion-plus a year is spent on TV advertising in the United States alone.
"All we need to do is capture a little of that," Maerov says.
Grey Ventures has its money riding on Visible World, a New York startup that has raised about $28 million in funding since its launch in February 2000.
Visible World has developed software in partnership with SeaChange International Inc. that, within seconds, can produce thousands of versions of a TV commercial, changing features such as music, voiceover and graphics to enhance its appeal with specific groups of viewers.
Currently, the technology is being used to help deliver customized ads to specific TV programs and designated markets. But Visible World also has initial agreements with two cable operators that could begin sending commercials to individual households as soon as 2005.
"With the advent of digital set-top boxes, you can go all the way down to the user," says Norman Fiore, a partner at RVC LP, the former venture-capital arm of Reuters Group, which last year led an $8 million investment in Visible World.
Most cable operators plan to make household-level TV advertising available in the 2006 to 2008 timeframe, industry experts say.
The market potential for that kind of targeting over TV could be huge, says Eric Schmitt, senior analyst with Forrester Research Inc., a technology research firm based in Cambridge, Mass.
Forrester last year surveyed 26 executives in the field of database marketing, 69 percent of whom said they were very or extremely interested in household-level TV ad targeting.
The executives, who make marketing decisions for major telecom, financial services and retail companies, said they would pay, on average, between 50 cents and 60 cents for each ad delivered to a household.
That's the equivalent of as much as $600 to reach 1,000 viewers, a common ad industry yardstick. "That's off the charts," says Schmitt.
Indeed, for regular advertising on daytime cable TV, the cost to reach 1,000 viewers can be as low as $5, while a prime-time show targeting adults may fetch between about $30 and $50 per 1,000 viewers.
Of course, TV operators will be very careful about protecting their existing block of advertising revenue as they begin rolling out targeted advertising.
Time Warner Inc. (NYSE TWX), which started deploying customized advertising capabilities across its cable systems in Hawaii in 2002 with technology developed by Navic, has seen a high level of interest from Madison Avenue, says Larry Fischer, president of advertising sales for Time Warner Cable.
"When I pick up the phone and say I want to talk about advanced advertising, it's on everyone's radar screen," he says. "Clients and ad agencies have digital set-top boxes. They know how they, and their friends, are watching TV. If you have VOD (video on demand), advertisers have lost their ability to reach you. That's a frightening thought."
Time Warner Cable is expanding its relationship with Navic, which has raised $43 million in venture funding. Time Warner also is in discussions with other startups with ad targeting technology.